## FOREWORD

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### Overview of current financial sentiment and risks
- Sentiments in financial markets are quite different now compared to April when the last Global Financial Stability Report was published.
- Recent developments: concerns about spread of stress in the banking sector gave way to optimism about brisk disinflation and a soft landing of the global economy.
- Risks to that optimism: upside surprises to inflation, financial stability concerns in China, and renewed concerns about debt sustainability, which can lead to a sharp repricing of assets.
- Recent rapid rises in global bond yields provide a glimpse of the abruptness at which financial conditions can tighten.
- Although acute strains in the global banking sector have subsided, indications of trouble elsewhere are emerging as higher interest rates squeeze repayment capacity of corporate and household borrowers.
- Financial stability risks therefore remain elevated, as was the case in April.

### Monetary policy and inflation priority
- The main priority continues to be returning inflation to target.
- Global core inflation has slowed so far this year but remains elevated.
- A restrictive stance is needed in economies with still-elevated and persistent inflation until there is tangible evidence that inflation is sustainably moving toward targets.
- Policy should account for divergence in inflation developments between advanced economies and some emerging market economies; country-specific circumstances are imperative in monetary policy decision making.

### Sovereign financing and debt vulnerabilities
- High global interest rates are affecting the cost of financing in emerging market and developing economies.
- Most major emerging markets have been resilient so far in 2023.
- A significant number of frontier and low-income sovereign issuers will likely continue to face financing challenges.
- Recommended sovereign actions:
  - Focus on structural reforms that foster growth and enhance efforts to manage risks associated with high debt vulnerabilities.
  - Where feasible, execute refinancing or liability management operations to rebuild buffers.
  - Countries nearing debt distress should establish early contact with creditors and coordinate preemptive and orderly restructuring to avoid costly defaults and prolonged loss of market access.
  - Promote development of local currency markets and cultivate a stable and diversified investor base to help insulate domestic financial conditions from external developments.

### Real estate sector vulnerabilities
- The prospect of higher-for-longer rates impacts residential and commercial real estate sectors.
- In certain countries, especially those with a significant share of variable rate mortgages, home prices have registered double-digit declines since their peak.
- Vulnerabilities in the commercial real estate sector pose a significant risk to the financial sector; the sector will face a funding pullback by lenders in the coming years.
- Recommended actions:
  - Conduct stringent stress tests to assess effects of rising interest rates on borrowers’ ability to repay loans and consequences of a sharp fall in real estate prices for households, corporations, and financial institutions.
  - Address systemic risks related to commercial real estate stemming from nonbank financial institutions by broadening the reach of macroprudential tools and enhancing data collection.

### Banking sector resilience and supervision
- Although acute stress observed last March has subsided, a sizable tail of weak banks remains (see Chapter 2 of the Global Financial Stability Report).
- Supervisory priorities:
  - Ensure banks have corporate governance and risk management processes commensurate with their risk profiles.
  - Pay specific attention to bank asset classification and provisions, and exposures to interest rate and liquidity risks.
  - Provide timely, intrusive, and conclusive banking supervision.
  - Safeguard the operational independence of supervisors by providing them clear safety and soundness mandates, adequate resources, and legal protection.
  - Continue to build buffers as necessary to guard against future losses and support credit provision through periods of stress.
- Policy evaluations:
  - Evaluate whether the Basel III liquidity standards performed as intended.
  - Explore potential improvements in international standards for interest rate risk.
  - Consider expanding scope of regulations and resolution regimes to encompass a broader range of banks.
  - Address obstacles—legal, regulatory, or operational—to cross-border funding in resolution, including the ability to mobilize collateral across borders.

### Nonbank financial intermediation (NBFI)
- NBFI has become increasingly important in the global financial system over the past decade, making comprehensive systemic risk assessments of NBFI a financial stability policy priority.
- Recommended actions:
  - Close data gaps by strengthening disclosures and regulatory reporting to better characterize and identify systemic risk from NBFI.
  - Facilitate increased supervisory effort to rein in excessive liquidity mismatches and leverage.
  - If central bank liquidity is needed to stem systemic crises involving NBFIs, provide clear communication about financial stability objectives and program parameters, including the time frame for exit.

### Climate finance and emerging market needs
- Addressing climate financing needs in emerging market and developing economies requires a comprehensive set of policies (see Chapter 3 of the Global Financial Stability Report).
- Policy mix suggestions:
  - Use carbon pricing, recognizing it can be highly effective in directing capital flows toward low-carbon investments but may take time to be phased in because of political resistance.
  - Complement carbon pricing with a mix of fiscal, structural, climate, and financial sector policies.
  - Strengthen the climate information architecture—data, disclosures, and alignment approaches (including taxonomies).
  - Develop transition taxonomies to help institutions identify activities that may reduce greenhouse gas emissions over time, including in the most carbon-intensive sectors.
  - Enhance disclosures and labels for sustainable investment funds to improve market transparency, market integrity, and alignment with climate impact–oriented outcomes.
- The IMF’s role:
  - Through its convening power, the IMF can mobilize private climate finance, particularly in lower-income countries.
  - The Resilience and Sustainability Facility can be a catalyst for private finance through its policy conditionality, supporting reforms that can help attract private capital.

*Source: International Monetary Fund | October 2023*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2023/october/english/foreword.pdf_