16 October 2019

Financial Times: Low interest rates fuel financial risk-taking, IMF warns

Persistently low interest rates are encouraging investors to take dangerous risks in a quest to maintain their financial returns, the IMF said on Wednesday, raising concerns that even the current lacklustre performance of the global economy may not be sustainable.

Policymakers should urgently seek to extend banking regulations introduced after the financial crisis to other parts of the financial sector such as insurers, asset managers and pension funds, the IMF recommended in its annual Global Financial Stability Report. Regulators should demand greater oversight of these companies and disclosures about the risks they are running, the IMF said.

Tobias Adrian, the IMF’s financial counsellor, said: “The search for yield among institutional investors — such as insurance companies, asset managers and pension funds — has led them to take on riskier and less-liquid securities. These exposures may act as an amplifier of shocks.”

Low interest rates were supporting growth “for now”, but were “putting growth at risk in the medium term”, he added.

Lending to companies that would struggle to repay their borrowings if a downturn hit has surged, Mr Adrian said, highlighting the global economy’s increasing vulnerability to this part of the financial system. 

He also noted the fragility of parts of the financial system, including insurance companies and pension funds, and some of the world’s poorest countries where foreign debts have hit historic highs.

Central banks have pursued low interest rates to encourage borrowing and spending, in a bid to raise economic performance and lower the cost of servicing debt, but the flipside of this policy is that the more successful it is, the more dangers mount in some pockets of the financial system.

“Accommodative monetary policy is supporting the economy in the near-term, but easy financial conditions are encouraging financial risk-taking and are fuelling a further build-up of vulnerabilities in some sectors and countries,” the IMF said. [...]

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Global Financial Stability Report: Lower for Longer

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