Global Financial Stability Report, October 2016: Fostering Stability in a Low-Growth, Low-Rate Era

Global Financial Stability Report, October 5, 2016

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Bibliographic details

• Published: October 5, 2016
• Series: Global Financial Stability Report
• DOI: https://doi.org/10.5089/9781513559582.082

Executive summary and outlook

• Short-term risks to global financial stability have abated since April 2016, but medium-term risks continue to build.
• A potent and more balanced policy mix is needed to deliver a stronger path for growth and financial stability, and avoid slipping into a state of financial and economic stagnation.
• Political conditions: A lack of income growth and a rise in inequality have opened the door for populist, inward-looking policies, making it harder to tackle legacy problems and further exposing economies and markets to shocks.

Banking sector and financial institutions (advanced economies)

• Financial institutions in advanced economies face a number of cyclical and structural challenges and need to adapt to low growth and low interest rates, as well as to an evolving market and regulatory environment.
• Weak profitability could erode banks’ buffers over time and undermine their ability to support growth.
• A cyclical recovery will not resolve the problem of low profitability.
• More deep-rooted reforms and systemic management are needed, especially for European banks.

Insurance, pensions, and nonbank financial institutions

• The solvency of many life insurance companies and pension funds is threatened by a prolonged period of low interest rates.
• The report examines how the rise of nonbank financing has altered the impact of monetary policy and finds that fears of a decline in the effectiveness of monetary policy are unfounded.
• It appears that the transmission of monetary policy is, if anything, stronger in economies with larger nonbank financial sectors.

Emerging market economies and corporate sector risks

• Corporate leverage in emerging market economies remains elevated in some countries.
• The current favorable external environment presents an opportunity for overly indebted firms to restructure their balance sheets.
• The report examines the link between corporate governance, investor protection, and financial stability in emerging market economies and finds that the improvements over the past two decades have helped bolster the resilience of their financial systems.
• These benefits strengthen the case for further reform.

Policy implications and recommendations

• Implement deep-rooted reforms and systemic management for banks, with an emphasis on European banks.
• Address weak profitability in the banking sector through structural reforms rather than reliance on cyclical recovery.
• Strengthen resilience of life insurers and pension funds to prolonged low interest rates.
• Use the current favorable external environment in emerging market economies to facilitate corporate deleveraging and balance-sheet restructuring.
• Continue improvements in corporate governance and investor protection to bolster financial system resilience.
• Adopt a more balanced policy mix to support stronger growth and financial stability and reduce vulnerability to populist, inward-looking policies.

Publication and identification

• Publication date: October 5, 2016
• Pages: 127
• Volume: 2016
• Issue: 002
• Series: Global Financial Stability Report No. 2016/002
• DOI: https://doi.org/10.5089/9781513559582.082
• Stock No: GFSREA2016002
• ISBN: 9781513559582
• ISSN: 1729-701X

International Monetary Fund. Global Financial Stability Report, October 2016: Fostering Stability in a Low-Growth, Low-Rate Era.

References

• https://www.imf.org/en/publications/gfsr
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• Nonbank financial institutions
• Public financial management (PFM)
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