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 The restrained reaction, especially from emerging markets, to the
Federal Reserve's signals has been encouraging, the quarterly update
from the Switzerland-based forum for major central banks said,
though it expected volatility to return.
"Calm has reigned over financial markets, but it has been an uneasy
calm," said Claudio Borio, the head of the BIS Monetary and Economic
Department.
With interest rates in many parts of the world testing "the
boundaries of the unthinkable day after day", Borio said it wasn't
surprising how sensitive markets remained to the actions of major
central banks.
"There is a clear tension between the markets’ behavior and
underlying economic conditions," Borio said. "At some point, it will
have to be resolved. Markets can remain calm for much longer than we
think. Until they no longer can."
Equity trading at a discount to book value by banks in many
countries remained a "clear sign of mistrust", he said, and the
level of bad loans at euro zone banks needed addressing
"vigorously".
The report also analyzed recent investment, lending flows and debt
issuance trends.
Between June and September, when global markets were rocked by
worries about China's economy, slumping commodity prices and a
surging dollar, debt issuance in emerging markets declined the most
since the end of the financial crisis in 2009.
Across all markets, debt issuance dropped almost 80 percent compared
with both the second quarter of this year and the third quarter of
2014.
Net issuance by Brazilian and Turkish banks and other financial
firms was negative at -$2 billion and -$1.6 billion respectively.
For Chinese financial firms, it fell to $300 million from $10
billion the previous quarter.
"The financial vulnerabilities in emerging market economies have not
gone away," Borio said. "The stock of dollar-denominated debt, which
has roughly doubled since early 2009 to over $3 trillion, is still
there.
"In fact, its value in domestic currency terms has grown in line
with the U.S. dollar’s appreciation, weighing on financial
conditions and weakening balance sheets."
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A special section in the report said hard-to-measure forward sales
of dollars to firms and funds, which are effectively dollar bank
loans, meant non-bank emerging market dollar debt could "easily" be
10 percent higher than the $3.8 trillion headline estimate.
The report also examined how more countries around the world were
selling euro-denominated bonds to take advantage of the record-low
interest rates the European Central Bank's stimulus program is
creating.
Emerging markets issued 62 percent of all their bonds in euros
between June and September, more than trebling the 18 percent share
from March to June.
"What is perhaps new is that the euro seems to be taking on the
attributes of an international funding currency, just like the
dollar," said Hyun Song Shin, BIS Economic Adviser and Head of
Research.
"Cross-border bank lending in euros to borrowers outside the euro
area shows the telltale pattern where a depreciating euro goes hand
in hand with greater euro-denominated lending to borrowers outside
the euro area."
(Reporting by Marc Jones, Larry King)
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