Transcript of the Press Conference on the Release of the October 2017 Global Financial Stability Report
IMF News, October 13, 2017
Source details
- Canonical URL
- Transcript of the Press Conference on the Release of the October 2017 Global Financial Stability Report
Other formats
Bibliographic details
- Published: October 13, 2017
Global financial stability outlook — summary of key findings
- Global financial stability has continued to improve as the economic recovery broadens and global markets are buoyant.
- Despite improvements, vulnerabilities are building under the surface that "could derail the global recovery, putting growth at risk."
- Core of the global financial system is stronger: systemically important banks and insurers are raising capital, addressing legacy issues, and adapting business models.
- In emerging markets, capital flows are rebounding; the cost of financing is low, and currencies and equity prices have strongly appreciated this year.
- Supportive financing conditions and buoyant markets have helped foster and repair balance sheets.
- Monetary accommodation remains necessary to support activity and boost inflation; markets expect a prolonged period of accommodation before full policy normalization.
Five vulnerabilities highlighted
- Market risk is rising:
- "Less than $2 trillion of investment‑grade bonds yielding over 4 percent compared with $16 trillion pre-crisis."
- Credit spreads are close to historic lows despite deteriorating corporate balance sheets.
- Institutional investors are being drawn out of their natural habitats, exposing balance sheets to increased credit maturity and liquidity risks.
- Term premia in longer‑term government securities are negative in many jurisdictions; investors are effectively paying to hold interest rate risk.
- Increasing debt in G‑20 economies:
- Private sector leverage is now higher than prior to the financial crisis.
- Debt service burdens have increased in several major economies, raising risks from sharp increases in interest rates.
- Rising external borrowing in emerging markets and low‑income countries:
- "Portfolio inflows to emerging market economies are on track to reach $300 billion in 2017, more than twice the total over the past two years."
- Greater reliance on foreign borrowing may become a vulnerability, particularly for low‑income countries, if funds are not used productively.
- Elevated risks in China:
- "Size, complexity, and pace of expansion of credit in the financial system, particularly shadow credit, point to elevated risks to financial stability."
- Banking sector assets "are now 310 percent of GDP, up from 240 percent in 2012."
- Complacency due to extremely low volatility across asset classes:
- Markets appear complacent about potential shocks including geopolitical risks, upside inflation surprises, a snapback in long‑term interest rates, and downside risks to economic growth.
Downside scenario and potential impact
- Downside scenario components:
- Risk premiums rise.
- Equity and housing prices fall.
- "$100 billion in portfolio flows are pulled from emerging markets."
- Projected impact:
- "Losses to global output could be about one‑third of that of the global financial crisis."
Specific regional and sectoral observations and statistics
- European nonperforming loans (NPLs):
- Latest official stock: "€988 billion."
- Expected decline to "about €900 billion by the end of the year."
- Italy: Italian banks expected to sell "€65 billion in nonperforming loans this year," including "€18 billion from UniCredit" and "€26 billion from Monte dei Paschi di Siena."
- Spain: Sales of nonperforming loans account for "a further 30 billion in euros."
- Portugal: NPLs peaked last year at "around 18 percent of corporate loans," down to "about 15.5 percent in the second quarter"; nonfinancial corporate sector NPLs "something of 20‑27 percent of corporate loans."
- China:
- Banking sector assets "now 310 percent of GDP, up from 240 percent in 2012."
- Rapid growth of intra‑financial system credit funded with more fragile wholesale funding structures is a concern, particularly for small and medium banks.
- Global systemically important banks (G‑SIBs):
- "We estimate nearly one‑third of systemically important global banks, representing 17 trillion in assets, will struggle to achieve sustainable profitability to ensure ongoing resilience."
- Analysis compares banks' return on equity with banks' own return‑on‑equity targets and market‑implied required returns.
- By 2019, roughly "a third of banks" expected to have relatively weak returns; "half of those institutions might not even meet their own profitability return on equity targets."
- Emerging market banks (India highlighted):
- Indian banking system found vulnerable with "low profitability, large problem loans, and inadequate buffers"; Indian corporates remain highly leveraged with "high debt at risk."
- North Africa:
- Some countries have increasing public debt; cheap financing may enable continued borrowing but could generate financial stability and debt sustainability problems if buoyant conditions reverse.
Policy recommendations and priorities
- Monetary policy:
- Major central banks should ensure a smooth normalization of monetary policy with well‑communicated plans for unwinding unconventional policies to ward off market turbulence.
- Current accommodative stance in the U.S., euro area, and Japan is appropriate given inflation remains below target and some signs of slack.
- Macroprudential and supervisory actions:
- Deploy macroprudential policies and consider extending their boundary to curb rising leverage and growing stability risks.
- Supervisors should increase focus on business models of major banks; help banks restructure business models to restore sustainable profitability.
- Enhance supervision of banks with high NPLs; ECB and Single Supervisory Mechanism targets to reduce NPL stocks should be time‑bound, proportionate, and followed with strict supervisory oversight.
- Structural and country‑specific actions:
- Emerging market countries should use benign financing conditions to address imbalances, reduce private sector leverage where high, and manage external sovereign debt exposures.
- Chinese policymakers should continue to address vulnerabilities and undertake broader reforms to make the economy less reliant on rapid credit growth (reduce corporate leverage, resolve nonviable firms, improve credit efficiency through SOE reform).
- Complete and fully implement the global regulatory reform framework developed after the financial crisis; maintain global cooperation.
- Resolution for challenged G‑SIBs:
- For the subset of systemically important banks likely to struggle with profitability, supervisors should consider more aggressive steps on business models, recapitalization where needed, or restructuring to reduce systemic risk.
Operational steps to reduce nonperforming loans and address bank weaknesses
- Strengthen supervision and set time‑bound targets for NPL reduction with strict supervisory oversight.
- Harmonize and modernize national corporate and insolvency frameworks.
- Develop active secondary markets for disposal and sale of distressed assets.
- In Portugal specifically, Novo Banco sale progressing; remaining steps include approval by EC competition authorities and the ECB; potential contingent capital injection contingencies in place.
Closing remarks
- Key message: "This is no time for complacency. Action is required now because vulnerabilities are building. These vulnerabilities could put growth at risk in the future."
- Recognition: Pete Dattels retiring after contributing to 27 Global Financial Stability Reports since September 2004, leading Chapter 1 for the past 11 years.
Transcript of the press conference, October 13, 2017 — IMF Communications Department