Banks are still at risk but support packages must end, says BIS

BANK profits cannot continue to rise at their current levels, according to the Bank of International Settlements (BIS).

The institution says the hike in earnings seen in the wake of the collapse is temporary and the sovereign debt crisis could weigh heavily on their bottom lines.

They could also be hit by tumbling commercial property prices and volatile currency trading conditions.

BIS also said governments must slash budget deficits decisively and central banks should not wait too long to raise interest rates.

And it warned that if the support provided to the banking industry and others in the private sector was kept in place for too long, policymakers ran the risk of creating “zombie” banks or companies, dependent on direct support.

But it acknowledged the tricky situation for policymakers and said the stakes were high and the risks from capping lifelines too early loomed large.

In addition, central bankers may underestimate inflation risks as the crisis may have lowered the potential growth rate. But it said challenges for emerging economies were different as they were recovering strongly and inflation was picking up.