Global Financial Stability: How stable are we?

The recent IMF report Global Financial Stability Report: Is Growth at Risk? was presented at a meeting hosted by CEPS and ECMI on October 25th. The key message delivered at the meeting by representatives of the IMF and the European Commission was that both policymakers and market participants should remain alert, avoid complacency and set up additional safeguards against a build-up of financial vulnerabilities. Financial crises have a series of common elements and fundamental economic forces that work as amplifiers; namely leverage, maturity transformation, interconnectedness, currency mismatch, and asset valuation.

The speakers noted that although the banking sector is now more resilient, there are concerns related to legacy issues and business model challenges. In order to strengthen the overall financial system, the non-bank financial sector should also be closely monitored and regulated. The search for yield is expected to continue, coupled with low market volatility. Most importantly, vulnerabilities are moving to the non-financial sector, given the boost in leverage by governments, corporates and households, in particular. Easy financial conditions can fuel economic growth in the short run, but when coupled with a rise in medium-term financial risk, economic growth is threatened. So far, macro-prudential polices have proved to be more effective in the emerging rather than advanced economies. 

The presentations delivered by Tobias Adrian (IMF) and Marco Buti (European Commission) are available here.