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jeudi 6 décembre 2018

Central bank warnings on the global economy are getting louder, by Howard Davies | The Guardian Thu 6 Dec 2018

The reasons to stay awake at night are multiplying - let’s hope this time we have priced the risks correctly

When I took over responsibility for banking supervision in the United Kingdom, in 1995, a wise old bird in the Bank of England (BoE) warned me that I would find it a thankless task.

No newspaper ever prints a headline reading “All London Banks Safe and Sound this Week”. But if a problem occurs, it is almost invariably seen as a case of supervisory failure. Dozy watchdogs asleep at the wheel are a trope that trips quickly into journalists’ coverage.

Regulators are caught in a crossfire of conflicting expectations. 

Banks want to be left alone, unless they need help. Consumers and their political representatives want regulators to be aware of every transaction, ready to intervene in real time if any glitch occurs. In the years running up to the 2008 financial crisis, the pendulum swung toward the non-interventionist end of the spectrum. Today, “intrusive” has a positive connotation in the regulatory lexicon. But the need to strike a sensible balance remains.

The other point my wise old bird made was that the only way to generate a positive story about regulation was to warn of trouble ahead. “Regulators warned today that…” is a good lede for the Financial Times or Wall Street Journal. Editors get a frisson of excitement from worrying their readers.

Joseph Stiglitz Project Syndicate economists :

GDP is not a good measure of wellbeing - it's too materialistic

Financial regulators and the international financial institutions have been following that sage advice a lot recently. As William Coen, the secretary-general of the Basel committee, put it at a recent conference, citing former US Federal Reserve chair Ben Bernanke: “For those working to keep our financial system resilient, the enemy is forgetting.” Coen went on to argue that, “the likelihood of a future financial crisis occurring only increases with time.” I suppose one can see what he means, though I wonder about the logic of that formulation.

The European Central Bank has weighed in with more specific concerns: “Vulnerabilities in financial markets continue to build up amid pockets of high valuations and compressed global risk premia.” The ECB is particularly concerned about the feedback loop to the eurozone from trouble in other markets. That concern centres on asset managers: Euro area investment funds are vulnerable to “potential shocks in global financial markets”.

The BoE has similar concerns about the price of risk. 

On its “Bank Underground” blog, which is fast becoming the most interesting of the BoE’s publications, you can find analysis of the evolution of risk premia. Using the prices of credit default swaps, it shows that investors are accepting less compensation for bearing given amounts of credit risk: compensation per unit of default risk has fallen by 20% since early 2016. Similarly, the volatility premium, defined as the price of options that insure against falls in the equity index, has fallen considerably. In retrospect, mispricing of risk was a flashing red warning sign that regulators and investors ignored in the run up to the 2008 crisis.

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