## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/gfsr/2019/october/english/execsum.pdf) ## Other formats - [Markdown version](/-/media/files/publications/gfsr/2019/october/english/execsum.pdf.md) - [Structured JSON version](/-/media/files/publications/gfsr/2019/october/english/execsum.pdf.json) --- ### Overview - Financial markets have been buffeted by the ebb and flow of trade tensions and growing concerns about the global economic outlook. - Weakening economic activity and increased downside risks have prompted a shift toward a more dovish stance of monetary policy across the globe, accompanied by sharp declines in market yields. - The amount of bonds with negative yields has increased to about $15 trillion. - Investors now expect interest rates to remain very low for longer than anticipated at the beginning of the year. - Accommodative monetary policy is supporting the economy in the near term, but easy financial conditions are encouraging financial risk-taking and fueling a further buildup of vulnerabilities in some sectors and countries. ### Key vulnerabilities in the global financial system - Rising corporate debt burdens. - Increasing holdings of riskier and more illiquid assets by institutional investors. - Greater reliance on external borrowing by emerging and frontier market economies. ### Corporate sector vulnerabilities - Corporate sector vulnerabilities are already elevated in several systemically important economies as a result of rising debt burdens and weakening debt service capacity. - In a material economic slowdown scenario, half as severe as the global financial crisis, corporate debt-at-risk (debt owed by firms that are unable to cover their interest expenses with their earnings) could rise to $19 trillion—or nearly 40 percent of total corporate debt in major economies—above crisis levels. - Recommendation highlights: - Maintain stringent supervision of bank credit risk assessment and lending practices. - Increase disclosure and transparency in nonbank finance markets to enable a more comprehensive assessment of risks. - In economies where overall corporate sector debt is systemically high, consider developing prudential tools for highly leveraged firms in addition to sector-specific prudential tools for banks. - Reduce tax-system biases that favor debt over equity financing. ### Nonbank financial institutions and institutional investors - Very low rates are prompting investors to search for yield and take on riskier and more illiquid assets. - Vulnerabilities among nonbank financial institutions are now elevated in 80 percent of economies with systemically important financial sectors (by GDP). - This share is similar to that at the height of the global financial crisis. - Vulnerabilities remain high in the insurance sector. - Institutional investors’ search for yield could lead to exposures that may amplify shocks during market stress: - Similarities in investment funds’ portfolios could magnify a market sell-off. - Pension funds’ illiquid investments could constrain their ability to play a stabilizing role in markets. - Cross-border investments by life insurers could facilitate spillovers across markets. - Policy recommendations: - Strengthen oversight of nonbank financial entities. - Use appropriate incentives (for example, to reduce the offering of guaranteed return products). - Implement minimum solvency and liquidity standards and enhanced disclosure. ### Capital flows and emerging/frontier market vulnerabilities - Capital flows to emerging markets have been spurred by low interest rates in advanced economies. - Median external debt in emerging market economies has risen to 160 percent of exports from 100 percent in 2008. - In some countries, this ratio has increased to more than 300 percent. - Increased borrowing could raise rollover and debt sustainability risks in the event of a sharp tightening in global financial conditions. - Some overindebted state-owned enterprises may find it harder to maintain market access and service their liabilities without sovereign support. - Greater reliance on external borrowing in some frontier market economies could increase the risk of future debt distress. - Policy recommendation: - Indebted emerging market and frontier economies should mitigate debt sustainability risks through prudent debt management practices and strong debt management frameworks. ### Banking sector and funding risks - Post-crisis regulation has improved the overall resilience of the banking sector, but pockets of weaker institutions remain. - Negative yields and flatter yield curves—along with a more subdued growth outlook—have reduced expectations of bank profitability, and the market capitalization of some banks has fallen to low levels. - Banks are exposed to sectors with high vulnerabilities through lending activities, leaving them susceptible to potential losses. - In China, the authorities had to intervene in three regional banks. - Among non-US banks, US dollar funding fragilities remain a source of vulnerability in many economies; these fragilities could amplify the impact of a tightening in funding conditions and create spillovers to countries that borrow in US dollars from non-US banks. ### Environmental, social, and governance (ESG) considerations - ESG principles are becoming increasingly important for borrowers and investors. - ESG factors could have a material impact on corporate performance and may give rise to financial stability risks, particularly through climate-related losses. - Authorities have a key role in developing standards for ESG investing, closing data gaps, and encouraging more consistent reporting. ### Macroeconomic policy guidance - Medium-term risks to global growth and financial stability remain firmly skewed to the downside. - Macroeconomic and macroprudential policies should be tailored to each economy’s circumstances: - In countries where economic activity remains robust but vulnerabilities are high or rising amid still easy financial conditions, policymakers should urgently tighten macroprudential policies, including broad-based macroprudential tools (such as the countercyclical capital buffer). - In economies easing policy in response to a deterioration in the economic outlook, but where sectoral vulnerabilities remain a concern, use a more targeted approach to address specific pockets of vulnerability. - For economies facing a significant slowdown, the focus should be on more accommodative policies, considering available policy space. ### Urgent policy actions (summary) - Rising corporate debt burdens: - Maintain stringent supervision of bank credit risk assessment and lending practices. - Increase disclosure and transparency in nonbank finance markets. - Consider prudential tools for highly leveraged firms where corporate debt is systemically high. - Reduce tax biases favoring debt over equity. - Increasing holdings of riskier and more illiquid securities by institutional investors: - Strengthen oversight of nonbank financial entities. - Use incentives, minimum solvency and liquidity standards, and enhanced disclosure to address vulnerabilities. - Increased reliance on external borrowing by emerging and frontier market economies: - Mitigate debt sustainability risks through prudent debt management practices and strong debt management frameworks. ### Global coordination priorities - Resolve trade tensions. - Complete and fully implement the global regulatory reform agenda, ensuring no rollback of regulatory standards. - Ensure a smooth transition from LIBOR to new reference rates for a wide range of financial contracts around the world by the end of 2021. *International Monetary Fund | October 2019* --- _Source: https://www.imf.org/-/media/files/publications/gfsr/2019/october/english/execsum.pdf_