Transcript of October 2021 Global Financial Stability Press Briefing
IMF News, October 12, 2021
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- Published: October 12, 2021
Major themes of the Global Financial Stability Report
- Three overarching themes: COVID, crypto, and climate.
- COVID:
- Three major vulnerabilities identified:
- Increased debt: corporate, government, and in some countries, household debt has increased tremendously.
- Stretched asset valuations: easy monetary policy, low interest rates, and eased financial conditions have produced rising risk‑asset prices and stretched valuations in some segments that could revert.
- Capital flow risks to emerging markets: improved access during the crisis but risk of sharp reversals.
- Inflation: inflation is higher and longer than expected in some countries, posing a policy challenge going forward.
- Crypto:
- Crypto valuations have risen "more than tenfold in just over two years" and are highly volatile with pronounced run‑ups and declines associated with leverage.
- Policy attention is focused on the crypto ecosystem and developing policy formulations for countries.
- Climate:
- Climate described as an existential threat with many countries already subject to climate catastrophes; urgent need for policies on climate finance to support transition.
Inflation: assessment, drivers, and central‑bank implications
- Observations on inflation:
- Inflation has been above target in a number of countries, though not universally.
- Three main drivers discussed:
- Base effects from pandemic year price drops.
- Commodity price increases that have been higher and more persistent than anticipated.
- Supply‑chain imbalances (e.g., shipping shortages) that can feed into core inflation.
- Central banks may need to act; some have already tightened policy (noted particularly in many countries in Latin America).
- Country/regional specifics:
- United States: inflation particularly notable; mid‑term expectations revision discussed.
- Euro area: five‑year/five‑year market‑based inflation measure cited as "about 1.8 percent", below the ECB's 2 percent target.
- India: inflation remains within the Reserve Bank of India target range; India scaled down some asset purchases recently.
- Egypt: inflation within the Bank of Egypt target range; most recent policy meeting made no change to policy rates.
- Policy and market interactions:
- Medium‑term IMF expectation: inflation will revert back to targets in the vast majority of countries, but there is "quite a bit of upside risk" to level and persistence.
- Monetary policy responses and clear communication are crucial to anchor inflation expectations and prevent unnecessary market volatility.
- Emerging markets have already seen significant monetary tightening on average; real interest rates have increased on average in emerging markets.
Financial‑stability vulnerabilities and policy trade‑offs
- Core vulnerabilities highlighted:
- Stretched asset valuations and deteriorating underwriting standards in certain risky‑asset segments.
- Rising leverage among sovereigns and in the corporate sector.
- Risk of capital‑flow reversals to emerging markets.
- Policy trade‑offs:
- Difficult balancing between inflation control and real activity; between short‑term and medium‑term financial stability.
- Interaction of monetary policy actions (interest rates, asset purchases) and communication with existing vulnerabilities will determine financial‑stability outcomes.
U.S. debt‑ceiling and implications for markets
- Debt‑ceiling risk creates uncertainty about U.S. Treasury cash balances and future borrowing; market pricing shows some increase in bill rates for early December (when the debt limit was then expected to be hit).
- A potential U.S. default would be "catastrophic" with threefold implications across financial markets, given U.S. Treasury securities' depth and liquidity.
- Current market evidence: some adjustment of Treasury bill pricing observed, but "not many signs at this point" of a significant imprint left in broader financial markets.
Macro‑prudential buffers and the U.S. countercyclical capital buffer
- Countercyclical capital buffer described:
- A surcharge between "zero and 2.5 percent of risk‑weighted assets"; currently "set at zero" but could be gradually ramped up.
- Rationale for activation:
- U.S. vulnerabilities noted: stretched asset valuations in some market segments and strong housing price increases in certain pockets.
- Good arguments exist to turn on the countercyclical buffer now, but the IMF has "not taken an official position" on activation.
China property sector risks (Evergrande) and spillover channels
- Evergrande:
- Largest property developer faces repayment challenges with "debt of about $300 billion dollars outstanding."
- Property market slowing and regulatory tightening on leverage.
- Authorities’ capacity:
- IMF assessment: Chinese authorities have fiscal space and legal/institutional means to address the problem.
- Potential amplification channels identified:
- Domestic financial channel: exposures of domestic banks and non‑bank financial institutions (wealth management products, trusts), interconnectedness, and contingent liabilities/guarantees.
- Domestic macro channel: slowdown in sales and home prices could affect collateral values, bank positions, and local government finances, creating feedback loops.
- Global markets channel: broader deterioration in risk appetite, equity market declines, freezing of offshore dollar funding markets could transmit stress globally.
- Policy recommendations for China emphasized:
- Delayer the financial system, accompany with restructuring and reform, gradual phasing out of guarantees, and address weak SOEs.
- If support is needed for the domestic economy, target support to households and consumption.
Cryptoassets: market size, systemic concerns, and regulatory recommendations
- Market size and characteristics:
- Crypto market nominal valuation stated as "over 2 trillion."
- Cryptoassets differ from stocks and bonds: many do not entail claims to future cash flows (e.g., Bitcoin).
- Stablecoins are distinct: some have reserves (cash or bank deposits) backing claims.
- Number of cryptoassets cited: "by some counts, there are more than 7,000 cryptoassets."
- Global asset markets context: crypto remains small relative to "global asset markets, which are over 100 trillion in the aggregate," but can be macro‑critical for some countries and emerging markets.
- Systemic risk considerations:
- Correlations between crypto and equity markets have increased in the year discussed, likely due to greater institutional participation, raising systemic potential.
- Shutdown or collapse in crypto markets could affect crypto exchanges, platform providers, and banks that provide liquidity to crypto platforms.
- Regulatory stance and policy recommendations:
- IMF advises tightening regulations around the crypto ecosystem; Chapter 2 of the GFSR analyzes the ecosystem in detail and lists policy recommendations.
- Suggested regulatory steps include:
- Regulate wallet providers: require identity (KYC) to ensure legitimacy and enable oversight.
- Regulate leverage and limit risky exposures taken by individuals and institutions in crypto markets.
- Implement investor protection and consumer‑protection measures (noting a current lack of such protections).
- Consider regulating stablecoin issuers at similar standards to banks in some jurisdictions (discussion noted around U.S. policy deliberations).
- No one‑size‑fits‑all: policy approaches should balance minimizing risks and harnessing beneficial applications of blockchain/distributed ledger technologies (e.g., financial inclusion, lower transaction costs).
- Country approaches discussed:
- El Salvador: IMF view is that adopting Bitcoin as legal tender is inadvisable due to Bitcoin's high volatility and attendant macroeconomic, financial‑stability, and financial‑integrity challenges.
- China (People's Bank of China): prohibiting all crypto transactions is one possible approach; IMF notes trade‑offs since outlawing a set of cryptoassets can push activity to other cryptoassets and nations. Policy choice depends on country institutional setups.
Communication and the importance of clear policy signaling
- Repeated emphasis that central banks must communicate clearly about policy paths to anchor expectations and avoid unnecessary tightening of financial conditions or market volatility.
- Accurate monitoring of inflation expectations (surveys and market‑based measures) and labor‑market dynamics is critical for policy decisions.
Transcript of October 2021 Global Financial Stability Press Briefing, October 12, 2021. International Monetary Fund.