## Financial Stability Improves, But Rising Vulnerabilities Could Put Growth at Risk

_IMF Blog, October 11, 2017_

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## Bibliographic details
- Authors: Tobias Adrian
- Published: October 11, 2017

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### Overview
- Article by Tobias Adrian, October 11, 2017.
- Global financial system is strengthening due to healthy economic growth, buoyant markets, and low interest rates.
- Simultaneously, rising financial vulnerabilities are building and could threaten the recovery if left unchecked.

### Capital buffers and reasons for optimism
- Big, globally systemic banks have added $1 trillion to their capital buffers since 2009.
- Overseas investment into emerging market and low income economies has increased.
- The global economic upswing is creating prospects for a sustained recovery and a return of monetary policy to normal settings.

### Risks in financial markets
- Before the crisis, there were $16 trillion in relatively safe, investment-grade bonds yielding more than 4 percent; that has dwindled to just $2 trillion today.
- Excess liquidity and scarce high-yielding safe assets are driving investors into riskier and less liquid assets, increasing potential losses if markets tumble.

### Rising levels of debt
- Borrowing by governments, households and companies (not including banks) in the Group of 20 exceeds $135 trillion, equivalent to about 235 percent of their combined gross domestic product.
- Despite low interest rates, debt servicing burdens have risen in several economies.
- Chapter two of the Global Financial Stability Report linked growth in household debt relative to GDP with a greater probability of a banking crisis.

### China
- Banking sector assets have risen to 310 percent of GDP, up from 240 percent at the end of 2012, and are nearly three times the emerging-market average.
- Rapid credit growth, including “shadow” lending and wealth management products, poses elevated financial stability risks, especially for smaller banks.
- Authorities have taken steps to address risks, but broader reform measures are necessary to reduce reliance on rapid credit growth.

### Low-income countries
- Expanded access to international bond markets has financed infrastructure projects, debt refinancing, and repayment of arrears.
- This borrowing has been accompanied by an underlying deterioration of debt burdens as measured by the debt service ratio.

### Bank profitability and systemic concerns
- Supervisors should scrutinize bank business models to ensure sustainable profitability.
- Almost one-third of systemically important banks, with $17 trillion in assets, are estimated to struggle to achieve the profitability needed to ensure resilience to shocks.

### Policy implications and recommended actions
- Major central banks should avoid creating market turbulence by thoroughly explaining plans to gradually unwind crisis-era policies.
- Financial regulators should deploy macroprudential policies, such as limits on loan-to-value ratios for mortgages, for macro critical objectives to discourage riskier lending.
- Emerging-market and low income countries should use benign external conditions to reduce vulnerabilities by enhancing underwriting standards, building capital and liquidity buffers, and increasing reserves.
- Complete and fully implement the global regulatory reform agenda; global cooperation remains essential.

### Conclusion
- Benign conditions present an opportunity to address mounting vulnerabilities; policymakers should act now to prevent future shocks from derailing the global economic expansion.

*Source: Financial Stability Improves, But Rising Vulnerabilities Could Put Growth at Risk (blog article by Tobias Adrian, October 11, 2017).*

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## References

- [Global Financial Stability Report](http://www.imf.org/en/Publications/GFSR/Issues/2017/09/27/global-financial-stability-report-october-2017)
- [chapter two](https://blogs.imf.org/2017/10/03/rising-household-debt-what-it-means-for-growth-and-stability/)
- [https://www.imf.org/wp-content/uploads/2017/10/ENG_Oct_6_GFSRCH1Chart2-1.jpg](https://www.imf.org/wp-content/uploads/2017/10/ENG_Oct_6_GFSRCH1Chart2-1.jpg)

_Source: https://www.imf.org/en/blogs/articles/2017/10/11/financial-stability-improves-but-rising-vulnerabilities-could-put-growth-at-risk_