And central banks have been “overburdened for far too long”, said Claudio Borio, head of BIS’ monetary and economic department.
“Developments in the period under review have highlighted once more just how dependent on central banks markets have become,” Borio said.
“It is becoming increasingly evident that central banks have been overburdened for far too long… A more balanced policy mix is essential to bring the global economy into a more robust, balanced and sustainable expansion.”
He added: “There has been a distinctly mixed feel to the recent rally – more stick than carrot, more push than pull, more frustration than joy.
“This explains the nagging question of whether market prices fully reflect the risks ahead. Doubts about valuations seem to have taken hold in recent days. Only time will tell.”
Borio described the UK’s Brexit vote as “a huge surprise that wrong-footed market participants”.
Despite equity prices falling, volatility spiking, credit spreads widening and sterling sinking to a 30-year low in the following days, Borio noted that the markets “continued to function well, and market liquidity – despite all the worries – held up, with no signs of gapping”.
“Moreover, a couple of days later, the turbulence had gone just as quickly as it had arrived,” he added. “To be sure, in contrast to other big ‘shocks’, its timing was entirely predictable: both market participants and the authorities had plenty of forewarning to prepare.
“And central banks were quick to provide reassurances, with both individual and joint statements that underlined their readiness to provide support to markets, institutions and the economy, if the need arose.
“Even so, the speed of the recovery took many by surprise, given the political and economic uncertainty that the vote had triggered.”
In the report, BIS highlighted how there have been nearly $250bn in outflows from prime dollar money-market funds, which provide short-term loans to banks, since late June. This has been linked to new rules, to be implemented next month, aiming to make the funds more transparent about risks.
The report said the outflows have “created incipient funding tensions for non-US, especially Japanese, banks which rely heavily on prime funds for their US dollar funding”.