Global Financial Stability: Vulnerabilities, Legacies, and Policy Challenges
IMF Blog, October 7, 2015
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Bibliographic details
- Authors: Jose-Vinals
- Published: October 7, 2015
Overall assessment
- Global financial stability is "not yet assured" and downside risks prevail.
- Financial stability has improved in advanced economies since the April Global Financial Stability Report due to a broadening and solidifying economic recovery.
- The Federal Reserve has indicated that monetary policy lift-off is close in the United States as the economic preconditions are nearly in place.
- The European Central Bank's policies "have gained traction" and credit conditions in the euro area are improving.
- Risks have rotated toward emerging economies; growth in emerging markets is "slowing for the fifth year in a row."
Emerging market vulnerabilities
- Corporate and bank balance sheets in emerging markets are "stretched."
- Estimated overborrowing in emerging markets: up to three trillion dollars.
- Higher private sector leverage and greater exposure to global financial conditions increase susceptibility to economic downturns, capital outflows, and deteriorating credit quality.
- China faces a delicate transition: shift to more consumption-driven growth, orderly deleveraging of high debt levels, and movement toward a more market-based system.
Crisis legacies in advanced economies
- Euro area priorities:
- Tackle sovereign and banking vulnerabilities.
- Fill gaps in the financial architecture.
- Complete the banking union and advance the capital markets union.
- Resolving nonperforming loans in euro area banks could deliver about three percent of loans in new lending capacity, amounting to around €600 billion euros.
- United States:
- Embark on the first policy rate increase in nine years; the process is "most-telegraphed, although unprecedented."
- Important transition for global markets.
Market liquidity, leverage, and amplification risks
- Market liquidity "has become less resilient."
- Extraordinary accommodative monetary policies have compressed risk premia across asset markets; risk premia could decompress in a disorderly way, causing fire sales, redemptions, and more volatility.
- Leverage in investment funds can amplify shocks: analysis found $1.5 trillion dollars in embedded leverage in bond funds through derivatives.
Economic scenarios and stakes
- Objective: achieve a "successful normalization" of monetary and financial conditions to secure financial stability and strengthen the economic recovery.
- Alternative: "failed normalization"—policy missteps and/or adverse shocks could result in prolonged global market turmoil and stall the recovery.
- The difference between the successful and failed normalization scenarios amounts to nearly three percent of global output by 2017.
- "Three percent of global output is at stake."
Urgent policy recommendations
- Monetary policy:
- Monetary policies in key advanced economies must remain accommodative and responsive.
- Euro area and Japan should continue countering downward price pressures.
- The United States should wait to raise policy rates "until there are further signs of inflation rising steadily, with continued strength in the labor market."
- Subsequent policy rate increases should be gradual and well communicated.
- Euro area structural and banking reforms:
- Do not rely on the European Central Bank alone; complete the banking union and advance the capital markets union.
- Comprehensively tackle nonperforming loans and the corporate debt overhang to strengthen banks, bolster market confidence, and improve the outlook.
- China:
- Rebalancing and deleveraging require great care.
- Deleveraging the corporate sector and enhancing market discipline will entail corporate defaults, exits of nonviable firms, and write-offs on nonperforming loans, requiring further strengthening of banks.
- Moving decisively will ultimately prove less costly than trying to grow out of the problem.
- Emerging markets:
- Get ahead of the credit cycle with immediate prudential attention to corporates and banks.
- Maintain sovereign investment-grade status through appropriate measures.
- Use available policy buffers nimbly and judiciously to manage financial contagion outbreaks.
- Market structure and asset management:
- Safeguard against market illiquidity and strengthen financial market structures.
- Enhance oversight of liquidity in the asset-management industry to avoid fire sales and a rush for redemptions.
- Collective action:
- A collective effort to deliver an urgent policy upgrade is needed to face rising challenges, ensure financial stability, and improve growth prospects.
José Viñals, October 7, 2015 — Global Financial Stability: Vulnerabilities, Legacies, and Policy Challenges
Content in this bundle
- 全球金融稳定：脆弱性、遗留问题和政策挑战; iMFdirect博客; 2015年10月7日
- Full Report
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