Global Financial Stability Report: Markets in the Time of COVID-19
Global Financial Stability Report, April 2020
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- Published: April 14, 2020
Market turmoil and tightening of financial conditions
- The coronavirus (COVID-19) pandemic poses unprecedented health, economic, and financial stability challenges.
- Following the COVID-19 outbreak, the prices of risk assets collapsed and market volatility spiked, while expectations of widespread defaults led to a surge in borrowing costs.
- Emerging market economies experienced the sharpest reversal of portfolio flows on record.
- Financial conditions tightened at an unprecedented speed; decisive monetary, financial, and fiscal policy actions managed to stabilize investor sentiment in late March–early April, with markets paring back some of their losses.
Factors amplifying asset price moves
- Previously overstretched asset valuations.
- Pressures to unwind leveraged trades.
- Dealers’ balance-sheet constraints.
- A deterioration in market liquidity.
Vulnerabilities and transmission channels
- A further tightening of financial conditions may expose more “cracks” in global financial markets and test the resilience of financial institutions.
- Asset managers may face further outflows and may be forced to sell assets into falling markets.
- Distress may rise among leveraged firms and households.
- Emerging and frontier markets may face challenging external funding conditions, rising rollover risks, and increased incidence of debt restructurings.
- Although banks have more capital and liquidity than in the past, have been subject to stress tests, and are supported by central bank liquidity provision, their resilience may be tested in some countries in the face of large market and credit losses.
Risky corporate credit and nonbank financial institutions
- Vulnerabilities in global risky corporate credit markets include:
- Weakened credit quality of borrowers.
- Looser underwriting standards.
- Liquidity risks at investment funds.
- Increased interconnectedness.
- These vulnerabilities could generate losses at nonbank financial institutions in a severe adverse scenario.
Emerging and frontier market flow dynamics
- The pandemic led to an unprecedented and sharp reversal of portfolio flows.
- Global financial conditions tend to influence portfolio flows more during surges than in normal times.
- Stronger domestic fundamentals can help mitigate outflows.
- Greater foreign participation in local currency bond markets may increase price volatility where domestic markets lack depth.
Banking sector and medium-term profitability
- Low interest rates are expected to persist.
- Chapter analysis indicates banks are likely to face profitability pressures over the medium term in an environment of persistent low rates.
Climate-related physical risk and equity valuations
- Physical risks associated with climate change do not appear to be reflected in global equity valuations.
- Stress testing and better disclosure of exposures to climatic hazards are essential to better assess physical risk.
Policy implications and priorities
- Wide-ranging fiscal, monetary, and financial policies, as well as strong international cooperation, remain essential to:
- Safeguard economic and financial stability.
- Prevent the emergence of adverse macro-financial feedback loops.
- Continued provision of central bank liquidity and targeted policy measures helped stabilize markets in late March–early April.
Global Financial Stability Report: Markets in the Time of COVID-19 (April 2020).
Content in this bundle
- Global Financial Stability Report, April 2020: Brochure; April 14, 2020
- Chapter 1
- Global Financial Stability Report, April 2020; Chapter 1 Executive Summary; April 14, 2020
- Chapter 2
- Chapter 3
- Chapter 4
- Chapter 5
- Foreword
- gfsr-apr-2020-ch1 — Dataset overview
- GFSR Chapter 2 Apr. 2020
- gfsr-apr-2020-ch3
- gfsr-apr-2020-ch4
- GFSR Chapter Apr. 2020
- Online Annex 1.1. Fragilities in Us Dollar Short-Term Funding Markets
- Global Financial Stability Report, April 2020; Online Annex 3.1: Technical Note; May 22, 2020
- Global Financial Stability Report, April 2020; Online Annex 4.1: Technical Note; May 22, 2020
- Online Annex 5.1. Data Sources, Climate Science Overview, Descriptive Statistics
- Online Boxes 5.1–5.3 — Physical Risk and Equity Prices
- Climate Change: Physical Risk and Equity Prices
- Full Report
References
- Tobias Adrian, IMF Financial Counsellor
- https://www.imf.org/en/topics/imf-and-covid19
- The IMF and COVID-19 (Coronavirus)
- Elizabeth Schulze, Multimedia Reporter CNBC; Tobias Adrian, Director Monetary and Capital Markets Department IMF; Fabio Natalucci, Deputy Director Monetary and Capital Markets Department IMF
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