Interest rates were brought to almost non-existent levels during the crisis in an attempt to stimulate investment. Instead, says the International Monetary Fund (IMF), they have fuelled the kind of risk-taking that could cause another crash.
“Policymakers are facing a new global imbalance: not enough economic risk-taking in support of growth, but increasing excesses in financial risk-taking posing stability challenges,” said José Viñals, financial counsellor at the IMF, which used its latest global financial stability report to highlight the dangers of the shadow banking system, made up of hedge funds, money markets and investment banks that do not take deposits from the public.
According to the report, the greatest risk to stability comes from this sector, rather than traditional banks, which remain weak despite numerous cash injections.
Part of this is due to ultra-low interest rates, which are leading to investor behaviour that is out of step with the global economy. “Accommodative policies aimed at supporting the recovery and promoting economic risk taking have facilitated greater financial risk taking,” such as rising asset price and lower premiums on risky investments, explained the IMF.
Preventing against another crisis, warns the organisation, will involve measures such as forcing banks to hold more capital and placing restrictions on lending in areas such as housing.
“The best way to safeguard financial stability and improve the balance between economic and financial risk taking is to put in place policies that enhance the transmission of monetary policy to the real economy – thus promoting economic risk taking – and address financial excesses through well-designed macroprudential measures,” said the IMF.