June 1, 2022
PRESS OFFICER:
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Good morning, good afternoon, and good evening, ladies and gentlemen.
On behalf of the IMF, I would like to warmly welcome you all to the Annual June Conference on Policy Challenges for the Financial Sector, in its 21st year this year. I would like to thank you for your participation and to also thank our partner institutions—the Federal Reserve Board and the World Bank—for working closely with us in ensuring that this event remains an important one on your annual calendars by providing a forum for dialog and reflection on key regulatory and supervisory issues.
Challenging times ahead
This year’s conference takes place at a challenging time given the prevailing geopolitical, economic, and financial environment. Just when we appeared to be moving past the worst phases of the pandemic with some green shoots of economic recovery becoming visible, the breakout of the war in Ukraine has once again dimmed prospects for growth, increased uncertainty and given rise to a fresh spurt of financial market volatility. Global financial conditions have tightened as downside risks to the economic outlook have increased and global financial stability is being threatened on multiple fronts.
Rising risks to the inflation outlook and rapidly changing views about the likely pace of monetary policy tightening are dominant factors impinging on financial stability. The sharp rise in commodity prices and supply disruptions have led to a significant increase in inflation expectations. While decisive tightening of monetary policy is necessary in many countries, central banks are faced with a challenging trade-off: between fighting record-high inflation and safeguarding the post-pandemic recovery at a time of heightened uncertainty about prospects for the global economy. It’s a delicate act of bringing inflation back down to target and preventing disorderly tightening of financial conditions that could interact with financial vulnerabilities and weigh on growth.
An unanticipated intensification of the war and associated escalation of sanctions could trigger a sudden repricing of risk that may expose, and interact with, some of the vulnerabilities built up during the pandemic, leading to a sharp decline in asset prices. Potential transmission channels of the war in Ukraine on global financial markets include direct and indirect exposures of banks and nonbanks; market disruptions in commodity markets and increased counterparty risk; poor market liquidity and funding strains; acceleration of cryptoization in emerging markets; and possible cyber-attacks. While banks’ direct exposures to Russia appear small, indirect exposures, which are more difficult to identify, may surprise investors if revealed to be material.
Emerging and developing economies are facing tighter financial conditions and higher risks of capital outflows, on the back of monetary policy normalization and heightened geopolitical uncertainty. Emerging market sovereigns have become more reliant on domestic banks for funding, and bank holdings of domestic sovereign debt have surged to historic highs. Distress in emerging markets could trigger an adverse feed-back loop between sovereigns and banks—and potentially reduce bank soundness and lending to the economy.
Technological innovation in financial activities holds the promise of supporting inclusive growth by strengthening competition, financial development, and inclusion. But the rapid growth of risky business segments can be a cause of financial stability concerns when fintech firms are subject to little or no regulation.
While the war in Ukraine has clarified the urgency of cutting our dependence on carbon-intensive energy and accelerating our transition to renewables, the ongoing energy crisis may in fact delay such a journey by altering the speed of phasing out fossil fuel subsidies in emerging market and developing economies. That is, the geopolitics of energy security may put climate transition at risk. This is a medium-term structural issue that policymakers will have to address in the next few years.
How do we address these risks and meet the challenges?
First, central banks should act decisively to address financial vulnerabilities and rein in rising inflation. To avoid unnecessary volatility in financial markets, it is crucial that central banks in advanced economies provide clear guidance about the normalization process while remaining data dependent. Emerging markets are particularly vulnerable to the impact of Covid-19, climate change, and disorderly tightening of global financial conditions. Policymakers should strive to manage the delicate balance between containing inflation and supporting the recovery from the pandemic. They should also consider tightening certain macroprudential tools to help strike a balance between containing the buildup of vulnerabilities and avoiding procyclicality.
Second, on the financial technology front, policymakers should develop a comprehensive, consistent, and coordinated global approach to regulation and supervision of crypto assets. On Central Bank Digital Currency (CBDC), there has been increasing emphasis on cross-border aspects of CBDC and interoperability to avoid fragmentation in payment systems. A stable and open international payments system is a vital pillar of the international monetary system.
Third, on addressing climate risk, policymakers should intensify their efforts to implement the 2021 United Nations Climate Change Conference (COP26) road map to achieve net-zero targets notwithstanding the short-term setbacks brought about by the war. I see the following areas as important:
International efforts on the latter have been wide ranging, including guidance for supervisors by the Network for Greening the Financial System (NGFS), and important ongoing efforts by the Basel Committee and others to define detailed, comprehensive and evidence-based international guidance on prudential supervision.
The IMF is actively contributing to these activities through its knowledge of global financial stability challenges and of climate risk and supervisory issues across its broad membership to help ensure wide applicability of these regulations. For example, we have started technical assistance activities by introducing a series of regional webinars last year and are currently registering first requests for bilateral technical assistance and deepening dialogue on the topic within FSAPs.
Let me conclude on a positive note. Despite multiple challenges, I believe there are strong foundations globally to ramp up capacities to tackle the most pressing issues and—once again—come up with solutions strengthening our financial systems long term. I also believe that the thought-provoking discussions at seminars like this one, where the most senior and knowledgeable policymakers meet, add materially to these foundations. With that, let me wish you all a fruitful discussion on a very important issue of the day.
