Global financial stability has continued to improve following broad economic recovery and global market buoyancy, but risks lurk around, says Mr Tobias Adrian, IMF Financial Counsellor and Director of the Monetary and Capital Market Department while presenting the revised global financial stability report.
The core of global financial stability, according to him, is stronger as systemically important banks and insurers continue to enhance their resilience. By raising capital and addressing legacy issues, financial institutions are adapting their business models to evolving regulatory and market environment, notes Adrian.
Emerging markets have rebounded with increased capital inflows, low financing costs as well as appreciating currencies and equities prices as a result of easing monetary policies of central banks in the developed world. This has created the space for financial institutions to repair their balance sheets.
Investors’ insatiable search for yield has led to elevated risks, especially in emerging markets and developing economies which is a key source of vulnerability. According to Adrian, there is less than $2 trillion of investment-grade bonds yielding four percent compared with $16 trillion before the financial crisis. This has driven up external borrowing in emerging markets and low-income countries. Also, the rate of credit expansion in China, particularly in shadow banking, poses significant threat to global financial stability.
However, monetary accommodation remains necessary to support economic activity and boost inflation. “Markets expect a prolonged period of accommodation before policies would be fully normalised,” he says. .
By Osaze Omoragbon