Transcript

Transcript of the April 2023 Global Financial Stability Report Press Briefing

April 11, 2023

Speakers:

Tobias Adrian, Financial Counselor and Director, Monetary and Capital Markets Department, IMF

Fabio Natalucci, Deputy Director, Monetary and Capital Markets Department, IMF

Charles Cohen, Deputy Division Chief, IMF

Moderator: Randa Elnagar, Senior Communications Officer

Ms. ELNAGAR: Welcome to everyone in the room and to our viewers around the world to the press briefing on the April 2023 Global Financial Stability Report. I am Randa Elnagar of the IMF’s Communications Department.

Let me introduce our speakers today. Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department. Fabio Natalucci, Deputy Director of the Monetary and Capital Markets Department. And Charles Cohen, Deputy Division Chief of the Monetary and Capital Markets Department.

Before taking your questions, let me kick‑start our conversation today and turn to Tobias and ask him a few questions.

Tobias, a lot has happened since we last spoke in October, including the recent turmoil in the banking sector. How do you assess the global financial stability in light of the recent events?

Mr. ADRIAN: Thanks so much. It’s a pleasure to be here.

So, we have seen turmoil in the banking sector in the U.S. and in Switzerland. And that really reflects the heightened vulnerabilities that have been building up over years of low interest rates. As interest rates are being raised, vulnerabilities are appearing. We saw that already last October, when we met here for the Annual Meetings, where we saw stress in the non‑bank financial sector in the U.K., more specifically, at that time; and we have seen it in March in the banking sector in the U.S. and Switzerland. There are certainly other vulnerabilities out there, and sharp adjustments in interest rates, sharp adjustments in expectations can trigger further stresses.

I think one of the key lessons from both the March episode and the October episode is that, while there are vulnerabilities that can be triggered and can test financial stability, there are also policy tools that are available to policymakers in central banks and in deposit insurance agencies, as well as finance ministries. And what we have seen is that these policy tools have been deployed in a very effective manner so that any threat to financial stability was contained and abated very quickly. So vulnerabilities are there, but there are also many tools to contain risks to financial stability.

Ms. ELNAGAR: So how can policymakers fight both inflation and contain financial stability risks?

Mr. ADRIAN: Yeah. I think what has happened in the past month is very telling in that respect. Central banks will always try to use tools separately to fight inflation, via monetary policy, and to ensure financial stability, via other tools.

So starting with the financial stability angle. For example, in the U.S. case, a systemic risk exemption was being used by the FDIC to make sure that the run of deposits would not spread to other banks. That was very effective, and any turmoil in the banking sector in the U.S. was mitigated by the deployment of that tool. There was also a new lending facility that was deployed by the Federal Reserve in order to allow more effective lending to those banks that were under stress.

In the case of Switzerland, the government supported a merger between two banks which, again, stabilized the financial stability situation.

And, finally, in the case of the U.K., back in October, the Bank of England deployed targeted and time‑limited asset purchases to stabilize the LDIs that were under stress.

And so in all of these cases, basically, central banks could continue to tighten monetary policy because they had the tools to contain threats to financial stability. The Federal Reserve increased interest rates after the SVB episode. The Swiss National Bank increased interest rates after the Credit Suisse merger. And, of course, back in‑‑since October, the Bank of England has hiked interest rates since the LDI episode.

So this is really the playbook, you know, that is ideal. Where there are financial stability problems, use targeted tools to address those and continue to use your monetary policy to fight inflation. Inflation remains high, well above target in many countries. What is priced into markets at the moment is a relatively optimistic view about inflation going forward. Inflation is expected, is priced in by markets to come back down to targets fairly quickly. And while we certainly hope that this is going to be the case, there is certainly a risk around this outlook on inflation. Inflation could prove to be more persistent, which could lead to a reassessment of the path of policy for monetary policy. And, you know, that could, again, trigger certain financial sector instabilities. So vulnerabilities are certainly elevated, both in the banks and in the non‑bank financial sector.

Ms. ELNAGAR: Thank, you Tobias.

Now we turn to your questions. For those watching online, you can submit your questions via the online media briefing center or WebEx. For the WebEx, we kindly ask you to please use the “raise your hand” feature.

We are going to take questions from the room. Raise your hand, and please identify yourself and your organization.

>> QUESTION: Thank you.

The report closely links the recent banking turmoil with the rapid pace of monetary tightening that we’ve seen in the past year. Were central banks like the Fed and the ECB wrong to front‑load their interest rate increases and implement these jumbo rate rises? And how concerned are you that what is ultimately required to quell inflation is going to spark some of those risks that were flagged in the report in terms of financial stability?

Mr. ADRIAN: Yeah. That’s an excellent question. You know, I think there’s a question about front‑loading certainly. I mean, we have seen some countries starting even earlier than, say, the U.S. or the European Central Bank in terms of tightening monetary policy. Many emerging markets actually preceded the advanced economies in terms of tightening monetary policy.

I think the pace of tightening has been appropriate. And we continue to expect that inflation is going to converge back to target. And, you know, what we have seen is that central banks and deposit insurance companies do have the tools to address any turbulence in the banking sector. So I would not expect at this point that, you know, monetary policy will be any different because of financial stability concerns.

Now, having said that, of course, there is an impulse from the change in the market assessment of the cost of capital to the banks. So, you know, stock prices of banks have dropped in both the U.S. and the euro area. And that is expected to have an impact on lending. So we provide some estimates of that channel in the Global Financial Stability Report. And we have seen, you know, some degree of contraction in lending in some countries. So, you know, there’s certainly some degree of financial tightening, but that is not in and of itself a financial stability issue. This is more a question about monetary policy transmission.

Finally, I would say that, of course, the SVB episode was related to, you know, changes in expectations about the future rate path. There were upside surprises to inflation early in the year, and that was certainly one of the triggers for, you know, pressure on SVB; but SVB really was an outlier relative to other banks, in terms of unrealized losses and the share of deposits, the share of wholesale deposits. And so it was much more vulnerable than, say, your average, you know, regional bank or average bank in general. So at this point, I don’t think that monetary policy will be any different due to financial stability concerns.

Ms. ELNAGAR: Thank you.

>> QUESTION: Do you think the term‑‑it was wise for central banks to‑‑I mean, you seem to praise central banks for raising interest rates after the banking crisis. But doesn’t classical economic theory tell us that this is not the right moment to tighten monetary conditions by raising interest rates; that perhaps they should have taken a pause and seen how credit conditions went before moving ahead, and that may cause problems further down the road?

Secondly, you referred, in rather friendly terms, to some of these bank bailouts. Don’t they run in‑‑don’t they fly in the face of the kind of rules which were set by the Financial Stability Board after the great financial crisis?

Mr. ADRIAN: Yeah. Let me start with the second question and then move to the first question.

So, you know, the second question is really about the kind of tools that are available for central banks under extreme stress. And so resolution is certainly one thing that the policy community around the world has been working on since the 2008 crisis. You know, a lot of effort has been put into building resolution regimes.

Now, in the case of, you know, Credit Suisse, that resolution regime was not being used; but I would argue that the outcome was fairly similar to what would have occurred under resolution. Of course, it’s always difficult to, you know, judge, in retrospect, those outcomes. But I do think the bottom line for financial stability is that it contained any further fallouts from the pressures in this particular situation.

In terms of the U.S. banks, the systemic risk exemption was being used, and that does have a cost to the Deposit Insurance Fund. But, of course, the systemic risk exemption was created for these types of circumstances. So I think it was, again, successful in terms of containing, you know, any spread of loss of trust or withdrawal of deposits.

Now, you are asking about sort of like the costs and benefits. And absolutely, you know, going forward, I think there will be a debate about whether policy instruments, institutions can be designed to mitigate moral hazard even more. Right? You know, unfortunately, it is really difficult to entirely get rid of moral hazard, but you can minimize it as much as possible. I think the trade‑offs were reasonable in these situations. They were fairly contained; but, of course, to contain moral hazard even further is certainly a desirable policy outcome, while containing financial stability threats.

So there’s a debate about, you know, what do you do in times of crisis, versus what you do in normal times in terms of regulation, policy tools, et cetera. And certainly, there will be a debate about, you know, regulations and containing risk‑taking.

In terms of your first question, which was really about sort of like, you know, to what extent would financial sector developments be taken into account in monetary policy? So I would distinguish two different things. So one is that, of course, tighter monetary policy always works through the financial sector to an important degree. It’s not the only transmission channel, but it’s an important transmission channel. So as monetary policy is tightened, lending standards are going to be tightened, and, you know, credit supply is going to be constrained at some point. That is a classic sort of like transmission channel. And that is certainly taken into account in terms of setting monetary policy‑‑i.e., to what extent is your tightening leading to the desired outcome of tightening credit supply?

Of course, there’s a different question which is, if such tightening is sort of like disorderly, disruptive, and, you know, triggers sort of like financial crisis. And, again, to date, I think central banks have had the tools to contain those crises so that they will certainly take the orderly tightening of credit conditions into account, but they have not had to take, you know, financial crises per se into account in monetary policy. And that is what central banks are aiming to do as much as possible.

>> QUESTION: (Inaudible)

Mr. ADRIAN: Yes. I think to the extent that they can separate the two, that is certainly desirable. Of course, there is a point where it becomes very difficult to separate the two. We are discussing that in the Global Financial Stability Report. So, you know, if you really get to a point where, you know, financial sector turbulence is of macro‑criticality, you know, at that point, it is more difficult to separate. But so far, there’s certainly‑‑you know, monetary policy transmission through bank lending will feed into monetary policy, but the turmoil in and of itself is probably not yet at the level of macro‑criticality and hopefully will not get there.

Ms. ELNAGAR: The gentleman at that back, on this side.

>> QUESTION: Jeremy Warner of The Daily Telegraph.

In the WEO, there is a characterization of the present spike in interest rates as a kind of brief aberration, the rates returning to their pre-pandemic level some time in the‑‑sometime soon. In fact, the natural rate of interest for the U.K. is actually forecast to be lower than it was before the pandemic. Given the effects of these very low interest rates on financial stability, asset prices, and so on, is this‑‑whether this view is right or wrong‑‑is this an entirely desirable state of affairs to see essentially the return of free money?

Mr. ADRIAN: Yeah. That is an excellent question. And it’s really ‑‑ at the core of monetary policy is this neutral level of interest rates. So this is what is referred to as R‑star. And what the WEO chapter is doing is to provide estimates for the whole world and for different countries in terms of where these neutral interest rates are going to go.

There is some debate among economists on whether we are going to return to those relatively low levels of real interest rates that we saw in the post‑crisis era, and, you know, our research certainly argues affirmatively. So we do believe that we will return back to relatively low interest rates. How long it’s going to take, you know, there’s a lot of uncertainty around that. And what the exact level is, of course, there’s also some uncertainty.

I would add to that, you know, what is done in the WEO chapter is really a kind of‑‑um, you know‑‑fundamental economic approach, so using modeling and filtering techniques. You can also look at market‑implied kind of metrics of R‑star. So these are sort of like, you know, far in the future forward rates adjusted for risk premia and liquidity premia. And those actually line up fairly well with those more economic theory‑based approaches. So the market assessment of R‑star is actually also pointing toward a relatively low neutral rate far in the future. Now, how we are going to get there, how fast we are going to get there, I think there’s quite a bit of question.

Now, you are asking about the desirability of a low R‑star. And you know, it’s really not a policy choice, I would argue. Right? So while the level of interest rates is a choice by the central bank, the neutral level of interest rates is given by deeper economic fundamentals, such as productivity growth, you know, labor, and, you know, certain technologies in the financial sector. So the financial intermediation technology is going to play a role, but it is not sort of like part of day‑to‑day monetary policy. So, you know, in terms of asset valuations, you know, absolutely. When interest rates are low, valuations, you know, tend to be elevated; but it’s not sort of like necessarily a variable of choice for the policymaker.

Ms. ELNAGAR: I will go to this side of the room, the lady in the pink jacket, please.

>> QUESTION: Stefania Spatti, Class CNBC.

In Figure 1.4, funding stresses surge in European bond market amid a central bank liquidity contraction. Italy stands out as the only country with outstanding TLTROs as a share of national GDP higher than that of excess liquidity. I was wondering if you could elaborate on this and explain the potential implications for the country.

Mr. ADRIAN: Let me turn to Fabio to go into more detail, and then I will complement.

Mr. NATALUCCI: So I think we were trying to focus on some possible stress channel coming from the banking sector turmoil here in the U.S. So one of the segments has been [to allow] improvements since then‑‑we have seen across risk assets; but one segment we are continuing to see stress is funding for banks. So we look through the channel for the U.S. side, for example, like the regional banks, in particular, the need to increase deposits. And then we try to do the same exercise for Europe. Right? So we have seen some, for example, pressure on swap spreads, an expectation for scarce collateral. So then we tried to think about, what are other possible risks that are more unique to the euro area? And one of them was the fragmentation risk that had been highlighted by the ECB itself, with the creation of new TPI instrument[s]. What we tried to do there is with the upcoming deadline for the repayment of TLTROs, trying to figure out what kind of‑‑whether there is a risk of funding pressure. So we compare the extent of outstanding TLTROs with the excess liquidity available and they‑‑try to flag one of the risks, one possible risk to monitor which is the extent to which Italian banks may need additional funding as they get close to the TLTROs, given how much excess liquidity they have. Now, clearly, the ECB is aware of this. As we know, we have a tool so they can address. So to Tobias’s point, trying to separate monetary policy from financial stability should have a tool that they can use and deploy, should they need to address possible fragmentation risks.

Mr. ADRIAN: Yeah. Let me just reiterate that message. Right? So the Transmission Protection Instrument, the TPI, has not yet been deployed; but it is certainly aimed at leaning against any fragmentation pressures that were so relevant 10 years ago in the euro crisis. So, you know, I think the ECB has been very clear that, you know, inflation is the first‑order objective for monetary policy and that any financial stability risks are contained. And, of course, they do have a very rich toolkit to address those financial stability issues.

Ms. ELNAGAR: The lady in the green jacket. We will stay on this side of the room.

>> QUESTION: My question is: The global financial system is highly interconnected, and the SVB incident triggered turmoil in global financial markets. Do you think there could be a greater global risk in the near future? And how is the current global financial system different from that of the 2008 crisis? Considering its global inference, should the Fed take more into account of the spillover effect to emerging markets, while pursuing domestic policy goals? Thank you.

Mr. ADRIAN: Yeah. Thanks so much for that very important question. So let me start with emerging markets, and perhaps Charles can complement me on the emerging market side as well.

You know, we have seen an incredible resilience in emerging markets‑‑the major emerging markets, in particular. You know, that has been going on for a number of years. So, you know, emerging markets were some of the earliest countries that increased monetary policy interest rates in order to fight inflation.

When the SVB turmoil hit, you know, there was a sell‑off of bank shares in the U.S. and the euro area but much less in emerging markets. And while there is certainly a broad heterogeneity in terms of the banking systems in emerging markets, in general, there is a somewhat smaller share of duration, so securities portfolios that are losing value when interest rates are being raised. And there’s a larger share of retail‑‑so stickier deposits, relative to the kind of wholesale deposits that we have seen in SVB. So I think that is one source of stability.

Now, of course, again, both in advanced economies and in emerging markets, there is a weak tail of banks, and SVB was one particular example of a bank with high vulnerability. And it’s certainly possible that, you know, if adverse shocks hit, you know, banks in other countries might also get into the stress. But this gets me to the policy toolkit. Right? So there are the vulnerabilities and then there are the policy tools.

Of course, capital and liquidity today is much higher than they were in the 2008 crisis. To date, much of the asset side of banks have been impacted by interest rate risk and less so by credit risk. Right? So we are expecting that the economy globally is going to slow down, but when you look at sort of like metrics of, you know, credit risks on banks, those have not deteriorated sharply in most countries. Now, that could change if there is, you know, a sharp deterioration of real activity; but to date, we see more of those, you know, losses or either realized or unrealized related to higher interest rates.

You know, relative to 2008, I think the first‑order difference is that you had this massive deleveraging cycle that was triggered in the financial sector. Right? The housing market declined. Banks and non‑bank financial institutions around the world were exposed to housing, and they were forced to de-lever. And I think there are less of these deleveraging pressures to date because you don’t have this common credit shock at the moment.

Now, having said that, of course, if we were to enter into a more adverse scenario‑‑you know, the WEO has a baseline, an adverse, and a severely adverse. So if we went to the severely adverse scenario, of course, financial stability would be threatened to a much higher degree.

Do you want to elaborate on the emerging markets a little?

Mr. COHEN: Thanks, Tobias.

Just to complement that, just to talk about monetary policy. Many EMs, as we pointed out before, actually acted ahead of AEs in addressing the global inflation shocks that were coming. So that has actually shielded them from some of that. And much of the FX depreciation that we saw last year, much of that has now recovered. And in many cases, conditions are roughly the same as they were prior to the‑‑prior to February of last year.

Also, it’s true that EM banks have seen little sell‑off in their equity. And in general, as Tobias mentioned, they are much less exposed to duration risk. It’s more about credit risk in emerging markets, where that is something we continue to monitor because there’s more macroeconomic volatility and more chances of higher NPLs and losses in emerging markets, if there is another slowdown globally.

I would also add to that, that another area we are focusing on in EMs, particularly in the banking sector, is in frontier markets where, as we note in the Global Financial Stability Report, there has been a growing bank‑sovereign nexus; that is to say, the purchases of local sovereign debt by local banks. And another issue that we’re quite focused on and is related to this question about the global tightening of conditions is the lack of market access for the more vulnerable countries in international sovereign debt markets. And so that is an area that we continue to monitor.

Ms. ELNAGAR: Thank you. We will move to this side of the room, the lady in the yellow jacket.

>> QUESTION: I have two quick questions. My first one is, speaking of the banking turmoil the U.S. has recently experienced, how do you see such a crisis affecting the emerging markets and developing countries, including a developing and emerging countries, like Egypt?

My second one is on inflation, which is a big deal now for these economies and markets. So how the depreciation of local currencies and more tightening of policy‑‑monetary policy can contribute to curb the soaring inflation in such markets? Thank you.

Mr. ADRIAN: Yeah, absolutely. So let me start with the second part, which is about inflation. You know, in general, we tend to think of monetary policy as being the main instrument for fighting inflation. So tighter monetary conditions are certainly the first response. And that, in turn, has implications for the exchange rate.

Now, in many emerging markets, fiscal policy can also play a complementary role to monetary policy. So, you know, a tightening of fiscal policy, while tightening monetary policy, can together be more powerful than just using one instrument at a time.

Now, having said that, of course, in many emerging markets, middle‑income countries, you know, the population is severely impacted by the rise in food prices and energy prices; so any fiscal action would have to watch out for the most vulnerable segments of the population. So you want to, you know, readjust the overall stance of fiscal policy while, you know, watching out for those that are the most vulnerable in terms of food and energy prices, in particular.

Now, in terms of banking developments‑‑so, you know, we addressed some of those issues already. So there really is quite a bit of heterogeneity across emerging markets and middle‑income countries in terms of how strong the banks are, how many credit losses there are, how much of a deposit insurance there is, and what are the tools the central bank and the finance ministries have in order to deal with any distress in weaker segments. As I said earlier, any contagion has been very limited to date; but, of course, you know, there are possible shocks that could trigger, you know, turbulence in some markets.

Ms. ELNAGAR: Thank you. I will take one question online and then get back to the room.

Question: Did crypto contribute to the banking stress by taking needed liquidity out of the system?

Mr. ADRIAN: Yeah. So we have seen relatively high correlations between, you know, equity markets and crypto valuations. So, in particular, last year, as equity markets declined, crypto valuations declined as well. And there were certain pockets of some institutions that were particularly catering to the crypto universe that saw, you know, some exposure to crypto; but, in general, there has been only a limited spillover from the crypto universe to the financial sector. The crypto universe is fairly‑‑fairly distinct at this point from the broader financial sector. So there are some interlinkages, but they remain fairly small. And, you know, both the rise in valuations and the bust in valuations and now, of course, valuations have been increasing again, you know, those have not directly been fueling valuations in the traditional financial sector. So I think the causality really goes from the financial sector to crypto but to date, very little from the crypto sector to the traditional financial sector, with the exception of some institutions that were in distress.

Ms. ELNAGAR: OK. I will go back to the room. The gentleman‑‑

>> QUESTION: Thank you.

I want to take you back to Africa. As you know, Bola Tinubu has just won the Nigerian presidential election and will be inaugurated next month, which is a big change because the previous government was there for eight years.

We note some of the problems with debt servicing, subsidies, and vulnerabilities. Could you talk a little bit more about, how stable is the Nigerian economy, some of the recommendations, and more broadly, in sub‑Saharan Africa, the same questions. Thank you.

Mr. ADRIAN: Yeah, absolutely. So, you know, we do have a regional press briefing that will talk about specific countries, so I don’t want to go specifically into the situation in Nigeria, but I am happy to talk about sub‑Saharan Africa more generally.

So you know, we do have a number of countries that are facing challenges in terms of debt service. You know, many sub‑Saharan African countries have seen their borrowing costs rise. And there have been attempts to restructure, you know, the debt in a number of countries. We are working very hard, together with our membership, to get to a speedy debt restructuring. I think it’s absolutely key to get countries back on track in terms of macroeconomic stability and growth prospects. We have a Sovereign Debt Roundtable meeting this week‑‑I think it’s tomorrow‑‑in order to make progress on the debt issue. But, of course, we also work directly with many countries in Africa on capacity building. So working directly with the central banks, with the regulatory agencies, and the finance ministries to build capacity to really build a foundation for long‑lasting growth, build a foundation for good policies that are going to build resilient economies.

I don’t know whether‑‑

Mr. COHEN: That was an excellent summary.

The only thing I would just add is that we continue to be focused on a lack of market access for many of these countries. So we see this very sharp bifurcation in terms of international sovereign bond issuance between investment grade emerging markets, where spreads have actually stayed at relatively low levels, despite stress since COVID has started; and for high yield issuers, where for many of them, issuance in international markets is now quite challenging. I think the latest count is about 19 of them with spreads of over 700 basis points, where issuance in the past has been highly challenging. And again, many of these are in sub‑Saharan Africa. So that is an area that we continue to focus on. And as Tobias mentioned this is closely related to the question of proactive sovereign debt restructuring for countries in debt distress.

Ms. ELNAGAR: The gentleman on the side, please.

>> QUESTION: Thank you. And my question is pertaining to the low‑income and emerging market debt distress situation. So you talked about the targeting in the developed world, where certainly banks are there and [doing] well, while keeping the monetary policy tight to control the inflation in those economies, where the debt distress is there, there are high concentrations of sovereign debt, and that is being with the challenges of the debt restructuring as well. And because of the interest rate hike, global hike, there is guaranteed pressure and inflation, and you know, high interest rate. And, again, that is where a country like Pakistan, with a very high sovereign debt holding by local commercial banks. And that is stressing the whole domestic financial system as well.

So is there going to be any targeted approach in economies like this, where you have a unique problem, the private credit is being contracting, while the sovereign debt is growing because of those issues of the high rates, in excess of the global financial markets?

And, again, this is connecting to the sovereign debt restructuring talk and its impact to the rising, you know, poverty, with inflation approaching the hyperinflation and the poverty is rising in those economies. So it’s a very important socioeconomic issue to deal with. And so how are you going to target in such economies? Thank you.

Mr. ADRIAN: Absolutely. So this is really the bread and butter of our work in Fund programs. You know, it is to get back to a path of stability. And our work on debt restructuring and banking restructuring as well is particularly focused on restoring stability to get back to growth and to get back to inclusive growth. You know, I think we have made a lot of progress in recent years, but the COVID pandemic and then the war in Ukraine were certainly big setbacks for big parts of the population.

And, of course, you know, you mentioned Pakistan. Climate challenges are also coming in many countries. Pakistan is one example. I think many sub‑Saharan African economies and other countries around the world are already feeling the heightened, you know, pressures through climate. So all of these are issues that we’re tackling squarely.

I do also want to point that in the Global Financial Stability Report, last year we had a specific chapter on the sovereign banking nexus and the financial stability issues around that. So it’s certainly something that we have looked at in detail. And, you know, fixing debt and fixing banks, that is the big message.

Ms. ELNAGAR: The gentleman here, please.

>> QUESTION: Central banks are assuming that there is no conflict between their monetary policy and their financial stability objectives, and you seem to be agreeing with them. How confident are you in that assessment? Or is there a risk in six months’ time, when we all meet again in Marrakech, that the canary in the coal mine that you talk about in the GFSR has made an unwelcome appearance?

Mr. ADRIAN: Yeah, absolutely. So I think you were saying, you know, central banks are assuming that there’s no interaction. I would rather say, you know, they’re working on trying to separate those two things, so financial stability from monetary policy. But, of course, as we are explaining in the GFSR, you know, there are situations in which financial crises do become macro‑critical and in which, you know, monetary policy may have to be adjusted in the face of very severe crises.

I talked about the instruments, crisis management instruments that are available. But in times of tighter monetary policy, you know, there can be more of a conflict than in times when monetary policy is being eased.

We have Chapter 2 in the GFSR that is specifically addressing these kinds of‑‑the nexus between monetary policy and financial stability, with respect to the stress in the non‑bank financial sector.

And I don’t know. Fabio, do you want to‑‑

Mr. NATALUCCI: I think I would like to step back for a second and put this in perspective.

So we are coming out of 10‑plus years of very low interest rate, low volatility, subdued inflation. And so when you start raising interest rates‑‑not just the extent of the increase but the speed of increase‑‑it is possible that there are cracks in the system. In some sense, that is what we have been seeing.

The SVB, the banking turmoil in the U.S. is just one example. You can go over the last year and think about the U.K. and the LDI. And you can think of Korea and the project‑financed (inaudible). So there is a common pattern there of some vulnerabilities that build over the years. Those include liquidity/maturity mismatch. It includes the use of financial leverage, for example. Some of [these are being masked] here. So the question is whether, again, this is essentially a harbinger of more stress to come, so the canary in the coal mine, or whether it’s just a natural manifestation that you would see after you start hiking interest rates and you need to do in a hurry because inflation continues to be high and stubborn.

So what we tried to do in the Financial Stability Report is to monitor some possible pressure points‑‑whether it’s financial institutions or the regional banks in the U.S., as an example, they have been challenged on the funding side. There may be an issue in terms of liquidity interest rate risk on the asset side. Or whether this is other non‑bank financial institutions in other jurisdictions or sectors. Right? So sectors like the venture capital is just one example and technology or commercial real estate. I think we spent quite a bit of time on the commercial real estate. That is a place where there seems to be a juncture of different risks in different financial institutions in the U.S. Smaller bank payroll but also non‑bank financial institutions. So we try to monitor effectively where there could be pressure points going forward, also being mindful, though, that inflation continues to be really high. And it’s important to address inflationary pressures to avoid that feeding into wages and unmooring inflation expectations.

Ms. ELNAGAR: OK. We will take one more question because we have less than a minute. Please, the gentleman who has raised his hand.

>> QUESTION: Does increasing use of the renminbi promote global financial stability?

Mr. ADRIAN: So that is a very good question. So, you know, for the moment, the renminbi has still limited convertibility. And we do expect that, over time, convertibility will be increased and that the renminbi is going to be used more often and might be more predominant in international transactions.

I would distinguish in between payments and capital markets. Right? So, you know, usage for payments in and of itself would not, in general, represent any implications for financial stability. But, of course, we would also expect that capital markets around renminbi‑issued securities would develop over time. You know, at the moment, of course, the US dollar is the dominant currency, not just for trade but also for capital markets. And I think on the capital markets side, this is where the financial stability question occurs. And that really goes back to the regulation and supervision of financial institutions that would provide the basis for capital markets around renminbi. So, you know, of course, Chinese authorities are committed to the international standards for banking supervision and for capital markets IOSCO, CPMI IOSCO principles. And I think that can really provide the foundation of, you know, deep and liquid capital markets around the renminbi that is addressing financial stability risks appropriately. So, you know, it is about the regulation and the plumbing of the financial system, once convertibility is broadened.

So, you know, lastly, I would mention, you know, the PBOC also has a number of swap lines with foreign central banks. And that is a quite extensive network that could, in principle, also serve as a backstop for any, you know, liquidity squeezes or so. So, you know, I think it is in development; but to the extent that institutions are well regulated and are well governed, you know, financial stability risks should be contained.

Ms. ELNAGAR: We come to the end of our briefing, unfortunately. If you have any questions, please feel free to send it to media@imf.org or to me.

I would like to thank our speakers, Tobias, Fabio, and Charles. Also, thanks to you and to our viewers who joined us today. We would like to remind you of the release of the Fiscal Monitor tomorrow morning at 8 a.m. in the same room, and we have the regional briefings to answer your questions. Thank you very much.