## The Financial System Is Stronger, but New Vulnerabilities Have Emerged in the Decade Since the Crisis

_IMF Blog, October 9, 2018_

## Source details

**Canonical URL:** [The Financial System Is Stronger, but New Vulnerabilities Have Emerged in the Decade Since the Crisis](https://www.imf.org/en/blogs/articles/2018/10/09/blog-gfsr-the-financial-system-is-stronger-but-new-vulnerabilities-have-emerged)

## Other formats

- [Markdown version](/en/blogs/articles/2018/10/09/blog-gfsr-the-financial-system-is-stronger-but-new-vulnerabilities-have-emerged/index.md)
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## Bibliographic details
- Authors: Tobias Adrian
- Published: October 9, 2018

---

### Overview
- Global expansion has plateaued while easy monetary policies continue to support growth.
- Short-term risks to the financial system have increased somewhat over the past six months, driven by escalated trade tensions, increased policy uncertainties in a number of countries, and financial market pressures in some emerging market economies.
- The financial system is stronger today than before the global financial crisis thanks to a decade of reform and recovery, but vulnerabilities continue to build and the system remains untested.

### Emerging vulnerabilities and market conditions
- Robust risk appetite has continued to support rising asset prices in major financial markets; financial conditions have remained relatively easy despite US Federal Reserve policy rate hikes.
- The stronger dollar and higher US interest rates have made overseas borrowing more expensive for emerging markets, especially those with larger credit needs and weaker economic conditions or policy frameworks.
- Asset valuations remain stretched across several sectors and regions.
- Underwriting standards are deteriorating in some areas of credit intermediation.
- Some global banks hold large amounts of more illiquid and opaque assets.

### Risk scenarios and probabilities
- If pressures on emerging market economies broaden and intensify, financial stability risks would increase significantly.
- The analysis suggests that—in the medium term—there is a 5 percent probability that emerging market economies will experience portfolio debt outflows of $100 billion or more. That is broadly similar in magnitude to outflows experienced during the crisis.
- Other sources of sharp increases in stability risks include:
  - A broader escalation of trade tensions.
  - A no-deal Brexit.
  - Renewed concerns about fiscal policy in some highly indebted euro area countries.
  - A faster-than-expected normalization of monetary policy in advanced economies.

### Key statistics
- Debt owed by governments, companies, and households in economies with globally systemically important financial sectors has risen from around 200 percent of GDP a decade ago to almost 250 percent today.
- Probability of sizable EM portfolio debt outflows in the medium term: 5 percent.
- Magnitude of concern for those outflows: $100 billion or more.

### Policy recommendations
- Micro-prudential (firm level) policies should aim to strengthen bank balance sheets against solvency and liquidity risks.
- Broad-based macroprudential tools should be used more actively where financial conditions remain accommodative and vulnerabilities are high. Example: the countercyclical capital buffer (which aims to increase bank capital when borrowing is rising in the economy).
- Develop and deploy new macroprudential tools to address vulnerabilities outside the banking sector, including:
  - Ensuring sound underwriting standards in nonbank credit intermediation.
  - Tackling liquidity risks posed by asset managers.
- For emerging market economies:
  - Reduce vulnerabilities and maintain robust policies and sound policy frameworks.
  - Build and maintain adequate foreign exchange reserves and use these reserves judiciously.
- Regulators and supervisors should:
  - Respond to new threats, including cyber risks.
  - Support fintech’s potential contribution to innovation, efficiency, and inclusion while safeguarding against risks to the financial system.
- Complete the financial regulatory reform agenda and avoid rollback of reforms.
- Strengthen international cooperation to maintain global financial stability and foster sustainable economic growth.

*Source: Tobias Adrian, "The Financial System Is Stronger, but New Vulnerabilities Have Emerged in the Decade Since the Crisis," IMF blog, October 9, 2018.*

---

## Content in this bundle

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---

## References

- [عربي](http://www.imf.org/ar/News/Articles/2018/10/09/blog-gfsr-the-financial-system-is-stronger-but-new-vulnerabilities-have-emerged)
- [,](https://blog-dialogoafondo.imf.org/?p=10141)
- [Português](https://www.imf.org/pt/News/Articles/2018/10/09/blog-gfsr-the-financial-system-is-stronger-but-new-vulnerabilities-have-emerged)
- [https://www.imf.org/wp-content/uploads/2018/10/BLOG-1024x600-GFSR-CH-1-Autodealerhsip-in-Woodside-New-York-Richard-B.-Levine-Newscom-lrphotos100458.jpg](https://www.imf.org/wp-content/uploads/2018/10/BLOG-1024x600-GFSR-CH-1-Autodealerhsip-in-Woodside-New-York-Richard-B.-Levine-Newscom-lrphotos100458.jpg)
- [Global Financial Stability Report](https://www.imf.org/en/Publications/GFSR/Issues/2018/09/25/Global-Financial-Stability-Report-October-2018)
- [https://www.imf.org/wp-content/uploads/2018/10/CHART-1.jpg](https://www.imf.org/wp-content/uploads/2018/10/CHART-1.jpg)
- [https://www.imf.org/wp-content/uploads/2018/10/eng-october-5-draft-gfsr1-revised.jpg](https://www.imf.org/wp-content/uploads/2018/10/eng-october-5-draft-gfsr1-revised.jpg)
- [Global Financial Stability Report](https://blogs.imf.org/2018/10/03/a-decade-after-lehman-the-financial-system-is-safer-now-we-must-avoid-reform-fatigue/)
- [A Decade After Lehman, the Financial System Is Safer. Now We Must Avoid Reform Fatigue](https://blogs.imf.org/2018/09/06/https://blogs.imf.org/2018/10/03/a-decade-after-lehman-the-financial-system-is-safer-now-we-must-avoid-reform-fatigue/)
- [Lasting Effects: The Global Economic Recovery 10 Years After the Crisis](https://blogs.imf.org/2018/10/03/lasting-effects-the-global-economic-recovery-10-years-after-the-crisis//)
- [Ten Years After Lehman: Lessons Learned and Challenges Ahead](https://blogs.imf.org/2018/09/05/ten-years-after-lehman-lessons-learned-and-challenges-ahead/)

_Source: https://www.imf.org/en/blogs/articles/2018/10/09/blog-gfsr-the-financial-system-is-stronger-but-new-vulnerabilities-have-emerged_