The New Global Imbalance: Too Much Financial Risk-Taking, Not Enough Economic-Risk Taking
IMF Blog, October 8, 2014
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Bibliographic details
- Authors: Jose-Vinals
- Published: October 8, 2014
Key messages
- Policymakers face a new global imbalance: not enough economic risk-taking to support growth, and increasing excesses in financial risk-taking that pose stability challenges.
- Banks are safer but may not be strong enough to vigorously support the recovery; risks are shifting to the shadow banking system as market and liquidity risks rise.
- To address the imbalance, promote economic risk-taking by improving monetary policy transmission to the real economy and address financial excesses through better micro- and macroprudential policies.
Global context and dynamics
- More than six years after the start of the financial crisis, the global recovery still relies heavily on accommodative monetary policies in advanced economies.
- The impact of monetary ease has been uneven: better in the United States and Japan, less so in Europe and in emerging markets.
- Prolonged monetary ease has encouraged the buildup of excesses in financial risk-taking, producing:
- elevated prices across a range of financial assets,
- credit spreads too narrow to compensate for default risks in some segments,
- and, until recently, record-low volatility indicating investor complacency.
- These developments have occurred across a broad range of asset classes and across many countries simultaneously.
- Corporate leverage has continued to rise in emerging markets.
Assessment of banks and credit supply
- Banks have increased capital levels and liquidity and are "much safer now."
- Analysis of 300 large banks in advanced economies found:
- banks representing almost 40 percent of total assets are not strong enough to supply adequate credit in support of the recovery,
- in the euro area, this proportion rises to about 70 percent.
- Implication: many banks need fundamental overhauls of their business models, including:
- repricing existing business lines,
- reallocating capital across activities,
- consolidation,
- retrenchment.
- The comprehensive assessment of balance sheets by the European Central Bank provides a strong starting point for necessary changes in bank business models.
- When banks meet capital adequacy standards they are "safe enough to lead a 'normal life'"; however, many countries need banks to operate as "athletes" that can vigorously support the recovery.
Shadow banking, markets, and liquidity risks
- Capital markets are providing more significant sources of financing, shifting risks to shadow banks.
- Credit-focused mutual funds have seen massive asset inflows and have collectively become a very large owner of U.S. corporate and foreign bonds.
- Fund inflows have created an illusion of liquidity in fixed income markets: liquidity promised to investors in good times may exceed available market liquidity in times of stress, especially as banks have less capacity to make markets.
- Emerging markets now receive more than $4 trillion, or about 13 percent of advanced-economy portfolio investors' total investments; this share has doubled over the past decade.
- Closer financial links mean shocks from advanced economies will propagate more quickly to emerging markets.
- Combined effects can amplify shocks on asset prices, causing sharper price falls and more market stress; such scenarios could hurt the global economy and, at the limit, compromise global financial stability.
- Triggers could include a wide variety of shocks, such as geopolitical flare-ups or a "bumpy" normalization of U.S. monetary policy.
Policy recommendations and measures
- Maintain accommodative monetary policies to support the recovery so long as demand stays weak, but recognize monetary policy alone cannot accomplish everything.
- Complement monetary policy with structural reforms, smart fiscal policies, and financial policies.
- Two key areas for financial policy action:
1. Improve the flow of bank credit to the economy by facilitating structural transformation of bank business models:
- Supervisors should facilitate banks' business-model adjustments to improve profitability without taking excessive risks and to support lending.
- This is particularly important in Europe where banks play a major role in financing the economy.
2. Design and implement a range of micro- and macroprudential policies to address financial excesses:
- In asset management, increase oversight to ensure redemption terms are better aligned with underlying liquidity conditions.
- Implement more comprehensive monitoring and reporting of leverage in nonbank sectors and in corporate sectors of emerging markets to identify potential vulnerabilities.
- To safeguard against global liquidity strains, deepen bilateral and multilateral swap lines to mitigate excessive volatility.
- These policies aim to make financial institutions more resilient and to contain procyclical asset price and credit dynamics, addressing growing risks in shadow banking—particularly market and liquidity risks.
- Policymakers need to be alert and take further actions now to promote economic risk-taking in support of growth and to address excesses in financial risk-taking to maintain stability.
José Viñals, October 8, 2014
Content in this bundle
- 新的全球失衡：金融风险承担过度，经济风险承担不足; iMFdirect博客; 2014年10月8日
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