Mapping the World’s Financial Weak Spots
IMF Blog, June 20, 2019
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Bibliographic details
- Authors: The Editors
- Published: June 20, 2019
Overview and purpose
- Where will the next financial crisis come from? The short answer is: We don’t know. We can, however, look for vulnerabilities in the system that, if left untreated, can develop into problems.
- A vulnerability is defined as "an area of weakness that can amplify and spread an unexpected economic shock, increasing the level of risk to the financial system."
- Analogy used: imagine the impact of an earthquake on a house built on sand, as opposed to bedrock.
Methodology and scope
- Chart constructed on a five-point scale ranging from lowest (dark green) to highest (red).
- Chart covers six sectors and five country groups.
- The chart shows the distribution of vulnerabilities across six sectors in five regions.
- Constructed using dozens of indicators going back up to two decades.
- Full details available in the Online Annex to the April 2019 Global Financial Stability Report.
Key findings and elevated vulnerabilities
- Vulnerabilities are elevated in several sectors by historical standards.
- Government debt in the euro area remains one of the most serious vulnerabilities dogging the global financial system.
- Government debt vulnerability is also elevated in the United States and many emerging market countries.
- In advanced economies outside the euro area, household borrowing is high.
- In China, vulnerabilities are high in several sectors, including nonbank financial institutions.
- One noted weak spot: the debt level in US corporations and the risks investors in their securities take; "Lending to heavily indebted companies with weak credit ratings is on the rise and may be a widening crack in the system."
Policy implications and recommended steps
- Knowing where vulnerabilities are high or rising can help policy makers take steps to protect their financial systems, as well as the global financial system.
- Possible steps include:
- having banks raise more capital,
- reducing levels of public debt,
- imposing curbs on borrowing by households or corporations.
- Data gaps remain an important obstacle to a comprehensive vulnerability analysis and should be filled.
The Editors, June 20, 2019
Content in this bundle
- Global Financial Stability Report April 2019; Online Technical Annex 1.1; April 10, 2019
