Transcript of Global Financial Stability Report Press Briefing
IMF News, April 18, 2018
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- Published: April 18, 2018
Opening overview
- Date and place: Washington, D.C., April 18, 2018.
- Participants: Tobias Adrian; Anna Ilyina; Fabio Natalucci; J. Benson Durham; Randa Elnagar.
- High-level assessment:
- Global economy shows broad-based momentum.
- Short-term risks to financial stability have increased; medium-term risks remain elevated.
- Easy financial conditions continue to support short-term growth despite recent equity volatility and trade policy tensions.
- Growth-at-risk analysis indicates that under a severely adverse scenario, growth could be negative three years from now.
Three main vulnerabilities identified
- Stretched valuations across many asset classes:
- Late-stage credit cycle dynamics emerging.
- Corporate bond spreads remain at low levels.
- Issuance of riskier bonds has surged; leveraged lending hit a record high in 2017.
- Faster-than-expected pickup in inflation could trigger rapid monetary withdrawal, sudden tightening in financial conditions, and sharp asset price declines, amplified by liquidity mismatches and increased leverage.
- Borrowing by emerging markets and low-income countries:
- Debt sustainability in low-income countries has deteriorated.
- More complex creditor composition complicates future debt restructurings.
- International bond issuance by low-income/frontier markets rebounded strongly in the previous year and remained strong early in 2018 despite volatility.
- Bank dollar liquidity mismatches:
- International US dollar balance sheets of non-US banks rely on short-term wholesale sources for about 70 percent of their funding.
- This structural dollar mismatch could expose banks to dollar funding problems in market strains.
- Overall bank resilience has improved since the global financial crisis, but dollar mismatch is a structural vulnerability.
Crypto assets and fintech observations
- Size and risk:
- Crypto assets’ size is currently around 3 percent of combined G4 central bank balance sheets.
- Current size implies little risk to financial stability, but risks could grow in the future.
- Benefits and harms:
- Some underlying technologies could make financial market infrastructure (e.g., payment systems) more efficient.
- Sector has been afflicted by fraud, security breaches, and operational failures.
- Regulatory approach:
- Jurisdictions are largely applying existing regulations (e.g., consumer/investor protection and securities laws) to crypto activities.
- Cross-border cooperation and coordination are important because investments and fintech business models are global.
- Remain vigilant due to rapid innovation and potential growth in systemic importance.
- Market activity:
- Over a thousand initial coin offerings occurred over the past two years.
Policy recommendations and priorities
- Monetary policy:
- Central banks should continue to normalize monetary policy gradually and communicate decisions clearly.
- Be attentive to shocks that could increase inflation uncertainty and raise long-term interest rates.
- Prudential and regulatory policy:
- Regulators should deploy and develop prudential tools to address financial vulnerabilities.
- Policymakers should ensure implementation of the post-crisis regulatory reform agenda and resist rollbacks of overall capital, liquidity, or resolution frameworks.
- Tweaks to regulations can be considered at the margin through international coordination (e.g., FSB) to preserve level playing field and avoid arbitrage.
- Emerging and low-income countries:
- Strengthen debt management, close data gaps, and use the new debt sustainability framework for low-income countries to identify debt-related vulnerabilities.
- Technical assistance to improve public-debt monitoring and fiscal policy design, including fiscal multiplier assessment, is ongoing.
Country- and region-specific points raised
- Europe and nonperforming loans:
- Some progress in reducing nonperforming loans as recovery strengthens, but levels remain high in some countries and more progress is needed.
- Comprehensive strategies needed: national authorities’ action, ECB guidance, judicial reforms to expedite resolution, and development of secondary markets for distressed assets.
- Reference to a chart indicating "900 billion" (as recalled during Q&A) related to nonperforming loans.
- China deleveraging and financial stability:
- Chinese regulators have tightened the regulatory environment and made financial stability a top priority.
- Debt growth has slowed but overall debt remains fairly elevated; further regulatory tightening and careful sequencing of reforms are encouraged.
- Shadow banking remains prevalent in China; interconnectedness, opacity, and complexity warrant continued attention.
- Low-income countries and Africa:
- Median public debt-to-GDP ratio in low-income countries rose by over 13 percentage points to about 47 percent of GDP.
- Over 40 percent now of low-income countries are at high risk of distress, up from about 20 percent in 2013.
- Rapid accumulation of public debt, deterioration in underwriting standards for foreign debt, and complex creditor structures are key concerns.
- Correspondent banking and AML/CFT:
- Withdrawal of correspondent banking has slowed; in some jurisdictions the number of correspondent banks has increased following work on AML/CFT shortcomings.
- Brexit and clearing:
- Central issue: potential shifts in euro clearing from London and implications for supervision, regulation, and safety.
- Emphasized need for high cooperation between UK and European regulatory authorities to manage financial stability risks.
- Nigeria and other country questions:
- Report does not detail specific country analyses in this briefing; regional briefings cover more specifics (e.g., Sub-Saharan Africa).
Scenarios, risks, and market dynamics
- Short-term (one-year horizon):
- Financial stability risks have increased but remain fairly low.
- Medium-term (three-year horizon):
- Financial stability risks are elevated due to buildup of vulnerabilities under easy financial conditions.
- Under a severely adverse scenario, global growth could be negative three years from now.
- Exposure varies by country depending on debt accumulation, currency mismatches, and liquidity transformation vulnerabilities.
- Inflation risk:
- Current inflation uncertainty is very low; analysts expect inflation to be low going forward in many jurisdictions.
- Report flags possibility of shocks that increase inflation uncertainty; historically, this is associated with rises in long-term interest rates and potential sharp tightening of financial conditions.
- Market correlations and spillovers:
- Correlation of yields across major advanced countries has increased, raising the potential for spillovers from faster-than-expected monetary normalization.
Key statistics and figures (as stated)
- Non-US banks’ short-term wholesale funding share of international US dollar balance sheets: about 70 percent.
- Crypto assets size: around 3 percent of combined G4 central bank balance sheets.
- Leveraged lending: hit a record high in 2017.
- Nonperforming loans (European reference in Q&A): recalled figure "900 billion."
- Initial coin offerings: over a thousand in the past two years.
- Median public debt-to-GDP in low-income countries: rose by over 13 percentage points to about 47 percent of GDP.
- Share of low-income countries at high risk of distress: over 40 percent, up from about 20 percent in 2013.
Transcript of Global Financial Stability Report Press Briefing, Washington, D.C., April 18, 2018 — IMF Communications Department