The International Monetary Fund's (IMF) Global Financial Stability Report urged "increased vigilance" on Wednesday, as the rise of non-bank lending and loose monetary policies could result in global "flare-ups" due to "excesses in financial risk-taking." Political instability and rising interest rates could result in a USD-3.8-trillion loss for investors, the IMF warned in its report.
"The increasing global synchronization of asset prices and volatilities, combined with rising market and liquidity risks in the shadow banking sector, could amplify the impact of shocks on asset prices," the report explained. "This may result in sharper price falls and more market stress." Speaking at a press conference this morning, Financial Counsellor and head of the IMF's Monetary and Capital Markets Department, Jose Vinals, affirmed that "the best way to address the new global imbalance between economic and financial risk-taking is to adopt policies that transmit the benefits of monetary policy to the real economy, and to address financial excesses through well-designed micro and macroprudential measures." Using a sample of 300 "advanced economy" banks, the report found that "many banks have the potential capacity to supply credit, although there is a group of institutions, mostly from the euro area, that would require a high level of re-pricing to generate sustainable profits and rebuild capital buyers." "Such a re-pricing may not be feasible, especially if done on a stand-alone basis and not followed by other market participants," the report added. "This could limit these banks' capacity to meet credit demand, particularly in those countries that are in greatest need of a recovery in credit, and create headwinds for the economic recovery." Vinals emphasized that "where banks have no future and are not viable, they need to think about exiting and consolidation. This exiting should also be facilitated by regulators." "Things look better in the United States and Japan, but less so in Europe and in emerging markets," the report said.
It made three recommendations for improved financial policy.
First, the IMF said banks ought to "fundamentally adjust their business models to help improve the flow of credit to the economy," and promote "safe sources" of non-bank lending.
Second, greater oversight is needed. "Comprehensive monitoring and reporting of leverage in nonbank sectors and in emerging market companies would also help identify potential vulnerabilities," the IMF noted.
Third, policymakers must not only collect the data necessary to monitor financial risk-taking, but they should also "have an explicit mandate to act when needed and, equally important, the courage to act even if measures are highly unpopular".