Central banks run the risk of distorting financial markets and creating “zombie banks” forever dependent on government support unless they quickly remove extraordinary measures and record low interest rates put in place to deal with the financial crisis, according to the Bank for International Settlements.
“We cannot wait for the resumption of strong growth to begin the process of policy correction,” Jaime Caruana, the BIS general manager, told the bank’s annual general meeting Monday. Banks around the world reported bumper profits last year but the results were distorted by measures taken by countries in the wake of the meltdown and the financial system is still fragile.
The longer governments and central banks wait to boost interest rates and cut deficits, “the larger will be the distortions they create, both domestically and internationally,” said the BIS in its annual report. The organization is worried that banks will become too dependent on government support to survive in a normal environment.
Moreover, the distortions are a serious threat to the broader market, leading investors to take on excessive risks, and encouraging companies to postpone the recognition of losses, which in turn will set the stage for another potentially even more serious phase of the financial crisis, according to the BIS.
Based in Basel, Switzerland, the BIS is an association of central banks aimed at coordinating monetary policy and increasing transparency in the financial system.