Global Financial Stability Improves; Getting the Policy Mix Right to Sustain Gains
IMF Blog, April 19, 2017
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- Authors: Tobias Adrian
- Published: April 19, 2017
Overall assessment and context
- The world’s financial system has become safer and more stable since the last assessment six months ago.
- Economic activity has gained momentum; the outlook has improved and hopes for reflation have risen.
- Monetary and financial conditions remain highly accommodative.
- Investor optimism over new policies under discussion in the United States has boosted asset prices.
- These conclusions are drawn from the IMF’s latest Global Financial Stability Report.
The right policy mix — high-level guidance
- Governments in the United States, Europe, China, and emerging markets should:
- Prevent fiscal imbalances.
- Resist calls for higher trade barriers.
- Maintain global cooperation on regulations needed to make the financial system safer.
- Completing the global regulatory reform agenda is vital and relies on continued multilateral cooperation and coordination.
United States — findings and policy implications
Findings:
- Discussions of corporate tax reform, infrastructure spending, and reductions in regulatory burdens have boosted business and investor confidence.
- Investment has languished for more than 15 years.
- Many firms with capacity to increase capital spending have instead focused on financial risk taking (acquisition of financial assets and using debt to pay out shareholders).
- Firms in sectors accounting for almost half of U.S. investment—namely energy, utilities, and real estate—are already highly levered.
Risks:
- A sharp rise in interest rates—for example, owing to larger budget deficits—could push corporate debt servicing capacity to its weakest level since the global financial crisis.
- Under such a scenario, companies with some $4 trillion of assets may find servicing their debt challenging. This is almost a quarter of the assets analyzed.
Policy recommendations:
- Ensure corporate tax measures encourage companies to invest in new machines, computers and equipment rather than engage in financial risk taking.
- Preemptively address areas where risk taking appears excessive and help ensure healthy corporate balance sheets.
- Aim to spur economic growth while avoiding imbalances that could have negative consequences for the rest of the world.
Emerging markets — vulnerabilities and policy steps
Findings:
- A sudden reversal of market sentiment could prompt capital outflows and hurt growth prospects.
- A global shift toward protectionism could also harm emerging markets.
- Debt held by the weakest firms could rise by as much as $230 billion under adverse scenarios.
- Banks in some countries would need to rebuild their buffers of capital and provisions; these are banks already experiencing a decline in asset quality after a long credit boom.
Policy recommendations:
- Improve corporate-restructuring mechanisms.
- Monitor corporate vulnerabilities.
- Ensure banks maintain healthy buffers.
China — credit growth concerns
Findings:
- Credit in relation to China’s economy has more than doubled in less than a decade, to more than 200 percent.
- Credit booms this big can be dangerous; the longer they last, the more dangerous they become.
- The Chinese authorities continue to adjust policies to limit the growth of the banking and shadow banking systems.
Policy implications:
- More needs to be done to slow credit growth.
- The authorities’ progress and success is essential for global financial stability.
Europe — bank profitability and structural issues
Findings:
- Policymakers have strengthened the banking system via higher capital requirements, more robust regulation and enhanced supervision.
- Over the past six months, bank equity prices have risen as yield curves steepened and the economic recovery has firmed.
- A cyclical recovery is unlikely to fully resolve the profitability challenge many banks in Europe face.
- Weak profitability limits banks’ ability to retain capital, making it harder for them to weather shocks and increasing risks to financial stability.
- The Global Financial Stability Report examines European banks representing $35 trillion in assets and divides them into three groups—global, Europe-focused, and domestic.
- Domestic banks face the greatest challenges: almost three-quarters of them had very weak returns in 2016.
- “Overbanking” is a problem for many: weak banks with low capital buffers, too many banks with a regional focus and narrow mandate, or too many branches with low efficiency.
Policy recommendations:
- Promote bank consolidation and branch rationalization.
- Reform bank business models.
- Address nonperforming loans.
Conclusion — sustaining gains
- Getting the policy mix right will provide a firm foundation for the global financial system and cement recent improvements in the outlook for growth and financial stability.
- Policy makers in the U.S., Europe, China and emerging markets all have roles to play.
Source: Global Financial Stability Improves; Getting the Policy Mix Right to Sustain Gains — Tobias Adrian, April 19, 2017.
Content in this bundle
- 全球金融稳定状况改善；实施适当政策组合，继续保持稳定
- 世界の金融安定性が改善; その維持に向けた正しいポリシーミ ックスとは : トビアズ・エイドリアン; IMFブログ 2017年4月19日掲載
- 041917ar