Financial stability risks from the debt of the eighties to the age of crypto

A recent report revealed that the International Monetary Fund released its first Global Financial Stability Report 20 years ago to strengthen financial market monitoring following a series of crises in emerging market economies and the internet recession. This biannual publication by the Department of Money and Capital Markets has evolved for years from seismic shifts into the global economic and financial landscape into one of the most important multilateral monitoring instruments. Together with the World Economic Outlook and the Fiscal Monitor, this major report aims to promote international monetary and financial stability.
Monitoring the health status and prospects of the global economy and member states is a cornerstone of the Fund’s work. This oversight role, made clear in the amendments to the Articles of Agreement first adopted at the 1944 Bretton Woods Conference, has the task of overseeing and protecting the international monetary system.
During the early years, supervision focused on the macroeconomic and exchange rate policies of member states, but the growth in international banking in the early 1970s highlighted the need to better track global capital markets and evaluate the implications for financial stability. As a result, the Fund began discussions with monetary authorities in major financial centers, and in 1974 began writing internal reports on market developments and prospects.

Identify periodic weaknesses

From 1980, the report known as “International Capital Markets” became the primary way to monitor financial market conditions, warn against risks and analyze distortions such as the Latin American debt crisis in the 1980s or the exchange rate crisis in Europe in the early 1990s. rapid integration of global capital markets, and the subsequent financial crises in Asia and many other emerging markets, highlighted the need for a better assessment of systemic risks, while the presentation of the Global Financial Stability Report is an important step towards’ a more comprehensive and regular assessment of cross-border capital flows and financial market risks. In his introduction to the first financial stability report, then-director-general Horst Koehler noted that the report’s roots go back to the crisis.
He wrote, “The rapid expansion of financial markets has underlined the importance of a continuous assessment of capital flows in the private sector, which is the engine of global economic growth but sometimes also the core of crisis developments … The opportunities that through international capital markets to promote global prosperity must be balanced by: Commitment to prevent debilitating financial crises.
Since then, the global report has focused on identifying cyclical and structural weaknesses in the banking and non-banking sectors in advanced and emerging market economies, the risks they pose, and policy options to mitigate these risks. Weaknesses, such as leveraged financing, tend to build up when financial conditions are easy and investors’ risk appetite is strong. In times like these, our stability reports focus more on potential threats we see as increasing.
One of the most crucial moments for the Global Financial Stability Report came in 2007, when contamination of the housing act in the United States shook the world’s economies and markets. In a tightly integrated world, the global financial crisis has highlighted the importance of better connecting the dots between institutions, sectors and countries. Since then, the Fund has stepped up its efforts to analyze and understand interrelationships and systemic risks, cross-border interdependence and floods, and to increase the role of macro-prudential policies in improving the resilience of the financial system.

Weaknesses that amplify shocks

In recent years, the IMF has adopted a conceptual framework to more systematically assess and monitor financial stability risks. It is centered around vulnerabilities that amplify negative shocks, creating a negative feedback loop between falling asset prices and tighter financial conditions, reducing debt by financial companies and weakening economic activity.

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Experimental implementation of the framework relies on two tools: The first is a broad set of key weakness indicators for the financial and real sectors (such as debt service capacity and the ratio of liquid assets to short-term liabilities) that can serve as intermediate targets for macro-prudential policies (such as capital reserves and liquidity reserves). ), The second is an overall measure of how financial stability risks affect projected global economic activity, called “growth at risk”.
These instruments are complementary to monitoring and policy-making purposes, as careful analysis of specific exposures provides the nuance and depth needed to measure the threats to economic growth.
The Global Financial Stability Report also actively called for reform of the international regulatory landscape to address the loopholes exposed by the global financial crisis. In addition, it has supported the strengthening of supervision of non-bank financial institutions, which have taken on a greater role in mediation since the crisis and may make the system more vulnerable.

New dangers that require constant vigilance

The Fund has stated that although significant progress has been made, the continued development of global financial markets – not least because of the astonishing pace of technological innovation – always brings new vulnerabilities and risks that require constant vigilance. The advent of fast and highly advanced computer technology, for example, has facilitated the growth of high frequency trading, which can improve market efficiency but can also be a source of market instability.
Like other emerging technologies such as artificial intelligence and distributed ledgers, financial markets are revolutionizing fintech assets and cryptocurrencies that hold opportunities but also pose fundamental risks, and climate change poses another threat to stability that we are increasingly analyzing, to the role which can play sustainable finances and the private sector in promoting green transformation.
Currently, the ongoing pandemic and war in Ukraine have exacerbated financial risks by exacerbating existing fragility, contributing to the greatest inflationary pressures in decades, and confronting international capital markets with greater risks of fragmentation.

The Fund explained that, more than ever, rapid technological change as well as frequent and diverse shocks of control are essential to protect international monetary and financial stability in order to promote growth and inclusion. It is becoming increasingly clear that in doing so, financial controls need to be adapted and refined to assess risks in order to better explore the global financial landscape and improve its resilience.

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