Financial stability risks are contained but vulnerabilities remain high
The International Monetary Fund (IMF) released its Global Financial Stability Report from October. The report asses the global financial system and markets, focusing on current market conditions, highlighting systemic issues that could pose a risk to financial stability and providing policy recommendations to manage that challenges.
Some highlights of the report would be the following:
- Financial vulnerabilities continue to be high in a number of sectors, masked in part by massive policy stimulus and by the rebound of the global economy this year: The report points out to “inflation risks” more persistent than currently anticipated; “stretched asset valuations” in some market segments, boosted by accommodative monetary policy; “solvency risks” in sectors hit hardest by the pandemic, despite that ”pickup in bankruptcies has not materialized” and household “debt service ratios have fallen in many countries, reducing the risk of defaults on mortgage and consumer loans”; “rising fragilities in the nonbank financial institutions”…
- The global banking sector has continued to play a crucial role in supporting the flow of credit to the economy. Banks have remained resilient during the Covid crisis, reflecting years of capital buildup following the global financial crisis reforms and continued unprecedented monetary and fiscal policy support. However, as “loan underwriting standards remain restrictive in many countries” the report alerts that “slowdown in international bank lending may pose additional downside risks to many emerging market economies”.
- The report includes several recommendations, such as the following:
- Fiscal policy should continue to support vulnerable firms and individuals, but targeted and tailored to country characteristics and needs, given the uneven economic recovery across countries and sectors
- Investment funds vulnerabilities should be addressed through enhanced prudential supervision and regulation to raise ex ante resilience against liquidity risks.
- Need to scale up the sustainable fund sector to support the global transition to a green economy: It will be key to strengthen the global climate information architecture: data, disclosures, sustainable finance classifications, to consider tools to channel savings toward transition-enhancing funds, and to conduct stress testing to mitigate potential financial stability risks from the transition.