The Bank for International Settlements has asked top central bankers and financiers to meet in Basel amid fears about the return of excessive risk-taking.
In its invitation, the BIS says it is concerned that “financial firms are returning to the aggressive behaviour that prevailed during the pre-crisis period”. It also lays out specific proposals that it believes could create a healthier financial system, including the reduction of return-on-equity targets for the banks as a way to discourage such risk taking.
According to a report in the Financial Times, the private sector bank chiefs attending the meeting in Basel include Blackrock's Larry Fink, Citigroup's Vikram Pandit and John Stumpf from Wells Fargo. Goldman Sachs' chief executive Lloyd Blankfein and Jamie Dimon, CEO of JP Morgan Chase, were invited but are not planning to attend, says the story.
At a time of uncertainty about the global economy's fragile recovery and the “overhang” of private sector debt, rapidly rising public sector debt, and high unemployment, the BIS invitation highlights concern that “the prolonged assurance of very cheap and ample funding may encourage excessive risk-taking”.
For example, BIS says that “low financing costs coupled with a steep yield curve may make participants vulnerable to future increases in policy rates – a situation reminiscent of the 1994 bond market turbulence which followed the Federal Reserve’s exit from a prolonged period of low policy rates.”
The note also raises concerns about the potential impact of deteriorating public finances, saying that doubt about fiscal prudence could disrupt bond markets if it “triggered concerns about creditworthiness or inflation because of concerns with government incentives to inflate debt away.”
