Central banks are getting closer and closer to issuing digital currencies, but this attempt to fend off the threat of cryptocurrencies raises many questions about the future of the economy.
One consequence of central bank digital currencies, which for the moment is not discussed as much as it should be, is that they could serve as “Trojan horses” for negative interest rates – and these in turn could amount to debt default by stealth.
The European Central Bank (ECB) seems to be wading deeper into political territory, opening an interesting debate on what exactly is the role of central banks.
The ECB recently published a guide to the banks under its supervision, explaining how it expects them to consider risks related to climate change and the environment in their business strategies and their risk management.
If you are wondering what’s behind the sudden largesse of the European Central Bank (ECB) when it comes to purchases of bonds, you may find a recent speech by an ECB official at a conference about financial stability enlightening.
While regulators focused on making banks safer following the 2007-2009 financial crisis, the non-bank financial sector has been allowed to continue without the same stringent requirements for liquidity and leverage. This gap came into sharp focus during the crisis caused by the Covid-19 pandemic.
This “like-no-other” Covid-19 pandemic is clearly a dangerously unique event, with ongoing severe economic and social consequences all around the globe. Nassim Taleb has famously described the Black Swan and more recently, BIS researchers pointed to the Green Swan in reference to the impact of climate change.
But the Covid-19 Swan is quite a combination of colours. It is an ongoing emergency situation, with fear often overcoming hope while anxiety heightens amid a decline in living standards.
Despite central banks keeping interest rates at the lowest levels in history and buying debt like there’s no tomorrow, the mountain of debt is not getting any smaller. Emerging markets are, as usual, the place where people are looking for the first signs of trouble.
It must be a strange experience, being a central banker these days. Ever since the financial crisis of more than a decade ago, central banks have had to reconcile two opposing goals — both of them self-imposed.
With summer over, Italy is back at the forefront of the news – this time not as a holiday destination but in its other capacity, as chief source of market worries. The way things are going, the worries are only just beginning.
When the bank of central banks warns about financial stability, you have to take notice — even if the warning comes in the Bank for International Settlements usually dry, academic style.
The BIS recently published a paper about the effect of prolonged interest rates on financial stability, and it makes worrying reading. (However, as most people are on holidays in August, unless they are reading it on the beach it will largely go unnoticed).