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Invest for a long time, short raging and take advantage of as possible. This is the way to earn money in financing. This is the way the banks gained their livelihood. But we also know very well that this story can end in the runs in order to go out and financial crises. This is what happened in the Great Financial Crisis (GFC) in 2007-2009. Since then, the bank explains international settlements in The latest annual economic reportIt has changed a lot of financial system. But this central feature was not.
Moreover, notes Hyun Song ShinBIS’s economic advisor, “although the real economy is divided, the monetary and financial system is now more tight than ever.” If this seems to be an accident awaiting it, then you are fully right. Central banks should be ready to ride to rescue.
The story that repeats is an interesting story. Thus, the effects of GFC did not make the system essentially different. He only changed who participated. In the period leading up to the crisis, the dominant form of lending to the private sector, especially in the form of real estate loans, was. After that, the private sector was lended, while the credit exploded for governments. The epidemic accelerates this trend.
It was not surprising: If people want to save them and lend it, another person must borrow and spend. This is the total economy 101. In addition to the change in the direction, a change in the intermediaries came: instead of large banks, the managers of the international portfolios have become. (See Plans.)
As a result, bond bond holdings have increased significantly. What matters here is changes in the total, not net, property. The latter is related to long -term sustainability to the macroeconomic and spending patterns. The former is more related to financial stability, because they lead (and move it) changes in the leverage, especially the financial leverage across the border. Moreover, Shin notes“The largest increases in governor’s possessions were between advanced economies, especially between the United States and Europe.” Emerging economies are relatively less than participating in this lending.
How then this new financial system works across the border? They have two basic characteristics: the leading roles of foreign currency and non -banking financial brokers.
The bulk of this across border lending consists of buying dollar bonds, especially US Treasury bonds. Foreign institutions that buy these bonds, such as pension funds, insurance companies and hedge funds, end with dollars and responsibility for local currency. Current hedge is necessary. The banking sector plays a major role, by enabling the market for foreign exchange bodies, which provide these hedges. Moreover, Forex swap is a “side borrowing process”. However, this does not appear on the public budget.
According to BIS, the distinguished Forex bodies (including attacking and currency bodies) reached 111 dollars at the end of 2024, as Forex bodies and attackers are about two -thirds of this amount. This is more than the bank’s cross -border claims (40 Train) and international bonds ($ 29 million). Moreover, the largest and fastest growing part of the market consists of contracts with non -traded institutions. Finally, about 90 percent of Forex bodies on the dollar contains one side of the deal and more than three quarters have a ripening less than one year.
As BIS is noticed, this non -transparent group affects the cross -border financing arrangements to transfer monetary policy. One of the proposals it offers is that the largest role of non -banking financial brokers, especially the hedge funds “may have contributed to the most connected financial conditions across countries.” Some of this is very hidden. Looking at the widespread foreign ownership of American bonds, for example, conditions in the home markets can be transferred to the owners to the United States. Once again, exchange rate movements that affect the value of the emerging market debts can lead to adjustments in their local prices.
What are the risks in this new financing system? As observed, banks are active in the market for Forex pace. It also provides a lot of ribau financing for hedge funds that actively speculate in the bond market. Moreover, according to BIS, more than 70 percent of dual -bank financing from banks is in a zero haircut. As a result, lenders have a little control over the influence of active hedge funds in these markets. It is not the least that non -American banks are active in providing dollar financing for companies that participate in these markets.
What does all this mean? Well, we now have tightly integrated financial systems, especially between high -income countries, even with the transition of countries, politically, and in terms of their commercial relations. Moreover, a lot of dollar funding is relatively short. It is easy to imagine the conditions in which funding dries, perhaps in response to large movements in bond yields or some other shock. As happened in GFC and the epidemic, the Federal Reserve will have to intervene as a lender for the last resort, whether directly or through the swap lines to other central banks, especially those in Europe. We assume that the Federal Reserve will already come to rescue. But can this be considered a release from it, especially after the replacement of Jay Powell next year?
The BIS system has a lot of fragility of traditional banking services, but even less transparency. We have a large number of companies that are not subject to regulation that occupy high summonses, funded on a short -term basis, to invest in long -term assets that may vary in market values significantly even if their capital values are safe in the end. This system requires an active lend of the last resort and the desire to maintain deep international cooperation in a crisis. You should work. But will he do that?
