Bankers are back to the excessive risk-taking that brought on the financial crisis. That, at least, is the fear of the Bank for International Settlements. The so-called “central banks' bank” has summoned a number of private sector bank chiefs to Basel this weekend to rap their knuckles about the return of “aggressive behaviour that prevailed during the pre-crisis period”. Given that the BIS was one of the few official organisations to warn of a brewing credit crisis way back when, its latest admonition is worrying. Yet, at the same time, the BIS wants to eat its cake and have it too.
Central banks want private bankers to take more risk. They want them to lend, even if credit demand is weak. More generally, they want to see funds flow out of cash and into the real economy. That, after all, is the point of near-zero interest rate policies and quantitative easing. The result has been a colossal and also lucrative carry trade, with both welcome and unwanted consequences.
The supply of cheap funding has created useful demand by commercial banks for government bonds, just as fiscal deficits are rising. It has also helped banks rebuild their balance sheets. It may even have led to an incremental increase in the supply of credit. But being able to borrow at zero in the US and lend at, say, 9 per cent plus in Brazil has unleashed a possibly dangerous surge of hot money into emerging markets. Back home, it has also produced embarrassingly large profits at banks that weathered the crisis well, such as Goldman Sachs.