## 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

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### 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*

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## References

- [Pakistan and the IMF](http://www.imf.org/external/country/PAK/index.htm)
- [Switzerland and the IMF](http://www.imf.org/external/country/CHE/index.htm)
- [Proposals for a Sovereign Debt Restructuring Mechanism (SDRM) -- A Factsheet](https://www.imf.org/external/np/exr/facts/sdrm.htm)
- [Transcripts](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
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_Source: https://www.imf.org/en/news/articles/2023/04/12/tr41123-gfsr-press-briefing_