GLOBAL financial markets are dangerously stretched and may unwind with shock force as liquidity dries up, the Bank of International Settlements has warned.
BIS boss Debelle has commented that, ‘The sell-off, particularly in fixed income, could be relatively violent when it comes. There are a number of investors buying assets on the presumption of a level of liquidity which is not there. This is not evident when positions are being put on, but will become readily apparent when investors attempt to exit their positions.
‘The exits tend to get jammed unexpectedly and rapidly.’
He added ominously about the current ‘nominal’ interest rates … ‘That is a point we haven’t started from before. There are undoubtedly positions out there which are dependent on zero funding costs. When funding costs are no longer close to zero, these positions will blow up,’ he said.
The BIS is one of the institutions that has warned that the world economy is more vulnerable to a financial crisis than it was in 2007. Debt ratios are now far higher, and emerging markets have also been drawn into the fire over the last five years. The world as whole has never been more debt ridden.
Debt ratios have now reached 275pc of GDP since the Lehman Brothers crash. The BIS warning follows on the heels of Bank of England Governor Carney’s warnings.
Senior bank executives unhappy with new rules to make them criminally liable for failures should resign, according to the Governor of the Bank of England.
Carney said directors and top executives should be made more responsible for any reckless staff behaviour because reforms to curb bank pay were not enough to prevent another financial crisis, and those who tolerated ‘reckless behaviour’ should face jail sentences.
Carney said bankers who abused the Libor inter-bank lending rate had become ‘detached’ from reality in their search for profits.’
However Philipp Hildebrand, vice-chairman of Blackrock who joined Carney on the panel of the event at the IMF’s annual meeting, rebuked him that creating a ‘cops and robbers’ situation where onerous regulation and hefty fines prevented banks from conducting day-to-day activities would also be counterproductive.
Carney however warned that global regulators had reached a ‘watershed’ moment in ending ‘too big to fail’ financial institutions that would be presented at next month’s G20 summit in Brisbane, Australia.
Said Carney: ‘Operating in a heads-I-win-tails-you-lose bubble, the world’s largest banks threatened the stability of the global financial system. Their bail-out using public funds undermines market discipline and goes to the heart of fairness in our societies,’ he said. ‘This cannot be allowed to continue.’
As part of this process US regulators and their British counterparts have been conducting war games since last Monday to rehearse how they would handle the failure of a huge financial firm with operations in both countries.
Federal Reserve Chairwoman Janet Yellen, Treasury Secretary Jacob Lew and other US regulatory chiefs have joined forces with Bank of England Governor Mark Carney, UK Chancellor of the Exchequer George Osborne and British regulators in Arlington, Virginia, for the sessions.
‘We want to make sure we are able to handle an institution that previously would have been too big to fail,’ Chancellor Osborne said.
The fact that the US and UK government are planning for the next banking crash with no bail-outs, just the destruction of all of the productive forces, is a warning to the workers of the world.
The ruling classes are preparing to dump the entire crisis onto their backs, and for a civil war against the working class. The working class must be ready to respond with socialist revolutions to expropriate the bankers and capitalists.
