Global Financial Stability Report Press Conference - 2016 IMF Annual Meetings
IMF News, October 5, 2016
Source details
- Canonical URL
- Global Financial Stability Report Press Conference - 2016 IMF Annual Meetings
Other formats
Bibliographic details
- Published: October 5, 2016
Assessment of risks and macro-financial environment
- Short‑term risks have declined since six months ago (Brexit shock absorbed; emerging market assets rebounded).
- Medium‑term risks are building due to "low, uneven, and unequal growth" that can increase populist and inward looking policies and policy uncertainty.
- Markets expect negative policy rates in the euro area and Japan to last through the end of this decade.
- Almost 40 percent of advanced economy government bonds carry negative yields.
- The new era: low growth, low rates, increased political and policy uncertainty — creates challenges for banks, policymakers, and corporates.
Banking system findings (sample and coverage)
- Bottom‑up analysis of some 280 banks covering about 70 percent of U.S. and the EU banking systems.
- A large majority of the U.S. banking system returns to healthy profitability under a cyclical recovery, but some weaknesses remain.
- In Europe, almost one third of the system, representing some 8.5 trillion dollars, remains weak and unable to generate sustainable profits.
- Market concern: equity valuations are well below book values for many banks as investors shift focus from capital levels to bank business models and profitability.
European banking sector structural challenges and quantified impacts
Findings:
- Legacy of nonperforming loans (NPLs) is a core constraint on bank profitability and balance‑sheet repair.
- Excess capacity: too many branches with too few deposits; many banks have funding costs above peers.
- Weak banks will have to exit; some banking systems will need to shrink.
Quantified impacts and scenarios:
- If insolvency and recovery regimes are strengthened and foreclosure times reduced, the capital cost of removing nonperforming loans could shift from a cost of some 80 billion euros to a benefit of capital of about 60 billion euros.
- Undertaking recommended structural reforms would improve the profitability of European banks in the analysis by over 40 billion dollars annually.
- Combined with a cyclical recovery, structural reforms would increase the share of healthy European banks to over 70 percent.
Policy recommendations (Europe):
- Resolve legacy nonperforming loans by strengthening insolvency and recovery regimes to reduce foreclosure times.
- Improve efficiency: address excess branches, deposit weaknesses, and high funding costs.
- Allow weak banks to exit and banking systems to consolidate where necessary.
- Complete regulatory reforms to reduce uncertainty without an across‑the‑board increase in capital requirements; avoid procyclical outcomes.
- Use flexibility and judgment within the Bank Recovery and Resolution Directive (BRRD) and related state aid rules; the regime will be reviewed in 2018.
Long‑term savings institutions
- Solvency of life insurance companies and pension funds threatened by prolonged low interest rates.
- Managers and regulators need to address medium‑term insolvency risks and funding gaps and strengthen capital framework standards.
Emerging markets: corporate leverage, deleveraging timeline, and buffers
Findings:
- Corporate leverage in many emerging markets has peaked; weaker commodity prices have led firms to slash investment and borrowing needs.
- Under the baseline scenario, indebtedness declines only gradually, returning to 2014 levels only by 2021.
- High debt levels leave emerging markets sensitive to downside risks and capital flow reversals.
Brazil (sample findings and adverse scenario):
- Current debt held by weak firms in the sample in Brazil is about 51 billion dollars, about 11 percent of Brazilian corporate debt.
- In an adverse scenario (slower growth, lower profits, higher funding costs), this debt could rise to some 88 billion dollars or about 19 percent of corporate debt in Brazil.
- Brazilian bank buffers could be overwhelmed if the downside scenario materializes.
Supervisory recommendations (emerging markets):
- Proactively address corporate vulnerabilities through swift recognition of nonperforming loans and strengthening insolvency frameworks.
- Supervisors should assess whether larger bank buffers are needed in several emerging markets and focus on that potential.
China: credit growth, nonbank credit intermediation, and vulnerabilities
Findings:
- Growing complexity as credit continues to grow; increasing share of credit packaged in opaque and complex credit products produced outside the banking system.
- Some of these credit products are on the balance sheets of smaller Chinese banks; these exposures exceed on average three times their capital buffers.
- Smaller banks rely on short‑term wholesale funding, which can be fragile.
Policy recommendations for China:
- Curb excess credit growth.
- Reduce the opacity of credit products.
- Ensure sound interbank funding structures.
- Strengthen viability of Chinese corporates, particularly in the state sector.
- Facilitate proactive recognition of losses and continue strengthening bank capital positions as debt write‑offs proceed.
Specific country and sector highlights
- Deutsche Bank: classified as an investment bank “in transition” away from dated business models; placed in the bucket of banks that need to adjust to convince investors of business‑model viability and address operational and litigation-related risks. Deutsche Bank is large and interconnected and therefore systemically important domestically and globally.
- Italy: asset quality reviews have been helpful for larger systemic banks; IMF recommends extending asset quality review to smaller banks to reduce uncertainty and address high levels of NPLs.
- Greece: Greek banks currently have adequate capital following recapitalization under the program, but nonperforming loans are a severe challenge (Greek nonperforming loans under the European Banking Authority numbers are almost 50 percent). Addressing NPLs requires legal and judicial reforms and effective out‑of‑court settlement procedures.
- Japan: yield curve control and monetary policy measures may provide additional support, but monetary policy alone is insufficient — structural reforms and a coherent medium‑term fiscal framework are also needed. Japanese banks are exposed to dollar funding risks due to increased cross‑border activity funded in wholesale dollar markets.
Regulatory enforcement, misconduct, and market impacts
- Stronger enforcement and higher fines since the global financial crisis have affected bank profitability and share prices, but the overall magnitude of fines has not been biased against non‑U.S. institutions; U.S. institutions have borne large fines as well.
- Addressing misconduct remains a work in progress to create a culture of responsible finance.
Overarching policy framework and conclusion
- The Fund's recommended three‑pronged strategy: structural, fiscal, and monetary policies within and across countries and over time to sustain growth and financial stability.
- Monetary policy (including unconventional measures) remains crucial to underpin the weak outlook, but has limits and side effects (e.g., compression of net interest margins and bank profitability).
- Immediate action is required to adapt the financial system to the new era to avoid sliding into financial and economic stagnation.
Transcript: Global Financial Stability Report Press Conference - 2016 IMF Annual Meetings, October 5, 2016