## 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](https://www.imf.org/en/news/articles/2016/10/05/am16-tr100516-global-financial-stability-report-press-conference)

## Other formats

- [Markdown version](/en/news/articles/2016/10/05/am16-tr100516-global-financial-stability-report-press-conference/index.md)
- [Structured JSON version](/en/news/articles/2016/10/05/am16-tr100516-global-financial-stability-report-press-conference/index.json)
- [Bundle manifest](/en/news/articles/2016/10/05/am16-tr100516-global-financial-stability-report-press-conference/bundle-manifest.json)

## 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*

---


## References

- [People's Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm)
- [Brazil and the IMF](http://www.imf.org/external/country/BRA/index.htm)
- [Greece and the IMF](http://www.imf.org/external/country/GRC/index.htm)
- [Italy and the IMF](http://www.imf.org/external/country/ITA/index.htm)
- [Japan and the IMF](http://www.imf.org/external/country/JPN/index.htm)
- [Transcripts](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2016/10/05/am16-tr100516-global-financial-stability-report-press-conference_