## execsum ## Source details **Canonical URL:** [execsum](https://www.imf.org/-/media/files/publications/gfsr/2020/october/english/execsum.pdf) ## Other formats - [Markdown version](/-/media/files/publications/gfsr/2020/october/english/execsum.pdf.md) - [Structured JSON version](/-/media/files/publications/gfsr/2020/october/english/execsum.pdf.json) --- ### Key findings: near-term financial stability and recovery prospects - Near-term global financial stability risks have been contained for now due to an "unprecedented and timely policy response" that has helped maintain the flow of credit and "avoid adverse macro-financial feedback loops," creating a "bridge to recovery." - Vulnerabilities are rising across multiple sectors, intensifying financial stability concerns in some countries: - nonfinancial corporate sector: firms have taken on more debt to cope with cash shortages; - sovereign sector: fiscal deficits have widened to support the economy. - Corporate liquidity pressures may morph into insolvencies, especially if the recovery is delayed. Small and medium-sized enterprises are more vulnerable than large firms with access to capital markets. - The future path of defaults will be shaped by the extent of continued policy support and the pace of the recovery, which is expected to be uneven across sectors and countries. - Global economy expected growth: "the global economy is expected to grow by 5.2 percent in 2021, according to the October 2020 World Economic Outlook (WEO)." - Capital flows and market sentiment: - Aggregate portfolio flows have recovered from March lows, though about half of emerging market economies have experienced outflows over the past three months. - Near-term probability of portfolio outflows fell from "about 60 percent at the peak of market turmoil to 25 percent in September." - Market valuations have rebounded strongly for equities (notably China and the United States) and corporate bond yields have declined—driven by lower risk-free rates and compression in credit spreads—resulting in a persistent "disconnect between rising market valuations and the evolution of the economy." ### Nonfinancial firms: liquidity strains, debt, and default risk - Nonfinancial firms have experienced significant liquidity strains following COVID-19; more vulnerable firms (weaker solvency and liquidity, smaller firms) faced greater stress. - To cope with cash shortages, many firms have: - stepped up bond issuance; - tapped bank credit lines (most notably in the United States); - taken advantage of government-guaranteed loans. - Corporate debt and default risks: - Firms whose earnings fell short of interest expenses have increased borrowing (see "Debt at Risk" indicators). - Aggregate nonfinancial corporate debt remains high in several economies (see country-level percent of GDP indicators). - Default rates have been on the rise; if a sustainable recovery is delayed, liquidity pressures may morph into insolvencies. - Distributional risks: - Large firms with capital market access are likely to avoid significant solvency pressures barring a significant tightening in funding conditions. - Small and medium-sized enterprises and firms in contact-intensive sectors (hotels, restaurants, entertainment) face higher risk of default and insolvency. ### Banking sector: buffers, risks, and stress scenarios - Banks entered the COVID-19 crisis with significantly stronger capital and liquidity buffers than in 2008–09, which has allowed continued credit provision. - Policies encouraging use of regulatory flexibility have likely supported banks' willingness and ability to lend; however, some banks are already starting to tighten lending standards. - Stress-test findings (29 countries, excluding China): - In the October 2020 WEO baseline scenario, most banks are expected to absorb losses and maintain capital buffers above minimum requirements. - In the October 2020 WEO adverse scenario (deeper recession and weaker recovery), a "sizable weak tail of banks" could see capital buffers depleted to levels that could constrain lending capacity. - Weak banks' capital shortfall relative to broad regulatory requirements could reach "$220 billion," even after accounting for borrower- and bank-oriented mitigation policies. ### Nonbank financial institutions (NBFIs): elevated vulnerabilities - NBFIs entered the crisis with elevated vulnerabilities. Fragilities were managed during the March turmoil with policy support, but risks remain high. - Specific risks: - Asset managers could be forced into fire sales if portfolio losses are larger and redemptions last longer than during March. - NBFIs play a growing role in credit markets, including riskier segments. - Increased links between NBFIs and banks imply potential for fragility transmission across the financial system. ### Sovereigns, emerging markets, and frontier economies - Sovereign vulnerabilities have increased because countries expanded fiscal support and sovereigns may face a sharp rise in contingent liabilities. - Cross-sector vulnerability concentration: "6 out of 29 jurisdictions with systemically important financial sectors now showing elevated vulnerabilities in the corporate, banking, and sovereign sectors." - Emerging markets: - Financing needs have risen sharply. - Concerns about new debt supply and weak domestic fundamentals may have curtailed demand for local currency bonds from foreign investors, especially where foreign investors hold large shares of debt and domestic investor bases are shallow. - Some emerging market central banks purchased substantial shares of bonds in the secondary market to stabilize conditions. - Frontier market economies face greater financing challenges, with borrowing costs pushed to "prohibitive levels" in many cases—calling for official support. ### Policy Road Map: adjustments depending on pandemic and recovery paths - Overarching guidance: accommodative policies remain essential as economies reopen to ensure the recovery takes hold and becomes sustainable. Policymakers should balance using available buffers today against the need for future support and the risk of exacerbating vulnerabilities. - Scenario: Gradual Reopening under Uncertainty - Monetary policy — Maintain accommodation to support the recovery - Liquidity support — Maintain support but adjust pricing to incentivize a gradual exit - Credit provision — Encourage banks to use capital and liquidity buffers to continue lending - Nonfinancial private sector — "Extend moratoria on debt service only if necessary to prevent widespread insolvencies, support viable firms through restructuring and efficient out-of-court workouts to reduce the debt burden, as well as by providing solvency support (as appropriate)" - Multilateral support — Provide support to emerging and frontier market economies facing financing difficulties - Scenario: Pandemic under Control - Monetary policy — Maintain accommodation until monetary policy objectives are achieved - Liquidity support — Gradually withdraw - Credit provision — Require banks to gradually rebuild capital and liquidity buffers, develop credible plans to reduce problem assets, and create markets for problem assets - Nonfinancial private sector — Recapitalize, restructure, or resolve nonviable firms - Green recovery — Encourage more proactive management of climate-related risks and green investments - Digitalization — Encourage greater digital investment to enhance financial sector efficiency and inclusion - Post-pandemic Financial Reform Agenda - Nonbank financial sector — Strengthen the regulatory framework to address vulnerabilities exposed during the COVID-19 crisis - Lower for longer — Implement prudential measures to contain risk-taking in the lower-for-longer interest-rate environment ### Final policy considerations - Policies will need to adjust depending on pandemic evolution and pace of economic rebound (see Policy Road Map). At each step, policymakers should consider intertemporal trade-offs and unintended consequences: the benefits of using buffers today should be balanced against the potential need for further support in the future and the risk of exacerbating future vulnerabilities. ### Policy stance and recovery support (Section 2) - Continued monetary policy accommodation and targeted liquidity support will be essential for sustaining the recovery. - A robust framework for debt restructuring will be critical for reducing debt overhangs and resolving nonviable firms. - Low-income countries with financing difficulties may require multilateral support. - Despite its adverse effect on firms’ environmental performance, the COVID-19 crisis also presents an opportunity to engineer a transition to a greener economy (see Chapter 5). ### Medium-term policy priorities once the pandemic is under control (Section 2) - Policy support can be gradually withdrawn after the pandemic is fully under control. - Policy priorities should focus on: - Rebuilding bank buffers. - Strengthening regulation of nonbank financial institutions. - Stepping up prudential supervision to contain excessive risk taking in a lower-for-longer interest-rate environment. ### Empirical snapshots from figures (Section 2) - Figure 12: Change in Local Currency Government Bonds Outstanding by Holder, end-February–June 2020 (Percent of GDP). - Axis tick labels shown in the figure: –3, –2, –1, 2, 0, 4, 7, 6, 3, 1, 5. - Note: Data are not adjusted for inflation-linked debt. South Africa total differs slightly from aggregated component changes. Indonesia central bank holdings of government securities reported as net of monetary operations by source. Data labels use International Organization for Standardization (ISO) country codes. LC = local currency. - Figure 11: Corporate, Bank, and Sovereign Vulnerabilities in 29 Jurisdictions with Systemically Important Financial Sectors. - Note: Based on the data underlying Figure 1; red dots denote countries with medium-high or high sovereign vulnerabilities. - Vulnerability categories indicated: Higher bank vulnerabilities (low — medium-low; medium-high — high) and Higher corporate vulnerabilities (low — medium-low; medium-high — high). - Figure 10: Nonbank Financial Institutions: Financial Vulnerability Indices and Sector Size. - Axis labels and values shown in the figure: - Financial vulnerability indices (percentile score): 0.0 0.4 0.3 0.2 0.1 0.5 0.6 0.7 0.8 1.0 0.9 - Sector size (trillions of US dollars): 0807060504030201090100110 - Note: See Chapter 1 for details. AEs = advanced economies; AMs = asset managers; EMs = emerging markets; OFIs = other financial institutions. *Source: Executive Summary section (execsum - Section 1), Global Financial Stability Report: Bridge to Recovery, October 2020.* ### Section 1 ### execsum - Section 1 ### Key findings: near-term financial stability and recovery prospects - Near-term global financial stability risks have been contained for now due to an "unprecedented and timely policy response" that has helped maintain the flow of credit and "avoid adverse macro-financial feedback loops," creating a "bridge to recovery." - Vulnerabilities are rising across multiple sectors, intensifying financial stability concerns in some countries. Notable increases in vulnerabilities include: - nonfinancial corporate sector: firms have taken on more debt to cope with cash shortages; - sovereign sector: fiscal deficits have widened to support the economy. - Corporate liquidity pressures may morph into insolvencies, especially if the recovery is delayed. Small and medium-sized enterprises are more vulnerable than large firms with access to capital markets. - The future path of defaults will be shaped by the extent of continued policy support and the pace of the recovery, which is expected to be uneven across sectors and countries. - Global economy expected growth: "the global economy is expected to grow by 5.2 percent in 2021, according to the October 2020 World Economic Outlook (WEO)." The expected rebound and easy financial conditions imply that the odds of negative growth next year are low, though the balance of risks is tilted to the downside. - Capital flows and market sentiment: - Aggregate portfolio flows have recovered from March lows, though about half of emerging market economies have experienced outflows over the past three months. - Near-term probability of portfolio outflows fell from "about 60 percent at the peak of market turmoil to 25 percent in September." - Market valuations have rebounded strongly for equities (notably China and the United States) and corporate bond yields have declined—driven by lower risk-free rates and compression in credit spreads—resulting in a persistent "disconnect between rising market valuations and the evolution of the economy." ### Nonfinancial firms: liquidity strains, debt, and default risk - Nonfinancial firms have experienced significant liquidity strains following COVID-19; more vulnerable firms (weaker solvency and liquidity, smaller firms) faced greater stress. - To cope with cash shortages, many firms have: - stepped up bond issuance; - tapped bank credit lines (most notably in the United States); - taken advantage of government-guaranteed loans. - Corporate debt and default risks: - Firms whose earnings fell short of interest expenses have increased borrowing (see "Debt at Risk" indicators). - Aggregate nonfinancial corporate debt remains high in several economies (see country-level percent of GDP indicators). - Default rates have been on the rise; if a sustainable recovery is delayed, liquidity pressures may morph into insolvencies. - Distributional risks: - Large firms with capital market access are likely to avoid significant solvency pressures barring a significant tightening in funding conditions. - Small and medium-sized enterprises and firms in contact-intensive sectors (hotels, restaurants, entertainment) face higher risk of default and insolvency. ### Banking sector: buffers, risks, and stress scenarios - Banks entered the COVID-19 crisis with significantly stronger capital and liquidity buffers than in 2008–09, which has allowed continued credit provision. - Policies encouraging use of regulatory flexibility have likely supported banks' willingness and ability to lend; however, some banks are already starting to tighten lending standards. - Stress-test findings (29 countries, excluding China): - In the October 2020 WEO baseline scenario, most banks are expected to absorb losses and maintain capital buffers above minimum requirements. - In the October 2020 WEO adverse scenario (deeper recession and weaker recovery), a "sizable weak tail of banks" could see capital buffers depleted to levels that could constrain lending capacity. - Weak banks' capital shortfall relative to broad regulatory requirements could reach "$220 billion," even after accounting for borrower- and bank-oriented mitigation policies. ### Nonbank financial institutions (NBFIs): elevated vulnerabilities - NBFIs entered the crisis with elevated vulnerabilities. Fragilities were managed during the March turmoil with policy support, but risks remain high. - Specific risks: - Asset managers could be forced into fire sales if portfolio losses are larger and redemptions last longer than during March. - NBFIs play a growing role in credit markets, including riskier segments. - Increased links between NBFIs and banks imply potential for fragility transmission across the financial system. ### Sovereigns, emerging markets, and frontier economies - Sovereign vulnerabilities have increased because countries expanded fiscal support and sovereigns may face a sharp rise in contingent liabilities. - Cross-sector vulnerability concentration: "6 out of 29 jurisdictions with systemically important financial sectors now showing elevated vulnerabilities in the corporate, banking, and sovereign sectors." - Emerging markets: - Financing needs have risen sharply. - Concerns about new debt supply and weak domestic fundamentals may have curtailed demand for local currency bonds from foreign investors, especially where foreign investors hold large shares of debt and domestic investor bases are shallow. - Some emerging market central banks purchased substantial shares of bonds in the secondary market to stabilize conditions. - Frontier market economies face greater financing challenges, with borrowing costs pushed to "prohibitive levels" in many cases—calling for official support. ### Policy Road Map: adjustments depending on pandemic and recovery paths - Overarching guidance: accommodative policies remain essential as economies reopen to ensure the recovery takes hold and becomes sustainable. Policymakers should balance using available buffers today against the need for future support and the risk of exacerbating vulnerabilities. - Scenario: Gradual Reopening under Uncertainty - Monetary policy — Maintain accommodation to support the recovery - Liquidity support — Maintain support but adjust pricing to incentivize a gradual exit - Credit provision — Encourage banks to use capital and liquidity buffers to continue lending - Nonfinancial private sector — "Extend moratoria on debt service only if necessary to prevent widespread insolvencies, support viable firms through restructuring and efficient out-of-court workouts to reduce the debt burden, as well as by providing solvency support (as appropriate)" - Multilateral support — Provide support to emerging and frontier market economies facing financing difficulties - Scenario: Pandemic under Control - Monetary policy — Maintain accommodation until monetary policy objectives are achieved - Liquidity support — Gradually withdraw - Credit provision — Require banks to gradually rebuild capital and liquidity buffers, develop credible plans to reduce problem assets, and create markets for problem assets - Nonfinancial private sector — Recapitalize, restructure, or resolve nonviable firms - Green recovery — Encourage more proactive management of climate-related risks and green investments - Digitalization — Encourage greater digital investment to enhance financial sector efficiency and inclusion - Post-pandemic Financial Reform Agenda - Nonbank financial sector — Strengthen the regulatory framework to address vulnerabilities exposed during the COVID-19 crisis - Lower for longer — Implement prudential measures to contain risk-taking in the lower-for-longer interest-rate environment ### Final policy considerations - Policies will need to adjust depending on pandemic evolution and pace of economic rebound (see Policy Road Map). At each step, policymakers should consider intertemporal trade-offs and unintended consequences: the benefits of using buffers today should be balanced against the potential need for further support in the future and the risk of exacerbating future vulnerabilities. *Source: Executive Summary section (execsum - Section 1), Global Financial Stability Report: Bridge to Recovery, October 2020.* ### Section 2 ### execsum - Section 2 ### Policy stance and recovery support - Continued monetary policy accommodation and targeted liquidity support will be essential for sustaining the recovery. - A robust framework for debt restructuring will be critical for reducing debt overhangs and resolving nonviable firms. - Low-income countries with financing difficulties may require multilateral support. - Despite its adverse effect on firms’ environmental performance, the COVID-19 crisis also presents an opportunity to engineer a transition to a greener economy (see Chapter 5). ### Medium-term policy priorities once the pandemic is under control - Policy support can be gradually withdrawn after the pandemic is fully under control. - Policy priorities should focus on: - Rebuilding bank buffers. - Strengthening regulation of nonbank financial institutions. - Stepping up prudential supervision to contain excessive risk taking in a lower-for-longer interest-rate environment. ### Empirical snapshots from figures (as presented) - Figure 12: Change in Local Currency Government Bonds Outstanding by Holder, end-February–June 2020 (Percent of GDP). - Axis tick labels shown in the figure: –3, –2, –1, 2, 0, 4, 7, 6, 3, 1, 5. - Note: Data are not adjusted for inflation-linked debt. South Africa total differs slightly from aggregated component changes. Indonesia central bank holdings of government securities reported as net of monetary operations by source. Data labels use International Organization for Standardization (ISO) country codes. LC = local currency. - Figure 11: Corporate, Bank, and Sovereign Vulnerabilities in 29 Jurisdictions with Systemically Important Financial Sectors. - Note: Based on the data underlying Figure 1; red dots denote countries with medium-high or high sovereign vulnerabilities. - Vulnerability categories indicated: Higher bank vulnerabilities (low — medium-low; medium-high — high) and Higher corporate vulnerabilities (low — medium-low; medium-high — high). - Figure 10: Nonbank Financial Institutions: Financial Vulnerability Indices and Sector Size. - Axis labels and values shown in the figure: - Financial vulnerability indices (percentile score): 0.0 0.4 0.3 0.2 0.1 0.5 0.6 0.7 0.8 1.0 0.9 - Sector size (trillions of US dollars): 0807060504030201090100110 - Note: See Chapter 1 for details. AEs = advanced economies; AMs = asset managers; EMs = emerging markets; OFIs = other financial institutions. *Source: execsum - Section 2 (execsum.pdf) — IMF staff estimates and figures as presented in the source content.* --- _Source: https://www.imf.org/-/media/files/publications/gfsr/2020/october/english/execsum.pdf_