Could the fixed balance sheets restore financial stability?

The OECD’s Economic Outlook published on the 25th of May and the BIS’s 81st Annual Report brought out on the 26th of June characterize the global recovery as self-sustained. It is projected that the US economy will grow by 2.6% in 2011 and 3.1% in 2012, the GDP in Euro area will rise by 2% in each of upcoming two years and the Japan’s GDP increase by 0.9 % and by 2.2% in 2011 and 2012 accordingly. Consequently, the safeguards of financial stability recommend withdrawing fiscal and monetary stimulus due to the rising inflation. However, these suggestions bear a strong resemblance to the decisions how to fix balance sheets instead of restoring foundations of financial stability.

From my point of view, the described economy recovery of the advanced countries in the OECD’s and the BIS’s reports is lack of structural analyses. Once the pressure of the inflation is taking under considerations I would rather like to know whose industrial sectors are overheated and why their development requires suppression. Moreover, has anybody estimated how the imposed extra costs associated with the suggested growth of interest rates would affect other fragile industries?

Additionally, increased capital (10.5% - total capital requirements that involves minimum capital plus conservation buffer), leverage and liquidity standards for banks according to the Basel III requirements and other endeavours such as accepted “ringfence” concept – the British initiative that intends to protect essential banks’ operations (deposit taking and payment systems) in big diverse banks; regulators agreement on extra capital charges of 1% to 2.5% of risk-adjusted assets on the 30 global systematically important institutions as well as suggestions of the BIS and the BCBS to apply supplementary countercyclical capital buffers are attempts to absorb losses in bad times and keep clean balance sheets of financial institutions after the banks’ bail outs started in 2008. However, those achievements do not mean that losses of the Financial Crisis are vanished. In most cases, they are just transferred to the governments’ balance sheets and the particular focus is required to recover the fragile economies of advanced regions.

However, according to the BIS's Annual Report “very low interest rates in major advanced economies delay the necessary balance sheet adjustments of households and financial institutions”. Thus, it may imply that encouragement to increase interest rates is aimed to restore price stability rather that the soundness of the whole financial system.