Transcript of October 2020 Global Financial Stability Report Press Conference
IMF News, October 13, 2020
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- Published: October 13, 2020
Overview
- The COVID‑19 pandemic has triggered a severe global economic crisis. Policymakers have taken bold, unprecedented action to protect public health, contain the immediate economic damage, and safeguard the financial system.
- Extraordinary monetary policy easing and massive fiscal support have, for the moment, restrained near‑term financial stability risks by stabilizing global financial markets, boosting investor sentiment, and maintaining the flow of credit.
- Some pre‑existing financial vulnerabilities are intensifying and represent potential headwinds to the recovery.
- Risks to growth are still tilted to the downside; the probability that global growth will fall below zero in 2021 is close to 5 percent.
Key findings and risks
- Policy actions have helped prevent destructive macro‑financial feedback loops seen in the global financial crisis more than a decade ago.
- Unintended consequences of policy support are possible if persistent, including a gap between rising stock market valuations and weak real‑economy performance.
- Additional corporate borrowing to cope with cash shortages has increased corporate debt burdens; many firms entered the crisis with very high levels of debt and indebtedness in some sectors is reaching new highs.
- Solvency risks may have shifted into the future; renewed liquidity pressures could morph into insolvencies if recovery is delayed.
- Increased links between corporates, banks, and non‑bank financial institutions could transmit fragilities across the entire financial system.
Banking sector: resilience and vulnerabilities
- The banking sector entered the COVID‑19 crisis with stronger capital and liquidity buffers than at the beginning of the global financial crisis.
- Global assessment: the banking system is assessed to be able to withstand further adverse shocks; overall, the global banking system is safe.
- Heterogeneity and “weak tail”:
- Some regions and segments harbor a weak tail of banks that are more vulnerable.
- Emerging markets tend to have a higher fraction of banks likely to be undercapitalized in an adverse scenario.
- Banks that are not GSIBs are generally more vulnerable than the 30 largest globally systemic banks (GSIBs).
- European banking systems are assessed to be somewhat more vulnerable than the global average.
- Profitability and buffer rebuilding:
- Low interest rates and flat yield curves compress net interest margins, challenging bank profitability and slowing the rebuilding of capital buffers.
- Capital buffers are intended to be used in crises; rebuilding will take more time when profitability is low.
- Stress testing and mitigation:
- Global bank stress tests indicate systemwide resilience but show substantial variance; mitigation policies (credit guarantees, capital adequacy measures) materially reduce projected capital shortfalls — capital shortfalls almost doubled in an adverse scenario if mitigation policies are not taken into account.
Non‑bank financial sector (market‑based finance)
- The non‑bank financial sector plays a growing role in credit markets in advanced economies, including riskier segments; it exhibited evident fragilities during market turmoil.
- Specific vulnerabilities observed in March–April stress:
- Money markets dried up and some money market funds became vulnerable.
- Dry‑up of liquidity occurred in Treasury markets and benchmark sovereign markets.
- Rapid increases in margins in some market segments created risks of forced deleveraging.
- Asset managers face liquidity mismatches and risk transformation vulnerabilities.
- Threat of asset correlation: shocks can propagate rapidly across non‑bank institutions and act as amplifiers.
- Incentives to use financial leverage could rise in a very low interest rate and low volatility environment.
- Policy support helped address acute strains, but structural weaknesses remain; regulatory focus may need to broaden to the non‑bank perimeter and macroprudential toolkit.
Emerging markets, low‑income countries, and sub‑Saharan Africa
- Global financial conditions easing has generally improved the outlook for portfolio flows to most emerging markets, but access varies by country and rating.
- Market access and issuance:
- Reopening of markets progressed from investment‑grade to high‑yield and then frontier markets.
- Total issuance in frontier markets for the year is about 25 billion.
- Sub‑Saharan countries remained largely closed to international capital markets since February (last issue with Ghana), which raises distress concerns for some countries.
- IMF financing and concessional support:
- Since the start of the pandemic, IMF financing provided to 81 countries.
- Total new IMF financing is about 100 billion — actually, a little bit more than 100 billion.
- Poverty Reduction and Growth Trust (PRGT) countries — many in sub‑Saharan Africa — received about 21 billion (concessional financing).
- Debt‑service and debt‑distress concerns:
- Some low‑income countries remain heavily indebted and may face distress with prohibitive borrowing costs.
- The G‑20 Debt Service Suspension Initiative (DSSI) has helped many countries cope with the crisis.
- Policy design and distribution of funds: IMF continues to work closely with countries to ensure financing reaches intended beneficiaries.
Policy recommendations and sequencing
- Near term:
- Monetary policy should remain accommodative as economies reopen to sustain the recovery.
- Maintain liquidity support, with gradual adjustment of pricing to encourage return to market funding.
- Continue fiscal support to protect the real economy and preserve credit flows.
- Medium term:
- Implement a robust framework for debt restructuring to reduce debt overhangs and resolve nonviable firms.
- Extend multilateral support to low‑income countries facing financing difficulties.
- Focus on transforming carbon‑intensive economic models toward greener, cleaner, and more stable economies as an overarching objective.
- Financial sector reform post‑pandemic:
- Rebuild bank capital buffers once conditions permit.
- Strengthen the regulatory framework and prudential supervision for non‑bank financial institutions.
- Step up macroprudential oversight to contain excessive risk taking in a lower‑for‑longer interest rate environment.
- Consider broadening the regulatory perimeter for non‑bank intermediaries and developing better data for supervision.
- Continue to use stress tests to assess trade‑offs between deploying capital buffers to support lending today and preserving financial stability going forward.
Observations on asset prices, central banks, and market sentiment
- Equity markets have rebounded in many segments to January 2020 levels or higher despite the severe economic recession; this reflects both forward‑looking valuation and policy‑induced easing of financial conditions.
- G10 central banks have expanded balance sheets by more than seven and a half trillion dollars since the onset of the crisis; this has lowered interest rates, compressed credit spreads, and boosted risky asset prices.
- Federal Reserve framework change (August) to average inflation targeting shifts the policy focus to hitting inflation on average and may influence investor expectations.
- Potential unintended consequences: very low rates for a prolonged period may incentivize heightened risk taking (duration, credit, leverage), which warrants macroprudential monitoring and possible regulatory adjustments.
Numeric highlights (preserve source wording)
- Probability that global growth will fall below zero in 2021 is close to 5 percent.
- Since the start of the pandemic, the IMF has provided financing to 81 countries.
- Total new IMF financing is about 100 billion — actually, a little bit more than 100 billion.
- PRGT countries received about 21 billion.
- Nearly 20 emerging market countries have employed asset purchases.
- Frontier market issuance year‑to‑date is about 25 billion.
- G10 economies expanded their balance sheets by more than seven and a half trillion dollars.
- The 30 largest globally systemic banks are referred to as GSIBs.
Transcript of October 2020 Global Financial Stability Report Press Conference — IMF Communications Department