Twenty years ago, the IMF published its first Global Financial Stability Report strengthen financial market surveillance after a series of crises in emerging market economies and the dot-com collapse.
This semi-annual publication from the Monetary and Capital Markets Department has since evolved over years of seismic changes in the global economic and financial landscape to become one of our main tools for multilateral surveillance. With the World Economic Outlook and the Tax monitorthis flagship report aims to promote international monetary and financial stability.
Monitoring the health and outlook of the global economy and member countries is the foundation of the Fund’s work. This watchdog role, described in amendments to our statutes first adopted at the Bretton Woods conference in 1944, tasks us with overseeing and protecting the international monetary system.
In the early years, surveillance focused on macroeconomic and exchange rate policies of member countries, but the growth of the international banking sector in the early 1970s highlighted the need to better monitor global financial markets and assess the implications for financial stability. Accordingly, the Fund entered into discussions with the monetary authorities of the main financial centers and, in 1974, launched internal reports on market developments and prospects.
Beginning in 1980, the report known as International capital markets became our primary vehicle for monitoring financial market conditions, warning of risks and analyzing disruptions such as the debt crisis in Latin America in the 1980s or the exchange rate mechanism crisis in Europe in the early 1990s But the rapid expansion and integration of global capital markets at this time, and the resulting financial crises in Asia and several other emerging markets, highlighted the need to better assess systemic risks.
The introduction of the Global Financial Stability Report marked an important step towards more comprehensive and frequent assessment of cross-border capital flows and financial market risks. In his preface to the first GFSR, then-Director General Horst Köhler noted that the report had its roots in the crisis.
“The rapid expansion of financial markets has underscored the importance of a constant assessment of private sector capital flows which are the engine of global economic growth, but sometimes also at the heart of the evolution of the crisis”, said he wrote. “The opportunities offered by international capital markets to enhance global prosperity must be balanced with a commitment to prevent debilitating financial crises.”
The GFSR has since focused on identifying cyclical and structural vulnerabilities in the banking and non-banking sectors of advanced and emerging market economies, the risks they pose, and policy options to mitigate those risks.
Vulnerabilities such as leverage tend to build up when financial conditions are easy and investors’ risk appetite is high. And at times like this, our stability reports put more emphasis on the potential threats we see developing.
One of the most defining moments for the GFSR came in 2007, when contagion from the US housing crisis shook global economies and markets. In a tightly integrated world, the global financial crisis has underscored how essential it is to better connect the dots between institutions, sectors and countries.
Since then, the Fund has intensified its efforts to analyze and understand systemic interconnections and risks, cross-border interconnectedness and spillovers, and the role of macroprudential policies in building financial system resilience.
In recent years, we have adopted a conceptual framework for more systematic assessment and monitoring of financial stability risks. It focuses on vulnerabilities that amplify negative shocks, creating a negative feedback loop between falling asset prices and tighter financial conditions, deleveraging of financial firms and weakening economic activity.
The empirical implementation of the framework relies on two tools: a large set of key vulnerability 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 macroprudential policies (such as capital buffers and liquidity coverage ratios); and an aggregate measure of how financial stability risks could affect expected global economic activity, which we call “growth at risk”.
These tools are complementary for surveillance and policy-making purposes, as granular analysis of specific exposures provides the nuance and depth needed for summary measurement of threats to economic growth.
The GFSR has also actively called for an overhaul of the international regulatory landscape to address the shortcomings revealed by the global financial crisis. In addition, he supported strengthening the supervision of non-banking financial institutions, which have taken on a greater role in intermediation since the crisis and could make the system more vulnerable.
Although we have made progress, the continued evolution of global financial markets, particularly due to the dizzying pace of technological innovation, always introduces new vulnerabilities and risks that require constant vigilance. For example, the advent of fast and highly sophisticated computer technology has facilitated the growth of high frequency trading, which can improve market efficiency but can also be a source of market instability.
Other emerging technologies such as artificial intelligence and distributed ledger are revolutionizing financial markets through fintech and crypto assets that offer opportunities but also fundamental risks that the GFSR highlights. Climate change is another threat to stability that we are increasingly analyzing, as well as the role that sustainable finance and the private sector can play in promoting a green transition.
And now, as our recent reports have highlighted, Ukraine’s lingering pandemic and war have further heightened financial risks by exacerbating pre-existing fragilities, contributing to the strongest inflationary pressures in decades, and confronting international capital markets. at a greater risk of fragmentation.
More than ever, rapid technological change as well as frequent and varied shocks make our surveillance crucial to preserve international monetary and financial stability in order to promote growth and inclusion. And it is increasingly clear that to do so, we need to continually adapt and refine our risk assessment tools to better scan the global financial landscape and build its resilience.
*About the authors:
- Tobie Adrian is a Financial Advisor and Director of the IMF’s Monetary and Capital Markets Department. He leads the IMF’s work on financial sector surveillance and capacity building, monetary and macroprudential policies, financial regulation, debt management, and capital markets.
- Fabio M. Natalucci is Deputy Director of the Money and Capital Markets Department. He is responsible for the Global Financial Stability Report which provides the IMF’s assessment of risks to global financial stability.
- Mahvash S. Qureshi is a Division Chief in the IMF’s Monetary and Capital Markets Department, where she heads the Global Financial Stability Analysis Division and oversees the production of the analytical chapters of the Global Financial Stability Report.
Source: This article was published by the IMF Blog