The Bank for International Settlements soothes inflation fears but says more regulation is needed to contain leverage risk and cryptocurrencies
The Bank for International Settlements soothes inflation fears but says more regulation is needed to contain leverage risk and cryptocurrencies
The Bank for International Settlements (BIS) believes recent increases in price inflation are transitory. In its 2021 annual economic report, published this week, the central banks’ bank said it expects inflation to follow the path suggested by “break-even” rates, defined as the spread between yields on nominal and inflation-indexed government bonds. That path is modest and temporary.
Importantly, the BIS adds that historical patterns suggest break-evens are “especially informative during volatile periods when conditions evolve quickly and market prices respond rapidly to new information.” Periods don’t get much more volatile than the past 18 months, so the good news is that low inflation should support a continued benign interest rate environment, in turn favoring equity investment, both private and public.
But inflation isn’t the only worry for the alternative assets industry. BIS cites increasing regulatory concern about the growing influence of non-banks on the financial system, saying that the central bank toolkit “is not well suited to addressing the build-up of vulnerabilities among non-bank financial intermediaries, such as asset managers and leveraged funds.”
Reforms after the Global Financial Crisis primarily targeted banks, insurance companies, and market infrastructures, in particular central counterparties (CCPs), while swathes of the financial system – particularly asset managers – were left largely untouched.
The Cryptocurrency Effect
BIS sketches out how central banks plan to meet the challenges of cryptocurrency through Central Bank Digital Currencies (CBDCs). The pitch is more explicitly antagonistic than usual: “Central banks stand at the center of a rapid transformation of the financial sector and payment system. Innovations such as cryptocurrencies, stablecoins, and the walled garden ecosystems of big techs all tend to work against the public good element that underpins the payment system. The DNA loop, which should encourage a virtuous circle of greater access, lower costs, and better services, is also capable of fomenting a vicious circle of entrenched market power and data concentration.”
The report cites recent “tremors” in the market without naming the recent collapse of the Archegos family office, as well as cryptocurrency volatility. BIS said that a prolonged period of aggressive risk-taking suggests that substantial leverage and liquidity mismatches may hide below the surface. The first stage of reform will be closer monitoring, so alternative asset managers can expect increased scrutiny from regulators.