Hyun Song Shin on the New Financial Stability Risks
Aug 31, 2023
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Hyun Song Shin, economic advisor and head of research at the Bank for International Settlements, shares his insights on today's evolving financial landscape. He discusses the shift from bank lending to bond-based borrowing and its inflation implications. Shin also highlights how even traditionally safe assets, like US Treasuries, can suddenly pose risks, as seen in recent crises. He emphasizes the complexity of central banking in curbing inflation while navigating high interest rates and stresses the need for coordinated policies to maintain financial stability.
The shift from bank lending to bond-based borrowing has introduced new risks in the financial system, challenging the traditional expectation of stable yields for bonds.
The changing landscape of financial intermediaries, with non-bank players gaining importance, and the role of infrastructure like central counterparties and exchanges, are key factors shaping the evolving financial system.
Deep dives
Living with high levels of public debt and high inflation
One theme that has emerged from the discussions at the Jackson Hole event is the challenge of living with high levels of public debt and high inflation while having a global financial system built on bonds. This goes against the traditional expectation that bonds should have stable yields. There has been volatility in yields over the last year, and even in the last month, with spikes in mortgage rates and 30-year yields. The podcast hosts also highlight the serendipity of meeting guests on a hiking trail at Jackson Hole.
The shift from credit risk to interest rate risk
The podcast guests discuss the shifting nature of risks in the financial system, moving from focusing on credit risk after the 2008 financial crisis to the current challenges of interest rate risk and the importance of bonds. Policies aimed at reducing credit risk might have unintentionally increased interest rate risk as bonds play a more fundamental role in the financial system.
The role of non-bank financial intermediaries
The discussion touches on the changing landscape of financial intermediaries, with banks shrinking in size and influence while non-bank players, such as asset managers, life insurance companies, and pension funds, gain importance. Additionally, the podcast highlights the role of infrastructure such as central counterparties and exchanges in the evolving financial system.
Financial stability risks and the need for a balanced approach
The guests emphasize the importance of finding a balance between mitigating risks, such as leverage and perverse demand responses, and allowing market determinants to guide outcomes. They discuss the need for central banks to act as a backstop, stepping in when necessary, but not being the first resort. Fiscal policy is also seen as an important factor, with the need for monetary and fiscal policies to work in concert.
At Jackson Hole, the Kansas City Fed's annual gathering for economists and central bankers, there's a lot of focus on the short-term path of monetary policy. But, of course, the Economic Symposium is supposed to be about long-term policy frameworks. And central bankers aren't just responsible for changing benchmark interest rates — they are also financial regulators. On this episode, we speak with Hyun Song Shin, economic advisor and head of research at the Bank for International Settlements, about where he sees risks lurking in the financial system now. We discuss the shift from bank lending to bond-based borrowing, and what it means for inflation now. We talk about how even safe assets like US Treasuries can become sources of stress, such as in March 2020, the gilt crisis of last year, and most recently, the collapse of Silicon Valley Bank. We also talk about how higher interest rates are supposed to bring down inflation, but might not be doing that much currently, as well as the limits of central banking.