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STORY: IMF / GLOBAL FINANCIAL STABILITY REPORT
TRT: 2.19
SOURCE: IMF
RESTRICTIONS: NONE
LANGUAGE: ENGLISH / NATS
DATELINE: 17 APRIL 2013, WASHINGTON D.C. / FILE - VARIOUS
FILE – WALL STREET, NEW YORK CITY
1. Various, bull statue on Wall Street
17 APRIL 2013, WASHINGTON D.C.
2. SOUNDBITE (English) José Viñals, Financial Counsellor and head of the Monetary and Capital Markets Department, IMF:
“I think that we are now in a much better situation regarding global financial stability than we were six months ago. And this has been due to the very decisive policy actions that have been taken in the euro area and which have helped to avoid a financial cliff, and in the United States where a fiscal cliff has been avoided. But we are not out of the woods yet.”
FILE – EUROPEAN COMMISSION BUILDING, BRUSSELS, BELGIUM
3. Various, European Commission Building, Brussels, Belgium
17 APRIL 2013, WASHINGTON D.C.
4. SOUNDBITE (English) José Viñals, Financial Counsellor and head of the Monetary and Capital Markets Department, IMF:
“I think that the crisis in Cyprus is a reminder that we cannot lower the guard because confidence is not sufficiently entrenched and it’s also a very powerful reminder that we need to continue making sustained progress towards a fully fledged banking union.”
FILE – US FEDERAL RESERVE BUILDING, WASHINGTON D.C
5. Various, US Federal Reserve Building, Washington D.C.
17 APRIL 2013, WASHINGTON D.C.
6. SOUNDBITE (English) José Viñals, Financial Counsellor and head of the Monetary and Capital Markets Department, IMF:
“The accommodative monetary policies that have been put in place in advanced economies in recent years are of the essence in order to support global financial stability in the economic situation, but they also may lead to unintended consequences regarding financial stability.”
FILE – SEOUL, SOUTH KOREA
7. Various, Seoul, South Korea
17 APRIL 2013, WASHINGTON D.C.
8. SOUNDBITE (English) José Viñals, Financial Counsellor and head of the Monetary and Capital Markets Department, IMF:
“I think that emerging markets need to keep their guard up. They have benefited from these international financial conditions insofar as they have been able to obtain financing which is helpful for domestic growth processes, but they have to be very attentive to potential financial excesses in terms of excess leverage in some corporate sectors in these economies, the potential foreign exchange mismatches which could cause problems down the road, and they also have to be very attentive and prepared to deal with a volatility of capital flows.”
FILE – WALL STREET, NEW YORK, NEW YORK
9. Various, Wall Street, New York, New York
The global financial system is far more stable than it was six months ago, but recent gains will only last if policymakers push ahead and finish the job they started by tackling old risks, which will help prevent new ones from spreading.
José Viñals, Financial Counsellor and head of the IMF’s Monetary and Capital Markets Department, which produced the report, said: “I think that we are now in a much better situation regarding global financial stability than we were six months ago. And this has been due to the very decisive policy actions that have been taken in the euro area and which have helped to avoid a financial cliff, and in the United States where a fiscal cliff has been avoided. But we are not out of the woods yet.”
In its latest Global Financial Stability Report, the International Monetary Fund said despite dramatic financial improvements in recent months, there is a persistent and growing wedge in Europe between financial “haves” and “have nots.” Because banks in Europe are broken, affordable credit is not getting through to the parts of the economy that need it, particularly to small and medium-sized enterprises. Also, large amounts of debt are weighing down many corporations in periphery countries, which they built up during the pre-crisis boom years.
Viñals said: “I think that the crisis in Cyprus is a reminder that we cannot lower the guard because confidence is not sufficiently entrenched and it’s also a very powerful reminder that we need to continue making sustained progress towards a fully fledged banking union.”
The IMF said policymakers around the world have taken action to— including the European Stability Mechanism, the European Central Banks’s announcement it was prepared to buy government bonds, and steps to set up a banking union— have led to real improvements in financial stability.
Viñals said: “I think that the crisis in Cyprus is a reminder that we cannot lower the guard because confidence is not sufficiently entrenched and it’s also a very powerful reminder that we need to continue making sustained progress towards a fully fledged banking union.”
Banks in advanced economies have taken significant steps to restructure their balance sheets, but progress has been uneven, as countries are at different stages of repair. In the United States, the process is largely completed, but requires further efforts for some European banks.
The IMF said in recent months large European banks have made progress in strengthening their balance sheets by reducing assets and increasing their capital, a process known as deleveraging.
But banks, particularly in countries on the "periphery", are still in an early stage of repair. They do not have enough capital and have too many bad loans on their books. Even outside the periphery, there is a need for banks to shrink balance sheets, reduce reliance on wholesale funding, and improve business models.
Policies put in place by central banks since the crisis, such as an extended period of low interest rates and buying assets such as government bonds, have been essential in stabilizing the financial system. After several years of these policies, policymakers need to manage their potential side effects and risks.
Viñals said: “The accommodative monetary policies that have been put in place in advanced economies in recent years are of the essence in order to support global financial stability in the economic situation, but they also may lead to unintended consequences regarding financial stability.”
The IMF said a particular concern is the possible mispricing of credit risk, riskier positioning by weaker pension funds and insurance companies, and a rise in liquidity risk, particularly in countries where recoveries are more advanced. Corporate leverage is rising in the United States, and is already around one-third of the way through a typical cycle.
One side effect of this is excessive capital flows into emerging market economies, where corporations—which generally have sound finances at present—are taking on more debt and foreign exchange exposure in response to low borrowing costs. More broadly, the low interest rates might make emerging market economies more complacent about growing challenges to their home grown financial stability risks.
Viñals said: “I think that emerging markets need to keep their guard up. They have benefited from these international financial conditions insofar as they have been able to obtain financing which is helpful for domestic growth processes, but they have to be very attentive to potential financial excesses in terms of excess leverage in some corporate sectors in these economies, the potential foreign exchange mismatches which could cause problems down the road, and they also have to be very attentive and prepared to deal with a volatility of capital flows.”
While much has been done to improve global and national financial sector regulations, the reform process remains incomplete. Banking sectors are still on the mend, and the pace of reform has been moderated to avoid making it harder for banks to lend to the economy while they are regaining strength, according to the IMF.
But the pace of the reform process also reflects difficulties in agreeing on the way forward on key reforms, due to concerns about banks facing more structural challenges.
Delays in completing the reform agenda are not only a source of continued vulnerability, but also a source of regulatory uncertainty that may impact the willingness of banks to lend. They foster the proliferation of uncoordinated initiatives to directly constrain banking activity in different jurisdictions, given the strong political imperatives to take action.
The IMF said policymakers must act to restructure weak banks and encourage the buildup of the new capital and liquidity buffers, as part of the implementation of international banking rules, known as Basel III, on an internationally consistent basis.
Improved financial reporting and disclosures by banks remain essential to promote better transparency and prudent and consistent valuation of risk weighted assets.
Enhanced disclosure will help improve market discipline and restore confidence in banks. Effective resolution regimes also need to be established to allow for the orderly exit of unviable banks, including effective cross-border agreements for winding down failing cross-border banks.
The IMF said more work is needed on the too-big-to-fail problem, over-the-counter derivatives reform, accounting convergence and shadow banking regulation.
What is needed now is a renewed political commitment at the global and national level to complete the reform agenda. Without greater urgency towards international cooperation and comprehensive bank restructuring, weak bank balance sheets will continue to weigh on the recovery and pose ongoing risks to global stability, according to the IMF.
