## Global Financial Stability: What’s Still To Be Done?

_IMF Blog, April 18, 2012_

## Source details

**Canonical URL:** [Global Financial Stability: What’s Still To Be Done?](https://www.imf.org/en/blogs/articles/2012/04/18/global-financial-stability-whats-still-to-be-done)

## Other formats

- [Markdown version](/en/blogs/articles/2012/04/18/global-financial-stability-whats-still-to-be-done/index.md)
- [Structured JSON version](/en/blogs/articles/2012/04/18/global-financial-stability-whats-still-to-be-done/index.json)
- [Bundle manifest](/en/blogs/articles/2012/04/18/global-financial-stability-whats-still-to-be-done/bundle-manifest.json)

## Bibliographic details
- Authors: Jose-Vinals
- Published: April 18, 2012

---

### Key messages
- Policy actions have brought gains to global financial stability since the September report.
- Current policy efforts are not enough to achieve lasting stability, both in Europe and some other advanced economies, in particular the United States and Japan.
- Sentiment can quickly shift and rekindle sovereign financing stress, leaving sovereigns and banking systems in a vicious circle.

### Recent policy actions and their effects
- Important and unprecedented policy steps have been taken to quell the crisis in the euro area.
- National-level measures: stronger policies in Italy and Spain; a new agreement on Greece; Ireland and Portugal progressing on their programs.
- European-level measures: the European Central Bank’s decisive actions have supported bank liquidity and eased funding strains.
- Bank-level measures: banks are reinforcing capital positions under the guidance of the European Banking Authority.
- Governance measures: steps have been taken to enhance economic governance, promote fiscal discipline, and buttress the “firewall” at the euro area level.
- These actions have brought much-needed relief to financial markets since the peak of the crisis late last year, but lasting stability is not yet ensured.

### Deleveraging: estimates, risks, and scenarios
- Current expectation:
  - Large European Union-based banks could shrink their combined balance sheet by as much as $2.6 trillion—or about 7 percent of their total assets—by the end of 2013.
  - About a quarter of that shrinkage would lead to a cutback in lending.
  - Deleveraging by EU banks could reduce the supply of credit in the euro area by about 1.7 percent over two years.
- Downside (if commitments not implemented and stresses intensify):
  - Large EU banks could shed a total of $3.8 trillion, or 10 percent, of their total assets by the end of 2013.
  - Such retrenchment could reduce euro area credit supply by 4.4 percent.
  - GDP could fall by 1.4 percent from the baseline after two years.
- Regional exposure:
  - Emerging Europe is the region most affected by the deleveraging process.
  - Other emerging markets are unlikely to remain immune; external shock could combine with homegrown vulnerabilities.

### Other latent global risks
- Unaddressed fiscal challenges in the United States and Japan represent latent risks to global stability.
- Both countries have yet to forge a much-needed political consensus for medium-term deficit reductions.
- The United States faces high household debt burdens and an overhang of home foreclosures.

### Policy recommendations — Europe
- Continued adjustment efforts at the national level, especially by countries currently under strain.
- The euro area “firewall” should be able to take direct stakes in banks to help break the adverse feedback loop between sovereigns and banks.
- Close macroprudential oversight by European banking authorities of bank business plans to ensure an orderly process of bank deleveraging.
- Greater efforts to restructure viable banks and resolve weak banks.
- Combine accommodative monetary policies with a sufficiently gradual withdrawal of fiscal support in countries not subject to market pressures, and implement structural policies to lift potential growth rates.
- Lay out and commit to a roadmap for a more integrated economic and monetary union with two key objectives:
  - (i) a truly pan-European framework for bank supervision and resolution as well as deposit insurance; and
  - (ii) greater ex-ante fiscal risk sharing, for example, through some central financing mechanisms.

### Policy recommendations — United States and Japan
- Start addressing medium-term fiscal challenges now.
- Forge political consensus for medium-term deficit reductions.
- For the United States: stronger efforts to address household debt and accelerate housing market reforms.

### Policy recommendations — Emerging markets
- Do not take stability for granted; use policy room to cushion external shocks and volatile capital flows.
- Address homegrown vulnerabilities, such as persistently rapid credit growth, to increase resilience.

### Closing appeal
- None of the recommended policies are easy and some are politically difficult, but they are within reach.
- Policymakers and politicians must act now and in close collaboration to end this crisis once and for all—this time must be different.

*José Viñals, April 18, 2012*

---


## References

- [https://www.imf.org/wp-content/uploads/2011/04/jv_spring-2011-gfsr.jpg](https://www.imf.org/wp-content/uploads/2011/04/jv_spring-2011-gfsr.jpg)
- [By José Viñals](http://blogs.imf.org/bloggers/jose-vinals/)
- [عربي](http://blog-montada.imf.org/?p=1119)
- [Global Financial Stability Report](http://www.imf.org/external/pubs/ft/survey/so/2012/NEW041812A.htm)

_Source: https://www.imf.org/en/blogs/articles/2012/04/18/global-financial-stability-whats-still-to-be-done_