Transcript of the Press Conference on the Release of the Global Financial Stability Report Update

IMF News, June 25, 2020

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The Global Financial Stability Update is a new IMF product to highlight major developments in global financial markets and assess global financial stability risks in between the semiannual Global Financial Stability Report editions.
Opening remarks delivered by Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department; Fabio Natalucci, Deputy Director, Monetary and Capital Markets Department, participated in Q&A.

Following sharp declines in February and March, global equity markets have recovered much of their pandemic-related losses and in some cases are close to January levels.
Yields in sovereign and corporate debt have fallen significantly in advanced economies and many emerging markets; credit spreads have narrowed sharply.
Global financial conditions have eased significantly, helping cushion the economic downturn and stabilizing outflows from emerging markets.
Central bank balance sheets estimated to have increased by over $6 trillion in just 3 months — an intended consequence of extremely accommodative monetary policy.

The Update analyzes a "tug of war" between the real economy and financial conditions; recent incoming economic data have been worse than expected and valuations in many risky asset markets appear stretched.
Investors’ earnings expectations suggest optimism that may be disconnected from economic fundamentals.
Four key areas of concern where preexisting vulnerabilities are being revealed:
- Corporate and household debt burdens could become unmanageable in severe economic contraction; corporate debt is at historically high levels and household debt has increased in many economies.
- Credit risks will test banking sector resiliency as banks reassess borrowers’ ability to repay; pressure on profitability has already led to declining bank stock prices.
- Nonbank financial companies could amplify stress; asset price corrections could lead to large outflows from investment funds.
- Economies that must refinance more debt face greater rollover cost risk, especially those with low reserves; credit rating downgrades could worsen this dynamic.

Possible triggers for renewed volatility or tightening include:
- A deeper and longer recession than currently anticipated.
- A second wave of COVID-19 infections with resumption of strong containment measures.
- Geopolitical tensions and broadening social unrest in response to rising global inequality.
- A reassessment of the extent of central bank support leading investors to reduce risk appetite.

Monetary policy has eased conditions and supported market functioning, but policymakers should be attentive to unintended consequences (e.g., asset valuations stretching beyond fundamentals).
Monetary easing should be complemented by macroprudential tools to ensure buffers are accumulated by sovereigns, corporates, and households.
Authorities should avoid rollbacks of financial regulation or fragmentation through domestic actions; maintaining open capital markets is important for growth.
Banks should consider cautious payout policies (dividends/share buybacks) to preserve capital cushions amid high uncertainty; supervisory stress tests can inform payout restrictions.
National authorities must balance immediate economic support with preserving medium-term financial stability.
Once recovery is underway, policymakers should urgently address vulnerabilities that have been depleted during the pandemic to avoid sowing seeds of future problems.
Multilateral institutions (including the IMF) stand ready to support immediate relief operations and a farsighted policy dialogue.

Banks entered the crisis with higher capital and liquidity compared with the 2008 crisis due to post-crisis regulatory reforms.
High levels of capital are helping banks absorb adverse developments, though the usability of capital during stress will be an important focal point.
Some banks with preexisting adverse conditions or concentrated exposures may face resolution or recapitalization needs; resolution regimes have been phased in across jurisdictions.
Nonbank financial institutions remain a potential amplifier of market stress; liquidity support by central banks was crucial during the February–March selloffs.

Sub-Saharan Africa has been hit by COVID-19; many countries implemented aggressive containment measures.
Some African countries have limited fiscal space; access to global financial markets is important for sustaining support.
The IMF has provided over 70 rapid financing facilities globally, many of which are in Sub-Saharan Africa.
For country‑specific analysis (South Africa, Nigeria, Ethiopia, Kenya, Egypt), consult the African Department and the Regional Economic Outlook release referenced in the briefing.

Yield curve control: targeting longer-term yields in addition to short-term policy rates can lower long-term borrowing costs but may enlarge central bank balance sheets.
Payout restrictions: examples cited include voluntary constraints in some jurisdictions (e.g., U.K.) and regulatory restrictions in others (e.g., Brazil).
Stress testing: U.S. stress tests historically guide bank payout policies; banks with material capital depletion under adverse scenarios may be required to suspend payouts.

Central bank balance sheets increased by over $6 trillion in just 3 months.
World Economic Outlook Update referenced: lowered global growth by 2.9 percent.
The IMF has accomplished over 70 rapid financing facilities for countries around the world.

Transcript of the press conference, June 25, 2020. IMF Communications Department.