Looking for the next financial crisis

The Bank for International Settlements quarterly review pays special attention to non-bank financial intermediaries © Reuters

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The Bank for International Settlements did not get enough credit. It is well known-among those who fully understand it-to be hypnotized as a “central banker’s bank”.There is no doubt that some people even confuse it with a more derogatory category “The Gnome of Zurich” -Unfair because it is located in Basel, does not engage in any banking business, and is a source of amazing wisdom about the global economy and financial system.

For example, in the past, the Bank for International Settlements helped understand The problem with zombie companies And showed how financial growth Will hurt economic growth. In my FT This week’s column, I pointed out how the BIS researchers emphasized that although we are talking about shortages, the supply of the global supply chain exceeds the forecast before the pandemic-including key inputs such as semiconductors, which have caused so much anxiety among policy makers.

This month, the Bank for International Settlements (BIS) appeared again Features of the quarter review Committed to non-bank financial intermediation (NBFI). There is also a voice that makes you stunned, but you should be careful, because this is the place where the next financial crisis is most likely to break out.

NBFI is its original intent: financial transactions and relationships through (“intermediaries”) non-bank financial participants. This is part of the financial system, which changes very quickly and is much faster than supervision. In any case, supervision is not as comprehensive as banks. The following are the three recent NBFI types highlighted by BIS: Crypto assets, Open-end mutual funds Invest in bonds And the new model U.S. dollar borrowing In emerging Asian economies. There are also articles on private capital markets and environmental, social and governance financing.

Bank for International Settlements Press release and Preface A good overview is provided by its general manager, Agustín Carstens, but please learn more about any of these specific areas, as these misfortunes will soon affect your wallet. In fact, they may already have it.

Take the US dollar financing of emerging Asia as an example. The problem here is that with the development and growth of domestic financial industries in various countries, many local investors hold USD assets and hold domestic currency liabilities. When the cost of insurance for this mismatch in the financial turmoil triggered by the pandemic in March 2020 soars, their demand for U.S. dollars may suddenly increase, so that under normal circumstances the funding sources are overwhelmed.This kind of thing will exacerbate the global squeeze on U.S. dollar funds, leading to unintended consequences. Dysfunction of U.S. Treasury Bonds This happened in the market when too many investors tried to sell US government bonds at the same time, which in turn forced the Fed to intervene on a large scale to support the market. This is something that affects all financial industries around the world.

What about the other two examples? Open-end bond funds are easiest to understand: when too many investors try to redeem their fund shares at the same time, they will be forced to sell bonds, thereby amplifying market volatility.

For most people, decentralized encrypted finance is new and strange. It consists of automated algorithms that make programmable or “smart” contracts on the encrypted blockchain possible-this means that holders of encrypted assets can enter various forms of lending, investment, and other transactions, which are subject to certain conditions. When it occurs, it is “automatically executed” by the algorithm. The goal is to achieve the logical end of a financial system encryption dream without any centralized intermediaries-but, as BIS pointed out, this is a “decentralization illusion”. Not all possibilities are programmable, and even if they are programmable, lack of coordination can lead to instability and operation. In these cases, some concentrated actions will be required, which will benefit the core of the natural concentration ultimately caused by blockchain technology.

Please read the details carefully. I will simply note down the common points. It is NBFI that is prone to the same core problem as banks: the perception of liquidity can only be achieved when there are not too many people trying to move positions in the same direction at the same time. The multiple ways of increasing leverage offered by fancy new products—investing in resources that are not your own—make this situation worse and more difficult to understand. It is not accidental that Carstens’s foreword is titled “Non-Bank Financial Sector: Systematic Supervision”. If NBFI poses the same risks to the economy as banks, they should be supervised like banks.

The logic is correct. But this puts BIS and other regulators in a dilemma. This means that the current situation—banks are strictly regulated, and NBFI, well, not so much—is unsustainable. But you can choose one of two diametrically opposite routes from this confirmation.

Both banks and non-banks provide necessary, systematic, liquidity and payment services. You can replace the bank/non-bank distinction with the distinction between systemic and non-systemic activities, and say that liquidity and payment functions must be as secure outside the bank as inside the bank. But this may not be possible, or it can only be done by very cruelly forcing certain activities (such as the repurchase activities of the Ministry of Finance for liquidity management) to be carried out only in institutions subject to strict supervision, or to completely replace certain activities in the same cruel manner. These activities (for example, through the introduction of programmable central bank digital currency).

Or, you can give up dividing the financial world into systemic and unsystematic worlds and accept that systemic risks may be ubiquitous.Logical consequence of That It is to admit that in a crisis, the central bank may have to bail out any exotic financial product that may have a systemic function: the final central bank put option.But then you are driven towards Lord Mervyn King’s thoughts As the “pawnbroker of all seasons,” the central bank promises in advance to provide loans for any asset (not just the bank) at a pre-agreed price.

Financial policymakers will find the end of either of these two directions very unpleasant. The question is whether there are any good alternatives.

Other readability

  • In the above column, I believe that the global economy’s supply response to fluctuating demand in the pandemic is more stable than many people think-a fascinating article from Nikkei Asia suggests that we may soon face Global semiconductor surplus.

  • An excellent note from the Resolution Foundation lists How to think clearly About the Omicron coronavirus wave.This variant is more contagious, so it must be a lot of If we are to avoid greater deaths, threats to the health system, and the need for deeper and longer lockdowns, it will be less virulent than Delta. Faced with this uncertainty, we may immediately adopt stricter restrictive measures.

  • London Stock Exchange Economic Performance Center Anatomy of the British labor shortage.

Digital news

  • The IMF just updated its global debt database-and found Global debt now reaches 226 trillion U.S. dollars. I hosted one Online discussion IMF’s Vitor Gaspar, World Bank chief economist Carmen Reinhart, and law professor and debt expert Anna Gelpern feel rather bleak about the prospects for orderly debt management in poorer countries.

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