Transcript of the April 2023 Global Financial Stability Report Press Briefing
IMF News, April 11, 2023
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Bibliographic details
- Published: April 11, 2023
Context and participants
- Date: April 11, 2023
- Speakers: Tobias Adrian (Financial Counsellor and Director, Monetary and Capital Markets Department, IMF); Fabio Natalucci (Deputy Director, Monetary and Capital Markets Department, IMF); Charles Cohen (Deputy Division Chief, IMF)
- Moderator/Press officer: Randa Elnagar, Senior Communications Officer, IMF
Assessment of recent banking turmoil and global financial stability
- Recent events:
- Turmoil in the banking sector in the U.S. and in Switzerland during March 2023.
- Earlier stress in October 2022 in the U.K. non‑bank financial sector (LDIs).
- Key observations:
- Heightened vulnerabilities built up over years of low interest rates are being revealed as interest rates rise.
- Sharp adjustments in interest rates and expectations can trigger further stresses.
- Policy tools (central banks, deposit insurance agencies, finance ministries) have been deployed effectively and contained threats quickly.
- Notable episodes and policy responses:
- U.S.: use of systemic risk exemption by the FDIC and a new lending facility by the Federal Reserve to support banks under stress (SVB example).
- Switzerland: government‑supported merger to stabilize Credit Suisse.
- U.K.: targeted and time‑limited asset purchases by the Bank of England to stabilize stressed LDIs.
Monetary policy versus financial stability tradeoffs
- Central bank approach:
- Aim to separate tools for inflation (monetary policy) and tools for financial stability (targeted interventions).
- Examples where central banks continued to tighten policy while deploying targeted stability measures:
- Federal Reserve increased interest rates after the SVB episode.
- Swiss National Bank increased interest rates after the Credit Suisse merger.
- Bank of England has hiked interest rates since the LDI episode in October 2022.
- Risks and transmission:
- Inflation remains high, “well above target” in many countries.
- Market pricing suggests inflation is expected to return to target fairly quickly, but persistence of inflation is a key risk that could force reassessment of monetary policy and trigger financial sector instabilities.
- Tightening monetary policy transmits through financial sector via lending standards and credit supply; this financial tightening is part of normal transmission, not necessarily a financial stability crisis.
- Moral hazard and resolution frameworks:
- Use of systemic risk exemptions and support measures carries costs (e.g., to the Deposit Insurance Fund) and raises moral hazard concerns.
- Resolution regimes developed since 2008 aim to manage failures, but some recent outcomes (e.g., Credit Suisse) did not use resolution per se while producing similar stabilizing outcomes.
- Ongoing debate needed on policy design to further mitigate moral hazard while containing financial stability threats.
Non‑bank financial sector and nexus with monetary tightening
- GFSR focus:
- Chapter 2 examines the nexus between monetary policy and financial stability, especially stress in the non‑bank financial sector.
- Observed patterns when rates rise quickly:
- Liquidity/maturity mismatches, use of leverage, and other vulnerabilities can surface (examples: SVB, U.K. LDI, project finance stresses in Korea).
- Commercial real estate identified as an area where multiple risks coincide across banks and non‑bank financial institutions.
- Monitoring approach:
- Flagging pressure points in banks and non‑banks and tracking funding stress, asset duration risk, and possible macro‑criticality.
Regional and emerging market implications
- Emerging markets resilience:
- Major emerging markets showed resilience; many tightened policy earlier than advanced economies.
- Less sell‑off of bank equities in emerging markets versus advanced economies.
- EM banks generally have smaller duration exposures and a larger share of retail (stickier) deposits versus wholesale deposits (SVB‑style vulnerability).
- Remaining concerns:
- Heterogeneity across EMs; a weak tail of banks could still be vulnerable if adverse shocks hit.
- Focus areas: frontier markets with growing bank‑sovereign nexus (local banks holding local sovereign debt), limited market access for vulnerable sovereigns.
- Sovereign debt and market access:
- Sharp bifurcation: investment grade EMs broadly maintain lower spreads; high yield issuers face constrained issuance.
- Approximately 19 issuers identified with spreads of over 700 basis points, making market access highly challenging; many are in sub‑Saharan Africa.
- IMF work emphasizes timely debt restructuring and capacity building to restore macro stability and growth.
Country and regional highlights raised in briefing
- Italy/euro area:
- Figure 1.4 (referenced): funding stresses in European bond markets amid central bank liquidity contraction; Italy noted as having outstanding TLTROs as a share of national GDP higher than excess liquidity—flagged as a risk to monitor in light of upcoming TLTRO repayments and potential funding pressure.
- ECB tools (e.g., Transmission Protection Instrument, TPI) exist to lean against fragmentation pressures.
- Sub‑Saharan Africa and Nigeria:
- Several countries face higher borrowing costs and debt‑servicing challenges.
- IMF engaged in debt restructuring efforts and capacity building; Sovereign Debt Roundtable convened to advance progress.
- Lack of market access for many low‑income and vulnerable sovereigns remains critical.
- Pakistan and similar cases:
- High sovereign debt holdings by local commercial banks increase sovereign‑bank nexus risks.
- IMF programs and debt/bank restructuring frameworks aim to restore stability and inclusive growth.
- Low‑income countries and policy mix:
- Monetary tightening is the primary tool against inflation; fiscal policy can complement monetary tightening while protecting vulnerable populations from food and energy price shocks.
Crypto and global spillovers
- Crypto‑financial sector linkages:
- High correlations observed between equity markets and crypto valuations.
- Limited spillovers from crypto to the broader financial sector to date, except for some institutions with direct crypto exposure.
- Causality primarily from financial sector conditions to crypto rather than vice versa.
Currency internationalization and financial stability
- Renminbi internationalization:
- Current limited convertibility constrains renminbi’s global role; greater convertibility and capital market development would increase international use.
- Distinction between payments usage (limited financial stability implications) and capital market usage (where financial stability depends on regulation, supervision, and market plumbing).
- Chinese authorities’ adherence to international standards for banking supervision and capital markets would support stable development.
Scenarios and outlook referenced
- WEO scenarios:
- World Economic Outlook provides baseline, adverse, and severely adverse scenarios; a severely adverse scenario would pose much higher risks to financial stability.
- Neutral rate (R‑star):
- WEO chapter provides estimates suggesting a return to relatively low neutral real interest rates in the future, though timing and exact levels are uncertain.
- Market‑implied metrics of R‑star broadly align with economic theory‑based estimates.
Policy recommendations and monitoring priorities (as discussed)
- Use targeted financial stability tools to address institution‑ or market‑specific strains while allowing monetary policy to focus on inflation.
- Continue strengthening resolution regimes to limit moral hazard while ensuring rapid and effective crisis containment.
- Monitor funding stresses, duration exposures, and bank‑sovereign linkages—especially where TLTROs, excess liquidity, and repayment deadlines could create pressures.
- Prioritize timely sovereign debt restructuring and restore market access for highly stressed sovereigns to prevent deeper systemic and social consequences.
- Advance regulatory and supervisory frameworks in jurisdictions with expanding currency internationalization and capital market development to mitigate financial stability risks.
Transcript of the April 2023 Global Financial Stability Report Press Briefing, April 11, 2023, IMF Communications Department