A new report from the Bank for International Settlements (BIS) highlights market risks amid expectations for even looser monetary policy in Europe, and the ongoing search for yield among investors.

The report, Volatility stirs, markets unshaken, notes that while equity prices declined briefly in August, they have since recovered those losses, as expectations for added monetary stimulus have now overcome worries about geopolitical issues. “Risk premia remain compressed, as worries over geopolitical tensions had only a brief impact on financial markets against the backdrop of unusually accommodative monetary conditions,” it says.

Instead, the strong demand for yield has returned to dominate market activity. “By fostering risk-taking and the search for yield, accommodative monetary policies thus continued to contribute to an environment of elevated asset price valuations and exceptionally subdued volatility,” the report says.

The BIS also reports that a contraction in overall international banking activity, which began in late 2011, went into reverse in the first quarter of 2014. It says that cross-border claims rose by US$580 billion between the end of 2013 and the end of the first quarter, representing, “the first significant uptick since 2011.” Banks increased their cross-border claims on both advanced and emerging market economies, it says.

Among the emerging market economies, claims on borrowers in China rose the most, to more than US$1 trillion, the BIS reports. It says that claims on the rest of Asia, Latin America and Africa and the Middle East also grew, albeit at a more modest pace.

Conversely, claims on emerging Europe fell for a fourth consecutive quarter, it notes. Corporate borrowers in the region “have lengthened the average maturity of their newly issued international debt securities,” the report says. “This lessens their rollover risk but increases the sensitivity of bond prices to yield changes.”

“Although many institutional investors and other bond buyers operate with little if any leverage, they might potentially be induced to behave as if leveraged by widespread indexation, relative performance metrics or dynamic hedging to offset losses from option selling and other return-enhancing practices,” it says. “The upshot is that they could be forced to sell into a falling market. This could impose significant costs on the economy through slower growth and tighter financial conditions.”