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Is the US taking too many financial risks again? 

October 13, 2014

By David Jones and Sanjay Hazarika

Six years after the start of the global financial crisis, low interest rates and other central bank policies in the United States remain critical to encourage economic risk-taking—increased consumption by households, and greater willingness to invest and hire by businesses.

However, this prolonged monetary ease also may have encouraged excessive financial risk-taking. Our analysis in the latest Global Financial Stability Report suggests that although economic benefits are becoming more evident, US officials should remain alert to excessive financial risk-taking, particularly in lower-rated corporate debt markets.

Bullish financial risk-taking bears monitoring

Persistently low global interest rates have prompted investors to search for higher returns in a wide range of markets, such as stocks and investment-grade and high-yield bonds. This has resulted in escalating asset prices, and enabled issuers to sell assets with a reduced degree of protection for investors (we give you an example below). The combined trends of more expensive assets and a weakening quality of issuance could pose risks to stability.

To track the changes in financial risk taking since the crisis, particularly in the lower-rated corporate debt market, we developed a heat map that looks at signs of financial risk taking from three angles: valuation, issuance trends, and redemption risks.

Read more: World Economic Forum

 
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