## Global Financial Stability: Vulnerabilities, Legacies, and Policy Challenges _IMF Blog, October 7, 2015_ ## Source details **Canonical URL:** [Global Financial Stability: Vulnerabilities, Legacies, and Policy Challenges](https://www.imf.org/en/blogs/articles/2015/10/07/global-financial-stability-vulnerabilities-legacies-and-policy-challenges) ## Other formats - [Markdown version](/en/blogs/articles/2015/10/07/global-financial-stability-vulnerabilities-legacies-and-policy-challenges/index.md) - [Structured JSON version](/en/blogs/articles/2015/10/07/global-financial-stability-vulnerabilities-legacies-and-policy-challenges/index.json) - [Bundle manifest](/en/blogs/articles/2015/10/07/global-financial-stability-vulnerabilities-legacies-and-policy-challenges/bundle-manifest.json) ## 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** - [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 (Markdown version)](/external/chinese/np/blog/2015/100815c.pdf.md){rel="alternate" type="text/markdown"} - [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 (PDF)](/external/chinese/np/blog/2015/100815c.pdf){rel="external" type="application/pdf"} - **Full Report** - [Full Report (Markdown version)](/external/pubs/ft/gfsr/2015/02/pdf/text.pdf.md){rel="alternate" type="text/markdown"} - [Full Report (PDF)](/external/pubs/ft/gfsr/2015/02/pdf/text.pdf){rel="external" type="application/pdf"} - **Глобальная финансовая стабильность: факторы уязвимости, последствия и проблемы политики** - [Глобальная финансовая стабильность: факторы уязвимости, последствия и проблемы политики (Markdown version)](/external/russian/np/blog/2015/100715r.pdf.md){rel="alternate" type="text/markdown"} - [Глобальная финансовая стабильность: факторы уязвимости, последствия и проблемы политики (PDF)](/external/russian/np/blog/2015/100715r.pdf){rel="external" type="application/pdf"} --- ## References - [April 2015 report](http://www.imf.org/External/Pubs/FT/GFSR/2015/01/index.htm) _Source: https://www.imf.org/en/blogs/articles/2015/10/07/global-financial-stability-vulnerabilities-legacies-and-policy-challenges_