Transcript of the Press Conference of the October 2018 Global Financial Stability Report
IMF News, October 10, 2018
Source details
- Canonical URL
- Transcript of the Press Conference of the October 2018 Global Financial Stability Report
Other formats
Bibliographic details
- Published: October 10, 2018
Overview
- Event: Press conference for the fall 2018 Global Financial Stability Report.
- Date: October 10, 2018.
- Speakers: Tobias Adrian (Financial Counsellor and Director, Monetary and Capital Markets Department), Fabio Natalucci (Deputy Director, Monetary and Capital Markets Department), Anna Ilyina (Division Chief, Global Markets Analysis Division), Andreas Adriano (Senior Communications Officer, Communications Department).
Main findings
- Global expansion remains strong and is supported by still easy monetary policy.
- The global financial system is stronger than before the global financial crisis due to a decade of reform and recovery, but financial imbalances continue to build and the system remains untested.
- Short-term risks to financial stability have increased; medium-term risks remain elevated.
- Debt levels:
- Total debt of governments, companies, and households in the key 29 countries with large financial systems has grown to about 250 percent of the combined GDP.
- Capital flows risk:
- Capital Flows at Risk analysis: there is a tail risk, or a 5 percent probability that emerging markets could face debt portfolio outflows of around 100 billion over a period of four quarters.
- Asset valuations and market conditions:
- Corporate bond spreads are compressed globally.
- Valuations in U.S. equity markets are elevated.
- Some housing markets in global financial-center cities are richly valued.
- Banking sector:
- Banks have increased capital and liquidity and are stronger than at the time of the global financial crisis, but vulnerabilities remain (lending to highly indebted borrowers, holdings of illiquid and opaque assets, reliance on foreign fragile currency funding).
- Market-making and liquidity:
- Market-making activity has changed since the crisis; high-frequency trading firms are relatively more important.
- Liquidity in normal days appears ample, but increased frequency of flash-crash events where liquidity briefly vanishes has been observed.
Risks and potential triggers
- Downside risk drivers identified:
- Intensification of concerns about emerging markets leading to larger capital flows.
- Broad escalation of trade tensions discouraging investment and souring risk appetite.
- Increase in policy uncertainty undermining investor confidence.
- Faster-than-anticipated normalization of monetary policy dampening real activity and triggering repricing in asset markets.
- Examples of triggers discussed:
- Inflation higher than expected in the U.S. prompting sharper monetary tightening.
- A disorderly Brexit affecting continuity of financial services and contractual arrangements (including CCP recognition and cross-border provision of services).
- Trade tensions channel:
- Main channel is the confidence channel — trade tensions can tighten financial conditions via declines in investor confidence, as already evident in China.
- Monetary policy normalization effects:
- Observed outcomes: 10-year rate is now over 3 percent; Federal Reserve balance-sheet normalization; recent appreciation of the dollar.
- Expected effect: tighter financial conditions for emerging markets and potential capital-flow reversals.
Vulnerabilities and amplifiers
- Debt and leverage:
- Nonfinancial sector debt has increased to around 250 percent of GDP in the key 29 countries.
- Market-based finance and underwriting:
- Increased credit intermediation outside the banking sector; deterioration in underwriting standards in parts of credit markets.
- Credit spreads tight by several measures, with underwriting contributing to overvaluation in credit.
- Housing and mortgage exposure:
- Housing-price runups in major cities linked to household leverage and bank exposures via mortgages.
- Unknowns in market structure:
- Uncertainty about resilience of contemporary market-making (greater role of high-frequency traders versus traditional broker-dealers) during large downward price adjustments.
- Cybersecurity:
- Cyber risk is the top concern for risk managers; attacks have produced operational outages and losses in multiple jurisdictions.
- Wide heterogeneity in preparedness across institutions and countries (some institutions have sophisticated backup locations; others are poorly prepared).
Policy recommendations
- General cross-cutting guidance:
- Strengthen resilience by addressing financial vulnerabilities; complete and implement the post-crisis regulatory reform agenda; resist calls to roll back reforms.
- Central banks should continue to normalize monetary policy gradually and communicate decisions clearly.
- Regulators should deploy microprudential and macroprudential tools (including supervisory capital buffers where appropriate) and develop new tools for vulnerabilities outside the banking sector.
- Support fintech’s contributions to innovation, efficiency, and inclusion while safeguarding against systemic risks (including cyber risk).
- Emerging markets and low-income economies:
- Build buffers against external risks.
- Pursue exchange rate flexibility.
- Consider timely targeted foreign exchange interventions.
- Use foreign exchange reserves judiciously during bouts of volatility.
- Specific tools and applications:
- Tackle underwriting standards, non-bank credit intermediation, and liquidity risks among asset managers.
- Deploy macroprudential tools for housing markets (limits on DTI ratios, loan-to-value ratios, countercyclical capital buffers).
- Develop data, visibility, and tools for market-based finance / shadow banking.
- Brexit-related guidance:
- Focus on financial stability preparedness (contractual continuity, CCP recognition, operational readiness).
- Authorities should engage closely with private sector; private sector should prepare for continuity under different Brexit outcomes.
Country- and region-specific analyses and guidance
- Indonesia:
- Growth: WEO projection around 5.1 percent for this year and next year.
- Current account: a little bit more than 2 percent deficit.
- Oil price movement cited: roughly from $60 to close to $85 this year contributed to rupiah depreciation.
- IMF advice: allow exchange-rate flexibility as a shock absorber; orderly FX intervention to ensure market liquidity is consistent with IMF advice.
- China:
- Authorities balancing deleveraging/financial-stability goals with easing in response to trade tensions; regulatory tightening has been phased; monetary and fiscal easing used to cushion slowdown.
- Rapid run-up of debt and large shadow banking sector noted as vulnerabilities.
- South Africa:
- FX hedging markets are well-developed; exchange-rate flexibility can be an effective shock absorber where hedging instruments exist.
- Nigeria and Sub-Saharan Africa:
- Markets under pressure since mid-April driven by USD appreciation, rising U.S. rates, and oil-price sensitivity (Nigeria being an oil exporter).
- Countries with stronger fundamentals and smaller external imbalances were less affected.
- Policy recommendation: flexible exchange rates; FX interventions in certain circumstances; judicious use of reserves; maintain sustainability of borrowing.
- Observed slowdown in debt issuance by Sub-Saharan African countries as emerging-market conditions tightened.
- Rollover needs noted for 2020 through 2022.
- Italy:
- Recent preliminary budget proposals widened sovereign spreads; political process and market assessment of sustainability are key.
Market structure, liquidity, and fintech
- Market liquidity:
- Liquidity abundant in normal times; flash events more frequent but not yet macrocritical.
- As rates normalize, liquidity conditions warrant continued monitoring.
- Fintech and inclusion:
- Fintech has expanded financial inclusion (examples: Kenya, China); also introduces new systemic risks (cybersecurity, concentration of intermediation through tech platforms).
- IMF and World Bank Bali Fintech Agenda discussed as a framework for harnessing fintech while managing risks (seminar and joint paper referenced).
Cybersecurity and operational resilience
- Cyber risk is pervasive and can produce operational outages and losses; preparedness varies widely across institutions and jurisdictions.
- Key resilience practices observed:
- Cyber stress testing.
- Backup locations (secondary and tertiary).
- Need to address human elements (phishing and social-engineering vectors).
- IMF engagement: technical assistance to help countries develop regulatory frameworks for cyber risks.
Transcript of the Press Conference of the October 2018 Global Financial Stability Report, October 10, 2018, IMF Communications Department