Banks worldwide may be taking on risks they will regret later if an economic upturn proves short-lived, the Bank for International Settlements (BIS) said today.
Banks worldwide emerged in surprisingly robust shape last year from an economic downturn but have now taken risky bets in their search for profits, said the BIS, the central bank to the world's central banks, in its annual review.
"The main concern is whether the financial sector, having escaped the slowdown relatively unscathed, might be moving ahead of the business cycle," said the report, a closely watched platform for central bank worries worldwide.
"Some institutions may have undertaken investments premised on tenuous assumptions regarding the outlook for growth and the level of interest rates," the report said.
In particular, if central banks in developed countries move to wean their economies from the lowest interest rates in generations, asset classes such as housing could suffer and consumer-oriented businesses see customers disappear, putting pressure on banks' loan books.
Investment banks have come to rely increasingly on proprietary trading, buying and selling securities using the bank's own money rather than on behalf of clients, for earnings, the BIS said.
One key measure of bank risk, so-called Value at Risk or VaR, had risen 20 per cent by the end of 2003 from the year before.
Similarly, lending banks have priced loans aggressively in a bid to win business, leaving them exposed should the economic upturn sour and those businesses weaken.