Investors Search for Yield As Rates Drop Further

Steven Bobson, Europe & Americas Editor
September 17, 2012 /

Weak growth and portfolio reallocations driven by concerns about euro area sovereign risk, combined with central bank policy actions, pushed government bond yields to unprecedented lows. And, as market participants searched for investment opportunities offering at least some yield, prices of equities and corporate bonds rose.

Cross-border lending by internationally active banks increased slightly in the first quarter, partly offsetting the sharp contraction in late 2011.

BIS economists Mathias Drehmann and Mikael Juselius show that recessions are likely to be deeper when a larger fraction of households’ and firms’ income is devoted to debt servicing. In addition, they show that a rapid increase in debt service costs (relative to income) raises the probability of a banking crisis.

Boris Hofmann and Bilyana Bogdanova of the BIS show that, since the early part of the last decade, policy rates in both advanced and emerging market economies have mostly been below the level implied by a simple Taylor rule.

The impact of the recent financial crisis on credit growth in Latin America was smaller than that of previous crises. Carlos Montoro (BIS) and Liliana Rojas-Suarez (Center for Global Development) examine whether this could have been a consequence of greater macroeconomic strength in the region at the onset of the crisis, combined with a new-found ability to implement offsetting policies.

Research by Michael Brei (University of Paris 10) and Blaise Gadanecz (BIS) finds that banks that were bailed out during the global financial crisis did not reduce the riskiness of their new lending more than banks that did not receive public assistance.

 

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