Banking official: Watch those asset prices
DAVOS, Switzerland (AP) — A top international finance official is warning banks to be cautious about the prices of investments that have gone up sharply because of current low interest rates.
Jaime Caruana, the general manager of the Bank for International Settlements, says the low interest rates in effect now may have made it difficult to assess the true value of those investments.
In an interview at the World Economic Forum in Davos, Switzerland, Caruana told The Associated Press that banks and their regulators "should be vigilant on the prices of some of these assets."
That's so that bank finances are solid in case those assets fall in price when central banks in developed countries start raising interest rates as the economy recovers.
Investments such as U.S. junk bonds — bonds issued by corporations with less than perfect credit ratings — have gone up as investors abandon lower-yielding, safer investments in search of higher interest yields. That rise, however, could go into reverse when rates rise. And that could mean losses for investors and banks if they are not careful ahead of time.
"We should be monitoring the levels of the asset prices that have moved rapidly, particularly in risky assets," Caruana said. "Financial institutions need to understand that the level of rates is very low."
At some point, there will be "a return to normality. and I think they should be at some point in time resilient to this type of movements," said Caruana.
The Bank for International Settlements, based in Basel, Switzerland, is a global organization of central banks. Its members include the U.S. Federal Reserve, Bank of Japan, Bank of England, and the European Central Bank, which conducts monetary policy for the 17 countries that use the euro.
Caruana's caution follows a similar warning from the Institute of International Finance, a global association of banks, investment funds and other financial institutions. The IIF this week warned that low rates could mean a "boom-bust cycle" once the central banks withdraw their stimulus.
Central banks in the richer countries — such as the U.S. Federal Reserve, the Bank of England and the Bank of Japan — have lowered interest rates to record lows and pushed newly created money into the financial system by purchasing financial assets.
Caruana avoided mentioning any individual country's policies but said central banks had done the right thing by making a strong effort to support the economy at a time of crisis.