Central bank group: Crisis fixes still needed

FRANKFURT—Governments, banks and households struggling with too much debt are dragging down the world's economy and more needs to be done to make the banking system safer, a global organization of central banks warned yesterday. The Bank for International Settlements said in its annual report that the world economy remains out of balance, with advanced economies struggling with debt and emerging economies growing strongly but facing risks of their own version of boom and bust.

The BI —an intergovernmental organization of central banks based in Basel, Switzerland—said it's key for governments to make banks take responsibility for their losses and force them to rebuild their finances. Meanwhile, the threat from risky bank behavior is growing again.

“The world is now five years on from the outbreak of the financial crisis, yet the global economy is still unbalanced and seemingly becoming more so as interacting weaknesses continue to amplify each other,” the BIS said in its 82nd annual report. “The goals of balanced growth, balanced economic policies and a safe financial system still elude us.”

The financial crisis that began in 2007 with losses suffered by investment funds and banks on mortgage-backed securities in the United States led to a full-blown crisis and global recession after US investment bank Lehman Brothers went bankrupt in 2008.

Stock markets have plunged and then recovered, governments have put billions into rescuing banks to avoid a worse collapse, and central banks have slashed interest rates and in some cases expanded the supply of money to bolster their economies.

This has left an uneven and fragile recovery, with high unemployment and increased levels of government debt afflicting developed economies. Meanwhile, the 17-countries that use the euro have sunk into a crisis over excessive government debt. The aftermath, says the BIS, is that governments, banks, and consumers are all trying to cut back on debt at the same time, magnifying each other's problem as they do so.

Stephen Cecchetti, the head of the BIS's monetary and economic department, said central banks should not be expected to carry the entire load of supporting growth and debt reduction. “In the middle of all this we find the overburdened central banks, pushed to use what power they have to contain the damage. But there are very clear limits to what central banks can do.”