## Transcript of October 2021 Global Financial Stability Press Briefing

_IMF News, October 12, 2021_

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## Bibliographic details
- Published: October 12, 2021

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### 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.*

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## References

- [Tobias Adrian](http://www.imf.org/external/np/bio/eng/ta.htm)
- [People's Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm)
- [Arab Republic of Egypt and the IMF](http://www.imf.org/external/country/EGY/index.htm)
- [India and the IMF](http://www.imf.org/external/country/IND/index.htm)
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_Source: https://www.imf.org/en/news/articles/2021/10/13/tr101221-transcript-of-october-2021-global-financial-stability-press-briefing_