{
  "title": "Weak Spots in Global Financial System Could Amplify Shocks",
  "publication": "IMF Blog, April 10, 2019",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2019/04/10/weak-spots-in-global-financial-system-could-amplify-shocks",
  "canonical": "https://www.imf.org/en/blogs/articles/2019/04/10/weak-spots-in-global-financial-system-could-amplify-shocks",
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  "summary": "Authors: Tobias Adrian, Fabio Natalucci",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Authors: Tobias Adrian, Fabio Natalucci\n- Date: April 10, 2019\n- Central message: Vulnerabilities across advanced and emerging market economies are rising and—if they continue to build amid still-easy financial conditions—could amplify shocks to the global economy and raise the odds of a severe economic downturn a few years down the road.\n- Short-term risks: \"still low by historical standards\" but \"slightly higher\" than in the October 2018 Global Financial Stability Report.\n- Medium-term risks: \"remain elevated.\""
    },
    {
      "heading": "Quantitative framework introduced",
      "content": "- Purpose: Quantify vulnerabilities in the financial system so policymakers can monitor them in real time and take preventive steps.\n- Scope: Framework encompasses six sectors—corporates, households, governments, banks, insurance companies, and other financial institutions (including \"shadow banks\").\n- Metrics tracked: Level and pace of change in vulnerabilities, including leverage, maturity and liquidity mismatches of assets and liabilities, and currency exposures.\n- Coverage: Aggregates across 29 systemically important countries."
    },
    {
      "heading": "Key vulnerabilities by region and sector",
      "content": "- Advanced economies:\n  - Corporate debt and financial risk-taking have increased.\n  - Creditworthiness of borrowers has deteriorated.\n  - \"The stock of bonds with BBB ratings has quadrupled, and the stock of speculative-grade credits has almost doubled in the United States and the euro area since the crisis.\"\n  - Concern about leveraged loans to highly indebted borrowers.\n- Euro area:\n  - Fiscal challenges in some countries could drive bond yields sharply higher, causing significant losses for banks with large holdings of government debt.\n  - Insurance companies could also face losses.\n  - This \"sovereign-financial sector nexus\" recalls dynamics from the euro crisis in 2011.\n  - Mitigants: banks have higher capital ratios today, and policymakers have taken steps to address nonperforming loans.\n- China:\n  - Declining bank profitability and \"capital levels remain low at small and medium-size lenders.\"\n  - This constrains credit to smaller private firms.\n  - Further monetary and credit support may increase financial stability risks by making it harder for smaller banks to clean up balance sheets.\n- Emerging markets:\n  - Overseas portfolio investments increasingly run by managers who seek to match returns of popular indexes.\n  - \"The value of fixed-income, benchmark-driven investments has quadrupled in the past ten years to $800 billion.\"\n  - Index-driven funds expand the investor base but increase vulnerability to sudden reversals of capital flows."
    },
    {
      "heading": "Specific statistics and exact phrasings to note",
      "content": "- \"The stock of bonds with BBB ratings has quadrupled.\"\n- \"The stock of speculative-grade credits has almost doubled in the United States and the euro area since the crisis.\"\n- \"The value of fixed-income, benchmark-driven investments has quadrupled in the past ten years to $800 billion.\"\n- Short-term assessment: \"short-term risks to global financial stability are still low by historical standards, though they are slightly higher than we found in our October 2018 Global Financial Stability Report.\"\n- Medium-term assessment: \"risks remain elevated.\""
    },
    {
      "heading": "Policy recommendations and tools",
      "content": "- Macroprudential measures:\n  - Use macroprudential tools to cool credit growth and strengthen system resilience.\n  - Example: countercyclical capital buffers requiring banks to increase capital when credit is growing.\n- Corporate-debt-heavy countries:\n  - Develop tools to limit the riskiness of credit to firms, especially credit from nonbank lenders.\n- Euro area:\n  - Lower the debt-to-GDP ratio among highly indebted governments.\n  - Further repair banks' balance sheets, including reducing non-performing loans.\n- China:\n  - Continue reducing leverage in the financial sector, especially in shadow banking.\n  - Ensure lenders build capital buffers.\n  - Promptly carry out announced reforms to address risks in investment products.\n- Emerging market economies:\n  - Limit reliance on short-term overseas debt.\n  - Ensure adequate foreign currency reserves and fiscal buffers.\n  - Use flexible exchange rates to absorb shocks.\n- Monetary policy stance:\n  - In some circumstances, countries with strong economies and inflation at or above target can consider using monetary policy to \"lean against the wind.\"\n  - Trade-off highlighted: patient monetary policy can accommodate downside risks now, but if financial conditions remain easy for too long, vulnerabilities will continue to build and increase the odds of a sharp drop in economic growth later."
    },
    {
      "heading": "Risks, trade-offs, and outlook",
      "content": "- Vulnerabilities can amplify sudden shocks such as:\n  - Sharper-than-anticipated economic slowdown.\n  - Unexpected shift in monetary policy.\n  - Escalation of trade tensions.\n- Trade-off for policymakers:\n  - A patient approach to monetary policy may be warranted to counter slowing growth.\n  - But prolonged easy financial conditions risk building vulnerabilities that increase medium-term downside risks.\n- Overall assessment: With the right mix of policies, countries \"can sustain growth while keeping vulnerabilities in check.\"\n\nSource: Tobias Adrian and Fabio Natalucci, April 10, 2019\n\n---\n\n\n References\n\n- عربي\n- 日本語\n- Português\n- Global Financial Stability Report\n- World Economic Outlook.\n- https://www.imf.org/wp-content/uploads/2019/04/gfsr-ch1-1.png\n- Global Financial Stability Report\n- https://www.imf.org/wp-content/uploads/2019/04/gfsrch1-2.png\n- https://www.imf.org/wp-content/uploads/2019/04/gfsrch1-3.png\n- blog\n- https://www.imf.org/wp-content/uploads/2019/04/gfsrch1-4.png\n- https://www.imf.org/wp-content/uploads/2019/04/gfsrch1-5.png\n- Assessing the Risk of the Next Housing Bust\n- Risky Business: Reading Credit Flows for Crisis Signals\n\nSource: https://www.imf.org/en/blogs/articles/2019/04/10/weak-spots-in-global-financial-system-could-amplify-shocks"
    }
  ],
  "bullets": [
    "[Markdown version](/en/blogs/articles/2019/04/10/weak-spots-in-global-financial-system-could-amplify-shocks/index.md)",
    "[Structured JSON version](/en/blogs/articles/2019/04/10/weak-spots-in-global-financial-system-could-amplify-shocks/index.json)",
    "[Bundle manifest](/en/blogs/articles/2019/04/10/weak-spots-in-global-financial-system-could-amplify-shocks/bundle-manifest.json)",
    "Authors: Tobias Adrian, Fabio Natalucci",
    "Published: April 10, 2019",
    "Authors: Tobias Adrian, Fabio Natalucci",
    "Date: April 10, 2019",
    "Central message: Vulnerabilities across advanced and emerging market economies are rising and—if they continue to build amid still-easy financial conditions—could amplify shocks to the global economy and raise the odds of a severe economic downturn a few years down the road.",
    "Short-term risks: \"still low by historical standards\" but \"slightly higher\" than in the October 2018 Global Financial Stability Report.",
    "Medium-term risks: \"remain elevated.\"",
    "Purpose: Quantify vulnerabilities in the financial system so policymakers can monitor them in real time and take preventive steps.",
    "Scope: Framework encompasses six sectors—corporates, households, governments, banks, insurance companies, and other financial institutions (including \"shadow banks\").",
    "Metrics tracked: Level and pace of change in vulnerabilities, including leverage, maturity and liquidity mismatches of assets and liabilities, and currency exposures.",
    "Coverage: Aggregates across 29 systemically important countries.",
    "Advanced economies:",
    "Euro area:",
    "China:",
    "Emerging markets:",
    "\"The stock of bonds with BBB ratings has quadrupled.\"",
    "\"The stock of speculative-grade credits has almost doubled in the United States and the euro area since the crisis.\"",
    "\"The value of fixed-income, benchmark-driven investments has quadrupled in the past ten years to $800 billion.\"",
    "Short-term assessment: \"short-term risks to global financial stability are still low by historical standards, though they are slightly higher than we found in our October 2018 Global Financial Stability Report.\"",
    "Medium-term assessment: \"risks remain elevated.\"",
    "Macroprudential measures:",
    "Corporate-debt-heavy countries:",
    "Euro area:",
    "China:",
    "Emerging market economies:",
    "Monetary policy stance:",
    "Vulnerabilities can amplify sudden shocks such as:",
    "Trade-off for policymakers:",
    "Overall assessment: With the right mix of policies, countries \"can sustain growth while keeping vulnerabilities in check.\"",
    "[عربي](https://www.imf.org/ar/News/Articles/2019/04/09/blog-gfsr-weak-spots-in-global-financial-system-could-amplify-shocks)",
    "[日本語](https://www.imf.org/ja/News/Articles/2019/04/09/blog-gfsr-weak-spots-in-global-financial-system-could-amplify-shocks)",
    "[Português](https://www.imf.org/pt/News/Articles/2019/04/09/blog-gfsr-weak-spots-in-global-financial-system-could-amplify-shocks)",
    "[Global Financial Stability Report](https://www.imf.org/en/publications/gfsr)",
    "[World Economic Outlook.](https://blogs.imf.org/2019/04/09/the-global-economy-a-delicate-moment/)",
    "[https://www.imf.org/wp-content/uploads/2019/04/gfsr-ch1-1.png](https://www.imf.org/wp-content/uploads/2019/04/gfsr-ch1-1.png)",
    "[Global Financial Stability Report](https://blogs.imf.org/2018/10/09/the-financial-system-is-stronger-but-new-vulnerabilities-have-emerged-in-the-decade-since-the-crisis/)",
    "[https://www.imf.org/wp-content/uploads/2019/04/gfsrch1-2.png](https://www.imf.org/wp-content/uploads/2019/04/gfsrch1-2.png)",
    "[https://www.imf.org/wp-content/uploads/2019/04/gfsrch1-3.png](https://www.imf.org/wp-content/uploads/2019/04/gfsrch1-3.png)",
    "[blog](https://blogs.imf.org/2018/11/15/sounding-the-alarm-on-leveraged-lending/)",
    "[https://www.imf.org/wp-content/uploads/2019/04/gfsrch1-4.png](https://www.imf.org/wp-content/uploads/2019/04/gfsrch1-4.png)",
    "[https://www.imf.org/wp-content/uploads/2019/04/gfsrch1-5.png](https://www.imf.org/wp-content/uploads/2019/04/gfsrch1-5.png)",
    "[Assessing the Risk of the Next Housing Bust](https://blogs.imf.org/2019/04/04/assessing-the-risk-of-the-next-housing-bust/)",
    "[Risky Business: Reading Credit Flows for Crisis Signals](https://blogs.imf.org/2018/04/10/risky-business-reading-credit-flows-for-crisis-signals/)"
  ],
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