## How to Sustain Recent Financial Gains: Fix Old Risks and Meet New Challenges

_IMF Blog, April 17, 2013_

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## Bibliographic details
- Authors: Jose-Vinals
- Published: April 17, 2013

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### Context and overall conclusion
- Author: José Viñals; Date: April 17, 2013.
- Policymakers’ decisive actions since the IMF’s last report in October have increased global financial stability by reducing acute risks.
- Improved financial markets and gains in financial stability will not be sustained—and new risks are likely to emerge—unless policymakers address key underlying vulnerabilities.
- Key framing: vulnerabilities are of two types — “Old risks” (legacy of the crisis) and “new risks” (from prolonged easy monetary policies).

### Old risks (legacy of the crisis)
- Euro area still needs to be fixed; policymakers averted an immediate financial cliff but structural problems remain.
- Credit is not adequately flowing in the euro area periphery.
- Periphery corporate sector faces a sizeable debt overhang built up before the crisis.
  - The report identifies a weak tail of companies that need to reduce their debt over time.
  - The required debt reduction by these companies accounts for a fifth of the total debt of periphery corporates in the sample.
  - This poses a challenge to periphery economies and financial stability.
- Banking system repair is uneven:
  - Five years after the start of the crisis, repair is largely completed in the United States but remains unfinished in Europe.
  - Many banks in euro area periphery countries still need to strengthen their balance sheets.
  - Important banks in the euro area core remain too dependent on wholesale funding markets.
- Global financial regulatory reform agenda is incomplete, creating regulatory uncertainty that leaves banks less willing to lend.

### New risks (from prolonged easy monetary policies)
- Prolonged easy monetary policies in advanced economies may cause side effects: excessive risk taking and leverage, and asset bubbles.
- Evidence and channels identified:
  - United States: corporate debt underwriting standards are weakening rapidly—even though corporate fundamentals are strong, and leverage is in line with typical historical patterns.
  - Continued low interest rates are leading some pension funds and insurance companies to take further risks to close their widening funding gaps.
  - Emerging markets: easy money is spilling over to emerging markets; borrowing on international markets by corporations in emerging economies has been growing at a record pace, exposing them to foreign currency risks and rising leverage.
  - This growing leverage makes emerging economies more sensitive to volatile capital flows.
  - The eventual unwinding of prolonged monetary easing in the United States could expose these vulnerabilities and destabilize credit markets.
- The current situation is described as “uncharted territory.”

### Policy recommendations — what needs to be done
- Fix the euro area:
  - Implement stronger policies to reduce financial fragmentation to help unblock the flow of credit to the economy and increase the resilience of the currency union.
  - Complete banking sector repair and move steadfastly towards full-fledged banking union.
  - Improve the flow of credit to solvent small and medium-sized enterprises.
  - Address private debt overhangs to complement the clean-up of bank balance sheets.
- Complete and implement the regulatory reform agenda:
  - Renew political commitment at the national and global levels to finish regulatory reform.
  - Minimize regulatory uncertainty and arbitrage, and reduce financial fragmentation.
- Address new risks in advanced economies and the United States:
  - Keep banks safe.
  - For non-banks, be vigilant and proactive by restraining too rapid increases in leverage and by encouraging prudent underwriting standards.
  - Deploy appropriate microprudential and macroprudential policies.
- Address new risks in emerging market economies:
  - Guard against deteriorating bank asset quality and disruptive short-term capital flows.
  - Deploy prudential policies to ensure adequate buffers in the financial system and to prevent excessive build-up of leverage and asset price bubbles.

### Closing imperative
- Recent policy actions have bought precious time to address underlying financial vulnerabilities.
- The report’s message: addressing old risks is essential to leave the crisis behind and reduces the need for continued accommodative monetary policies, which in turn prevents new risks from growing and becoming systemic.
- Final call to action: We all know what needs to be done. There is no time to waste. Get it done!

*Source: IMF blog post “How to Sustain Recent Financial Gains: Fix Old Risks and Meet New Challenges,” José Viñals, April 17, 2013.*

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## Content in this bundle

- **最近の金融部門の改善をいかに維持すべきか: 旧来リスクを打破し新試練に対処せよ; ホセ・ビニャルス; iMF direct ブログ 2013年4月17日掲載**
  - [最近の金融部門の改善をいかに維持すべきか: 旧来リスクを打破し新試練に対処せよ; ホセ・ビニャルス; iMF direct ブログ 2013年4月17日掲載 (Markdown version)](/external/japanese/np/blog/2013/041713j.pdf.md){rel="alternate" type="text/markdown"}
  - [最近の金融部門の改善をいかに維持すべきか: 旧来リスクを打破し新試練に対処せよ; ホセ・ビニャルス; iMF direct ブログ 2013年4月17日掲載 (PDF)](/external/japanese/np/blog/2013/041713j.pdf){rel="external" type="application/pdf"}
- **42462_Ch 01.indd**
  - [42462_Ch 01.indd (Markdown version)](/external/pubs/ft/gfsr/2013/01/pdf/c1.pdf.md){rel="alternate" type="text/markdown"}
  - [42462_Ch 01.indd (PDF)](/external/pubs/ft/gfsr/2013/01/pdf/c1.pdf){rel="external" type="application/pdf"}

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## References

- [عربي](http://blog-montada.imf.org/?p=2242)

_Source: https://www.imf.org/en/blogs/articles/2013/04/17/how-to-sustain-recent-financial-gains-fix-old-risks-and-meet-new-challenges_