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How to Sustain Recent Financial Gains: Fix Old Risks and Meet New Challenges

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Policymakers’ decisive actions  since our last report in October have increased global financial stability by reducing acute risks.

But our latest Global Financial Stability Report concludes that improved financial markets and gains in financial stability will not be sustained—and new risks are likely to emerge—unless policymakers address key underlying vulnerabilities.

There are two types: “Old risks”, which are the legacy of the crisis, and “new risks” coming from the easy monetary policies put in place to fight the crisis.

Old risks

First, the euro area still needs to be fixed.

Second, we need healthy banks to support economic recovery. But five years after the start of the crisis, banking systems around the world are still in different stages of repair.

New risks 

The easy monetary policies in advanced economies have been essential to support the economy. But their use over a prolonged period may cause side effects, such as excessive risk taking and leverage, and asset bubbles.

Do we see evidence that those risks are growing?

A key message of this report is that addressing the old risks is essential to leave the crisis behind. But it also reduces the need for continued accommodative monetary policies. This will prevent the new risks from growing and from becoming systemic. 


What needs to be done?

Policymakers need to fix the euro area. This calls for stronger policies to reduce financial fragmentation to help unblock the flow of credit to the economy and increase the resilience of the currency union.

We also need to see renewed political commitment at the national and global levels to complete and implement the regulatory reform agenda. This is critical to minimize regulatory uncertainty and arbitrage, and to reduce financial fragmentation.

At the same time, policymakers must address new risks. 

In the United States, policymakers need to keep banks safe. As for non-banks, they must be vigilant and proactive by restraining too rapid increases in leverage and by encouraging prudent underwriting standards. All this requires appropriate microprudential and macroprudential policies. 

Emerging market economies must keep the guard up against deteriorating bank asset quality and disruptive short-term capital flows. At the same time, prudential policies should be deployed to ensure adequate buffers in the financial system and to prevent the excessive build-up of leverage and asset price bubbles.

Recent policy actions have bought precious time to address underlying financial vulnerabilities. We all know what needs to be done. There is no time to waste. Get it done!