## sum1 ## Source details **Canonical URL:** [sum1](https://www.imf.org/-/media/files/publications/gfsr/2018/oct/ch1/doc/sum1.pdf) ## Other formats - [Markdown version](/-/media/files/publications/gfsr/2018/oct/ch1/doc/sum1.pdf.md) - [Structured JSON version](/-/media/files/publications/gfsr/2018/oct/ch1/doc/sum1.pdf.json) --- ### Overview - In the 10 years since the global financial crisis, regulatory frameworks have been enhanced and the banking system has become stronger, but new vulnerabilities have emerged, and the resilience of the global financial system has yet to be tested. - Since the last Global Financial Stability Report (GFSR), near-term risks to global financial stability have increased somewhat, but financial conditions are still broadly accommodative and supportive of growth in the near term. - Risks could rise sharply should pressures in emerging market economies mount or if trade tensions escalate. - Medium-term risks remain elevated, as easy financial conditions contribute to a further buildup of financial vulnerabilities. ### Near-term risks and financial conditions - Over the past six months, global financial conditions have marginally tightened and the divergence between advanced and emerging market economies has grown. - The global economic expansion continues, but growth appears to have peaked in some major economies. - Financial conditions in advanced economies remain accommodative, particularly in the United States: interest rates still low by historical standards, risk appetite robust, and asset valuations rising in major markets. - Financial conditions have remained broadly stable in China, where authorities have eased monetary policy to offset external pressures and the impact of tighter financial regulations. - Financial conditions in most emerging market economies have tightened since mid-April, driven by higher external financing costs, rising idiosyncratic risks, and escalating trade tensions. - Near-term risks assessed using the growth-at-risk (GaR) approach have increased somewhat over the past six months. - A much sharper tightening of financial conditions in advanced economies would significantly increase short-term risks. - Potential triggers for increased near-term risk: - Intensification of concerns about resilience and policy credibility in emerging markets, leading to further capital outflows and rising global risk aversion. - Broader escalation of trade actions undermining investor confidence. - Political and policy uncertainty (for example, in the event of a no-deal Brexit or concerns about fiscal policy in some highly indebted euro area countries) that could spike risk aversion. - Faster-than-expected monetary policy normalization as inflation firms, leading to a sudden tightening of global financial conditions. - Overall, market participants appear complacent about the risk of a sharp tightening of financial conditions. ### Emerging market vulnerabilities and capital flows - Despite improved fundamentals in recent years, emerging market economies remain vulnerable to spillovers from monetary policy normalization in advanced economies and could face reduced capital inflows even under a relatively benign baseline scenario. - With rising U.S. interest rates and a stronger dollar, and intensifying trade tensions, a number of emerging market economies have experienced a reversal in portfolio flows. - Market pressures to date have been concentrated in countries with large external imbalances and weak policy frameworks. - IMF capital-flows-at-risk analysis: - With a 5 percent probability, emerging market economies (excluding China) could face debt portfolio outflows in the medium term of $100 billion or more over a period of four quarters (or 0.6 percent of their combined GDP), broadly similar in magnitude to the global financial crisis. - External borrowing has continued to rise in most emerging market economies, posing challenges for countries facing external financing risks and trade shocks but lacking adequate reserve buffers or strong domestic investor bases. - Policymakers in emerging market economies should be prepared for further capital outflow pressures. ### Medium-term risks and vulnerabilities - Medium-term risks to global financial stability and growth remain elevated. - Vulnerabilities that could be exposed by a sudden, sharp tightening of financial conditions include: - In advanced economies: high and rising leverage levels in the nonfinancial sector, continued deterioration in underwriting standards, and stretched asset valuations in some major markets. - Total nonfinancial sector debt in jurisdictions with systemically important financial sectors: - $113 trillion (more than 200 percent of their combined GDP) in 2008. - $167 trillion (close to 250 percent of their combined GDP) more recently. - Banks have increased capital and liquidity buffers since the crisis but remain exposed to highly indebted companies, households, and sovereigns; to holdings of opaque and illiquid assets; and to use of foreign currency funding. ### Regulatory reform assessment and policy recommendations - The global regulatory agenda set by the international community has helped strengthen the global banking system. - Some pernicious forms of shadow banking that developed pre-crisis have been curtailed. - Most countries now have a macroprudential authority and some tools to oversee and contain risks to the financial system. - However, factors may have led to some fragmentation in funding and market liquidity: - Regulators increasingly focus on liquidity of individual entities within international banking groups; ring-fencing of liquidity has benefits for resolution but risks fragmenting liquidity in international banking groups. - Market liquidity appears more segmented across different trading platforms; no clear evidence of a broad-based deterioration in market liquidity, but careful monitoring is warranted. - To further improve resilience and address potential systemic risks: - Complete the financial regulatory reform agenda and avoid rollback of reforms. - Use financial regulation and supervision more proactively. - Use broad-based macroprudential tools, including countercyclical capital buffers, more actively in countries where financial conditions remain accommodative and vulnerabilities are high. - Develop new macroprudential tools for addressing vulnerabilities outside the banking sector. - Remain attentive to new risks, including cybersecurity, financial technology, and institutions or activities outside the perimeter of prudential regulation. *International Monetary Fund | October 2018* --- _Source: https://www.imf.org/-/media/files/publications/gfsr/2018/oct/ch1/doc/sum1.pdf_