Global Financial Stability Report, April 2021: Preempting a Legacy of Vulnerabilities

Global Financial Stability Report, April 6, 2021

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Canonical URL: Global Financial Stability Report, April 2021: Preempting a Legacy of Vulnerabilities

Extraordinary policy measures have eased financial conditions and supported the economy, helping to contain financial stability risks.
There is a pressing need to act to avoid a legacy of vulnerabilities while avoiding a broad tightening of financial conditions.
Actions taken during the pandemic may have unintended consequences such as stretched valuations and rising financial vulnerabilities.
The recovery is expected to be asynchronous and divergent between advanced and emerging market economies.
Several emerging markets face challenges given large external financing needs, especially if a persistent rise in US rates brings about a repricing of risk and tighter financial conditions.
The corporate sector in many countries is emerging from the pandemic overindebted, with notable differences depending on firm size and sector.
Concerns about the credit quality of hard-hit borrowers and profitability are likely to weigh on the risk appetite of banks.

Warns of a pressing need to act to avoid a legacy of vulnerabilities while avoiding a broad tightening of financial conditions.
Highlights unintended consequences of pandemic-era actions: stretched valuations and rising financial vulnerabilities.
Emphasizes divergence in the recovery between advanced and emerging market economies.
Flags vulnerability of emerging markets with large external financing needs to a persistent rise in US rates and a repricing of risk.

Studies leverage before and during the COVID-19 crisis.
Points out a policymaker trade-off: boosting short-term growth by facilitating an easing of financial conditions versus containing future downside risks.
Notes that high and rapidly building leverage may amplify this trade-off and increase downside risks to future growth.
Recommends country-specific timing for deployment of macroprudential tools, depending on:
- pace of recovery,
- vulnerabilities, and
- policy tools available.

Examines impact of the COVID-19 crisis on the commercial real estate sector.
Finds little evidence of large price misalignments at the onset of the pandemic, but signs of overvaluation have now emerged in some economies.
Warns that misalignments in CRE prices, especially if interacting with other vulnerabilities, increase downside risks to future growth due to the possibility of sharp price corrections.

Carefully calibrate policy actions to avoid creating a legacy of vulnerabilities while maintaining accommodative financial conditions where necessary.
Monitor and address stretched asset valuations and rising leverage across nonfinancial private sector and CRE markets.
Design macroprudential tool deployment on a country-specific basis, aligned with recovery pace and available policy instruments.
Pay particular attention to emerging markets with large external financing needs in the event of a persistent rise in US rates and repricing of risk.

October 23, 2020](https://www.imf.org/en/publications/gfsr/issues/2020/10/23/global-financial-stability-report-october-2020-bridge-to-recovery-49686)