Global Financial Stability Report: Bridge to Recovery
Global Financial Stability Report, October 2020
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- Published: October 13, 2020
Near-term assessment and overall outlook
- Near-term global financial stability risks have been contained as an unprecedented policy response to the coronavirus (COVID-19) pandemic has helped avert a financial meltdown and maintain the flow of credit to the economy.
- The outlook remains highly uncertain, and vulnerabilities are rising, representing potential headwinds to recovery.
- Vulnerabilities have increased in the nonfinancial corporate sector as firms have taken on more debt to cope with cash shortages and in the sovereign sector as fiscal deficits have widened to support the economy.
- Nonbank financial institutions have managed to withstand the market turmoil thanks to swift policy interventions, but fragilities remain, and the damage could be more extensive in a more prolonged period of market stress.
Policy response and market functioning
- For the first time, many emerging market central banks have launched asset purchase programs to support the smooth functioning of financial markets and the overall economy.
- Asset purchases have been effective in reducing bond yields and have not contributed to currency depreciation, but they appear to have taken longer to reduce broader domestic bond market stress.
- The report concludes that asset purchases with credible monetary policy frameworks and good governance may be a useful addition to the policy toolkit of central banks in emerging and frontier market economies, although a careful ongoing evaluation of associated risks is needed, especially for open-ended programs.
- In frontier market economies, policymakers face the dual challenge of addressing the effect of the pandemic while dealing with high debt; the report examines potential impacts on investor perception of sovereign risk tied to expected treatment of different classes of creditors in future debt restructurings.
Corporate sector: liquidity, solvency, and size-related vulnerabilities
- After the outbreak, firms’ cash flows were adversely affected as economic activity declined sharply.
- More vulnerable firms—those with weaker solvency and liquidity positions and smaller size—experienced greater financial stress than their peers in the early stages of the crisis.
- As the crisis unfolds, corporate liquidity pressures may morph into insolvencies, especially if the recovery is delayed.
- Small and medium-sized enterprises (SMEs) are more vulnerable than large firms with access to capital markets.
- The report presents forward-looking analysis of nonfinancial firms to assess these risks.
Banking sector and financial institutions
- Although the global banking system is well capitalized, some banking systems may experience capital shortfalls in an adverse scenario, even with the currently deployed policy measures.
- The report assesses bank capital, COVID-19 challenges, and policy responses to gauge potential vulnerabilities.
Emerging and frontier markets; capital flows
- Some emerging and frontier market economies already face financing challenges, which may lead to rising debt distress or financial instability.
- The report contains forward-looking analysis of emerging market capital flows and evaluates the role of unconventional tools (asset purchases) in these economies.
Corporate sustainability and environmental performance
- The report assesses the pandemic’s impact on firms’ environmental performance to gauge the extent to which the crisis may result in a reversal of the gains posted in recent years.
Policy recommendations and priorities
- It is imperative that policy support is maintained for the recovery to take hold.
- As economies reopen, accommodative monetary and financial conditions, credit availability, and targeted solvency support will be essential to sustaining the recovery.
Source: Global Financial Stability Report: Bridge to Recovery (October 2020).
Content in this bundle
- Chapter 1
- Chapter 2
- Chapter 3
- Chapter 4
- Chapter 5
- Chapter 1
- Chapter 2
- Chapter 3
- Chapter 4
- Chapter 5
- Executive Summary
- Foreword
- Global Financial Stability Report, October 2020: Online Annex 1.1. Technical Note; October 14, 2020
- Global Financial Stability Report, October 2020: Online Annex 2.1. Technical Note; October 23, 2020
- Global Financial Stability Report, October 2020: Online Annex 3.1-3.6; October 23, 2020
- Global Financial Stability Report, October 2020: Online Annex 4.1. Technical Note; October 23, 2020
- Global Financial Stability Report, October 2020: Online Annexes 5.1-5.4; October 23, 2020
- Global Financial Stability Report, October 2020: Online Boxes 3.1-3.2; October 23, 2020
- Full Report