BIS Says Banks Paring Reliance on Central Banks, Governments
Banks have pared their reliance on central banks and governments for liquidity support as the worst financial crisis since the Great Depression ebbs, according to a study by the Bank for International Settlements.
“The take up of many measures has declined,” economist Petra Gerlach wrote in the study, published in the Basel, Switzerland-based BIS’s latest quarterly review.
The report comes as central banks such as the U.S. Federal Reserve trim some of the emergency programs they introduced to combat the crisis. The Fed has completed its purchase of U.S. Treasuries, while the European Central Bank conducted a final auction of 12-month funds in December. The Bank of Japan stopped its purchases of commercial paper and corporate bonds.
The shift “seems to reflect” the increased ability of banks to raise funds in markets, although it may also be the result of some lending programs becoming more restrictive, Gerlach said. She also said support may need to be removed to avoid distorting competition and so banks don’t have an excuse not to postpone repairing balance sheets quick cash.
While the decline in demand for liquidity is “clearly good news,” some institutions are relying more on governments and central banks than others, Gerlach said.
“This suggests that a differentiated exit strategy is desirable,” she said. “Such an approach would aim for a timely discontinuation of public support while taking into account that some financial institutions remain weak.”
The BIS also noted that banks within the European Union had a combined exposure of more than $200 billion to sovereign debt in Greece, Spain and Portugal at the end of the third quarter of last year. That dwarfs the exposures of the U.S. and Japan, where combined exposure is less than $20 billion.