## The New Global Imbalance: Too Much Financial Risk-Taking, Not Enough Economic-Risk Taking _IMF Blog, October 8, 2014_ ## Source details **Canonical URL:** [The New Global Imbalance: Too Much Financial Risk-Taking, Not Enough Economic-Risk Taking](https://www.imf.org/en/blogs/articles/2014/10/08/the-new-global-imbalance-too-much-financial-risk-taking-not-enough-economic-risk-taking) ## Other formats - [Markdown version](/en/blogs/articles/2014/10/08/the-new-global-imbalance-too-much-financial-risk-taking-not-enough-economic-risk-taking/index.md) - [Structured JSON version](/en/blogs/articles/2014/10/08/the-new-global-imbalance-too-much-financial-risk-taking-not-enough-economic-risk-taking/index.json) - [Bundle manifest](/en/blogs/articles/2014/10/08/the-new-global-imbalance-too-much-financial-risk-taking-not-enough-economic-risk-taking/bundle-manifest.json) ## 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** - [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 (Markdown version)](/external/chinese/np/blog/2014/100814c.pdf.md){rel="alternate" type="text/markdown"} - [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 (PDF)](/external/chinese/np/blog/2014/100814c.pdf){rel="external" type="application/pdf"} - **Full Report** - [Full Report (Markdown version)](/external/pubs/ft/gfsr/2014/02/pdf/text.pdf.md){rel="alternate" type="text/markdown"} - [Full Report (PDF)](/external/pubs/ft/gfsr/2014/02/pdf/text.pdf){rel="external" type="application/pdf"} --- ## References - [https://www.imf.org/wp-content/uploads/2014/10/gfsr-vinals-blog-chart-rev.jpg](https://www.imf.org/wp-content/uploads/2014/10/gfsr-vinals-blog-chart-rev.jpg) _Source: https://www.imf.org/en/blogs/articles/2014/10/08/the-new-global-imbalance-too-much-financial-risk-taking-not-enough-economic-risk-taking_