## Transcript of Global Financial Stability Report Press Briefing

_IMF News, April 18, 2018_

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## Bibliographic details
- Published: April 18, 2018

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### 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*

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## 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)
- [Nigeria and the IMF](http://www.imf.org/external/country/NGA/index.htm)
- [The IMF and Good Governance -- A Factsheet](https://www.imf.org/en/about/factsheets/sheets/2023/the-imf-and-good-governance)
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_Source: https://www.imf.org/en/news/articles/2018/04/18/sm18-tr041818-transcript-of-global-financial-stability-report-press-briefing_