An organization that serves as an umbrella institution for the world’s largest central banks on Sunday joined a growing list of institutions and leaders pushing euro zone countries to insure bank deposits and take other steps to prevent the European debt crisis from further undermining the global economy.
The organization, the Bank for International Settlements, warned that central banks could not cope with the euro zone crisis alone. The central banks are nearing the limits of their resources, the organization said in its annual report, and it is time for policy makers to act.
“Central banks are being cornered into prolonging monetary stimulus, as governments drag their feet and adjustment is delayed,” the organization said. “It would be a mistake to think that central bankers can use their balance sheets to solve every economic and financial problem.”
The unusually sharp language reflected frustration among central bankers at the risks they have assumed to fight a crisis that has continued to worsen. Through emergency lending to commercial banks or large purchases of government bonds, central banks in the United States, Europe and other developed countries have more than doubled the money that they have at risk in the last decade, the organization said. The sum equals about 30 percent of global economic output, or $18 trillion, it said.
The Bank for International Settlements, based in Basel, Switzerland, acts as a place where central banks, including the Federal Reserve and the European Central Bank , can conduct transactions with one another. It also serves as a forum for central bankers to discuss issues like economic policy or bank regulation. Members of its board include Masaaki Shirakawa, governor of the Bank of Japan; Ben S. Bernanke, chairman of the Federal Reserve; and Mario Draghi, president of the European Central Bank.
Stephen G. Cecchetti, the organization’s chief economist, said the views in the annual report were those of the institution and not necessarily of its board.
The message, however, was in tune with recent statements by Mr. Draghi and others that political leaders must move much more urgently to contain the debt crisis.
A growing number of policymakers, including Mr. Draghi and now the Bank for International Settlements, have been pressing euro zone leaders to quickly lay the groundwork for a so-called banking union to end the fatal embrace of overly indebted governments and poorly capitalized banks.
“The first step has to be the banks,” Mr. Cecchetti said during a conference call with reporters. “If you can make sure the banks are solid, then the banks are not putting weights on the sovereigns and the banks are able to support real economic activity.”
A banking union would include a deposit guarantee fund to reassure depositors that their money is safe and prevent bank runs in places like Spain. A banking union would also have a powerful, centralized banking supervisor instead of the hodgepodge of national regulators that now exist. And it would have a fund used to wind down failed banks so that taxpayers would not need to bear the burden.
“The conclusion is hard to escape that a Pan-European financial market and a Pan-European central bank require a Pan-European banking system,” the Bank for International Settlements said.
The report warned that bank deposits were already flowing out of countries perceived as vulnerable. By May, Greek banks had lost about one-third of their foreign deposits and one-quarter of domestic deposits, and the outflow seemed to be accelerating, the report said.
Money is also flowing out of Ireland, Italy, Portugal, and Spain and into banks in Germany and the Netherlands that are perceived as safer. The organization regularly collects data on the flow of money between countries.
While Europe is the center of the crisis, the report said, other regions are experiencing similar problems.
“At its root the European crisis is a potential harbinger,” the report said, “a virulent and advanced convergence of the problems to be expected elsewhere if policy fails to break the vicious cycles generated by the global weaknesses we describe in this report — sectoral imbalances, excess leverage, public overindebtedness and overburdened central banks.”