TD Bank’s economics department warns sustained low interest rates may have put global financial markets at risk, TD says in a new report.

“Although the base case world economic outlook is for continued moderate economic growth, subdued inflation, low interest rates and rising corporate profits — all of which constitute a healthy backdrop for financial markets — the prolonged hyper-stimulative stance of monetary policy in many countries has created its own set of financial excesses,” it warns.

“The sustained low interest rate environment has dramatically increased global liquidity and may have led financial market participants to become overly leveraged and inadequately diversified, leaving them vulnerable to a sharp and unexpected increase in rates,” it notes. TD warns that the current low-rate environment may be viewed as normal, and this may be breeding a culture of complacency about the risks of some of the investment strategies being pursued.

TD warns that risk is “being increasingly transferred to a wider array of financial market participants — and, in many cases away from the institutions that are the most capable of managing it. Meanwhile, the rapid growth and development of new financial products and practices is making it harder to assess and monitor the risks being assumed by market participants.”

TD cites hedge funds and income trusts in Canada as examples of products whose risks may not be well understood by investors. It notes that the shift from defined benefit pension plans to defined contribution plans is transferring market risk from corporations to individuals, “who, arguably, are not nearly as well-equipped to manage the risk.”

TD says it does not mean to suggest that a global financial crisis is inevitable, but it says potential threats need to be monitored closely.

“The bottom line is that global financial markets may be more vulnerable today to unexpected shocks than they have been in the past, implying that vigilance is called for in the pursuit of risk management strategies and the monitoring global financial developments for signs of instability,” TD concludes.