Investors Complacent About Financial Market Risks, FSB Says

Investors are becoming complacent about risks in financial markets as loose monetary policy spurs a search for yield, the Financial Stability Board said today.

Asset valuations are “stretched” and volatility is compressed, increasing the risk of a sharp reversal in prices, the board said in a statement following a two-day meeting in Cairns, Australia. While regulation has reduced leverage in the banking system, it has picked up in other parts of the financial system, including the market for corporate debt, it said.

“There are also concerns about the mispricing of liquidity risks,” the board said. “Pressures on market liquidity could exacerbate downward price dynamics and market dislocations during a price fall.”

The MSCI World Index of global developed-market equities touched 16.22 times estimated earnings this month, the highest since December 2009, according to data compiled by Bloomberg. Federal Reserve policy makers signaled yesterday that they won’t raise rates anytime soon, pledging to hold interest rates near zero for a “considerable time” after they end asset purchases, probably next month.

“There are increasing signs of complacency about risks in financial markets, in part reflecting a search for yield amidst exceptionally accommodative monetary policies,” it said.

The Financial Stability Board said it also reviewed a draft proposal for a basic capital requirement for global systemically important insurers with a final proposal to be issued ahead of a Group of 20 leaders meeting in Brisbane, Australia in November. It didn’t specify details of the requirement.

The FSB, which was set up to coordinate financial regulatory work of national authorities, also reviewed representation on the board.

“The proposals that are being developed will respond to the increasingly important role of emerging markets in the global economy and the financial system,” it said.

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