Time Waits for No Man: How to Secure Financial Stability in 2011
IMF Blog, January 25, 2011
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Bibliographic details
- Authors: JosVials
- Published: January 25, 2011
Key messages
- More than three years after the onset of the financial crisis, global financial stability is still not assured.
- Policymakers need to step up efforts to tackle pressing policy challenges, such as sovereign risk, banking system vulnerabilities, and increased global capital flows.
- Press ahead with structural solutions to longstanding financial problems.
Context and presentation
- Presented by José Viñals in Johannesburg, South Africa.
- Date: January 25, 2011.
Financial stability challenges
- Sovereign risk
- High public debt levels have sustained market concerns about sovereign risk.
- Spillovers have affected a greater number of countries, mostly in the euro area.
- An adverse feedback loop has developed between banking and sovereign credit risks in some euro area countries: the fate of some banks is increasingly intertwined with that of their sovereign—and vice versa.
- Banking system fragilities
- Markets are questioning the quality of many bank assets, reflecting concerns about banks’ exposure to countries facing sovereign pressures and exposure to real estate loans.
- Banks face significant funding needs over the next two years; sovereigns will also need to refinance their debt over that period, creating competition for limited funding resources.
- Many banks still need to raise their capital levels and improve the quality of their capital to reassure investors and to meet the more stringent Basel III standards.
- If unresolved, these banking challenges would hinder the provision of credit to companies and households and would hurt the global economic recovery.
- Capital inflows to emerging market economies
- Rapid rebound in capital inflows can fuel asset price bubbles and strain absorptive capacity of local financial systems.
- Current assessment: at the early stages of such a cycle, but vigilance is required.
Policy priorities and recommendations
- General
- Time is of the essence in addressing immediate policy challenges—particularly in the euro area—and in finding a better balance between macroeconomic and structural financial policies.
- Without timely policy responses, global financial stability and sustainable growth will remain elusive.
- Europe
- Break the adverse feedback loop between sovereigns and banks.
- Contain sovereign risk through credible, medium-term fiscal consolidation strategies.
- Repair the financial system via a comprehensive plan to reduce uncertainty about banks and help restore investor confidence, including:
- improved bank transparency;
- greater firepower for the European Financial Stability Facility (EFSF);
- a decisive pursuit of recapitalization and restructuring of banks;
- better economic governance for the European Union.
- United States
- Put in place a credible strategy for medium-term fiscal consolidation to avoid a potential, sharp rise in long-term interest rates.
- Increase efforts to address effects of still-damaged real estate markets on banks.
- Emerging markets
- Act now to avoid future crises by maintaining the appropriate mix of macroeconomic and prudential financial policies to manage capital inflows.
- Deepen and strengthen local capital markets and market infrastructures to become more resilient.
- Global regulatory agenda
- Ensure continued progress on the global financial policy agenda and that financial systems adapt to regulatory reform.
- Adopt new regulations consistently across the world, including on systemically important financial institutions and the so-called “shadow” banking sector.
- Improve supervision and bank resolution regimes to work more effectively within—and across—national borders to safeguard financial stability.
Source: José Viñals, "Time Waits for No Man: How to Secure Financial Stability in 2011", January 25, 2011.
Content in this bundle
- 012511a
- 时不我待：2011年如何确保金融稳定 -- 作者：José Viñals
- 時計の針は進み続ける：2011年、金融の安定性の確立を目指して
- Время не ждет: как обеспечить финансовую стабильность в 2011 году