## FOREWORD

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### Overview: the 3Cs
- The report frames three accelerating trends as central: COVID-19, Crypto, and Climate (the "3Cs").
- These trends present opportunities: sustaining the ongoing recovery; facilitating more efficient, accessible, and inclusive financial service provision; and greening the economy.
- They also pose risks that, if left unchecked, "could put growth at risk in the medium term or test the resilience of the global financial system."

### Financial stability, policy support, and market developments
- Ongoing policy support has contained financial stability risks and "fueled the global rebound."
- Investors have become increasingly concerned about the economic outlook amid rising virus infections and greater uncertainty about the strength of the recovery.
- After declining notably through the summer, global long-term yields "have risen in late September, in some countries entirely reversing their earlier moves."
- Financial conditions:
  - Eased further in advanced economies.
  - "Remained easy on balance in emerging markets."
  - A prolonged period of extremely easy conditions may lead to overstretched asset valuations and heightened financial vulnerabilities.
- Corporate credit conditions have improved but remain uneven across sectors and countries.
- With removal of fiscal and regulatory support measures, insolvency may rise in some countries.
- Banks: except for "a weak tail of banks in some countries," banks have remained resilient, but remain cautious about the credit outlook in most countries.
- Non-bank financial intermediaries: the pandemic "has unmasked vulnerabilities that need to be urgently addressed."

### Inflation, monetary policy, and emerging markets
- Price pressures have risen; risks to the inflation outlook "appear to be skewed to the upside in many countries."
- In emerging markets, inflation pressures have led many central banks to hike policy rates.
- The pace of domestic emerging market tightening, combined with the potential for sudden tightening of global financial conditions, "could hit emerging markets hard."
- Observation: "Already, we see higher financing costs for domestic debt in emerging markets (except China) since last year."
- Policy guidance recommendations:
  - Central banks should provide clear guidance about the future stance of monetary policy to avoid an unwarranted tightening of financial conditions and minimize the risk of market volatility.
  - Monetary authorities should remain vigilant and—"if price pressures turn out to be more persistent than anticipated"—act swiftly to counter any possible unmooring of inflation expectations.

### Crypto assets and regulatory priorities
- Crypto asset markets are growing rapidly; prices remain highly volatile.
- In some emerging markets, the volume of crypto asset transactions "has reached macro critical levels," often "as high as those of domestic equities."
- Stablecoins: some business models "have been subject to the risk of sudden and severe liquidity pressures."
- Policy recommendation: "A sound regulatory framework for crypto assets, and decentralized finance markets more generally, must be a priority on the global policy agenda."
- A regulatory level playing field is identified as a key priority.

### Climate finance and COP26
- The forthcoming 26th United Nations Climate Change Conference of the Parties (COP26) is described as "a pivotal opportunity to speed up the transition and much-needed global climate actions to avoid catastrophic climate change."
- Achieving net-zero carbon emissions by 2050 "requires substantial additional global investment by both the public and private sectors."
- The global financial sector can play a crucial role in catalyzing private finance and accelerating the transition.
- Climate finance trends:
  - Climate finance is growing rapidly, particularly among asset managers.
  - Assets under management in climate-themed investment funds remain relatively small, but inflows have surged.
  - Potential benefits include cheaper funding costs for climate-friendly firms and greater climate stewardship by funds.
  - Sustainable fund flows "also appear more resilient to adverse shocks," suggesting climate-friendly investors might be relatively stickier.
- Policy objectives: improvements in data, disclosure, and sustainable finance classifications to facilitate assessment of transition-related risks and prevent greenwashing.

*Tobias Adrian, Financial Counsellor*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2021/october/english/foreword.pdf_