Though the world’s financial system is getting stronger, thanks to healthy economic growth, buoyant markets, and low interest rates, there are dangers in the form of rising financial vulnerabilities, warns the International Monetary Fund (IMF) in a blog publication seen by businessamlive.com.
“As we explain in the latest Global Financial Stability Report, the recovery from the global financial crisis isn’t yet complete. Central bankers rightly maintain easy policies to support growth. But this is breeding complacency and allowing a further build-up of financial excesses,” the blog said, adding that non-financial borrowers are taking advantage of cheap credit to load up on debt, just as investors are buying riskier and less liquid assets.
“To be sure, there are reasons for optimism. Low interest rates and rising asset prices are spurring growth. Big, globally systemic banks – so called because the failure of just one of them could shake the financial system – have added $1 trillion to their capital buffers since 2009.
“Overseas investment into emerging market and low income economies has increased. The global economic upswing is laying hopes for a sustained recovery and allowing central banks to eventually return their monetary policies to normal settings,” it said.
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The blog said if left unattended, these growing vulnerabilities will continue to mount, threatening to derail the economic recovery when shocks occur, adding it estimates that almost one-third of systemically important banks, with $17 trillion in assets, will struggle to achieve the profitability that’s needed to ensure their resilience to shocks.
To this end, the Bretton Woods institution advised policymakers to act now to keep those vulnerabilities in check, including central banks avoiding creating market turbulence by thoroughly explaining their plans to gradually unwind crisis-era policies.
“To discourage riskier lending, financial regulators should deploy so-called ‘macroprudential’ policies, such as limits on loan-to-value ratios for mortgages, for macro critical objectives.
Emerging-market and low income countries are advised to take advantage of benign external conditions to reduce vulnerabilities and enhance resilience by enhancing underwriting standards, building capital and liquidity buffers, and increasing reserves.
The blog particularly noted that before the crisis, there were $16 trillion in relatively safe, investment-grade bonds yielding more than four percent, which has dwindled to just $2 trillion today. He added that there is simply too much money chasing too few high yielding assets and as a result investors are taking more risks and exposing themselves to bigger losses if markets tumble.
Equally there are rising levels of debt in the world’s biggest economies.
“Borrowing by governments, households and companies (not including banks) in the so-called Group of 20 exceeds $135 trillion, equivalent to about 235 percent of their combined gross domestic product,” the blog stressed, adding that despite low interest rates, debt servicing burdens have risen in several economies.
It specifically sounded out that while borrowing has helped the recovery, it has also created new financial risks, associating rising growth in household debt relative to GDP with a greater probability of a banking crisis.
It said low-income countries have also benefited from easy financial conditions by expanding their access to international bond markets, noting that while borrowing has generally been used to fund infrastructure projects, refinance debt, and repay arrears, it has also been accompanied by an underlying deterioration of debt burdens as measured by the debt service ratio.
Overall, it said investors are growing complacent about potential shocks that could cause turmoil in markets, including include geopolitical risks, a surge in inflation, and a sudden jump in long-term interest rates.
Frontpage August 28, 2019