In its Annual Report issued yesterday, the Bank of International Settlements (BIS) warned that taxpayers still face potentially large losses because the governments have failed to act quickly enough to remove toxic assets from the balance sheets of important banks. Also, government guarantees and asset insurance have exposed taxpayers to potentially large losses.

BIS, whose role can be described as the Central Bank of Central Banks, had been warning in the past about the buildup of toxic assets on the balance sheets of the banks, and had also been calling for implementation of higher capital adequacy norms.

The bank expressed concerns over the difficulty the Central Banks may be facing on when to start reining in the recovery. With the massive liquidity injection programs currently in place all over the world, tightening too late may result in inflationary pressures, or contribute to yet another cycle of an asset prices bubble.

BIS also called for an overhaul of financial regulations, economic policy and the structure of the global economy. It recommended sweeping reforms to markets to limit bilateral trading between banks and, instead, introduce central counter parties, with trading on regulated exchanges.

We have been writing in our blogs that while the banks have benefited a lot from the various programs of the Fed and the Treasury and are in a much better shape now, the amount of toxic assets on the balance sheets of banks like Bank of America (BAC) and Citigroup (C) still remains a big concern.

The Public-Private Investment Program (PPIP), which was designed to remove these toxic or legacy assets from the balance sheets, has not taken off so far (it is expected to be unveiled tomorrow) and is facing many problems even before it has started. While the program is a bad deal for the tax payers, it would certainly help alleviate the problem of toxic assets.

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