A joint call to protect our financial system

It is widely recognised that the extent of the latest financial crisis has warranted swift implementation of a number of extraordinary measures to mitigate a deep recession. But while much has been achieved, the economic recovery remains fragile and uneven. Nevertheless it is time to take note of the possible implications of those measures for the financial system.

To identify those implications, Swiss Re held a meeting with senior private and public sector market participants on 16 June entitled "Financial repression – the unintended consequences". Swiss Re jointly with the Institute of International Finance (IIF) and The Geneva Association have agreed to share the key themes of the discussion with the wider financial community to help foster an active debate of this important issue.

While recognising that extraordinary monetary policies were necessary to support the global economy following the financial crisis, participants expressed concern about the implications of official sector policies that are keeping interest rates at historically low levels for a sustained period of time. They are also concerned about the requirements and incentives for institutional investors to hold government debt instruments.

These policies and actions mask a number of potential unintended consequences for the real economy and for the proper functioning of global capital markets.

"Financial repression" not only results in a 'tax' on households today since it prevents them from earning interest on their deposits; it also means future generations will have to shoulder the long-term costs – including the underfunding of pension provisions. At present, the need to increase savings to compensate for low interest rates has weakened consumption growth, resulting in poor economic recovery and adding to the excess of cash in search of yield.

Furthermore, the distortions created in capital markets – in particular a possible mispricing of risks – must be considered.

Participants also noted that the unprecedented active participation of public institutions in financial markets risks crowding out private investors and thus reducing the diversification of funding sources – whereby a key element of financial stability is at risk of being weakened. 

Considering these possible consequences, participants will continue to engage actively in the international debate and work together to build the foundation of stronger and sustainable economic growth, benefiting  long-term investors and society alike.

There's no doubt that the global financial crisis has been addressed with extraordinary official policies. But seven years later, it is time to move on.  Possible unintended consequences must now be identified and addressed to ensure a more balanced policy approach for the future.

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