Risks to Global Financial Stability Are Rising, IMF Cautions

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Risks to the global financial system have risen over the last six months and asset prices remain stretched, the International Monetary Fund warned.

Short-term risks to financial stability are still low by historical standards, and financial conditions are relatively loose, especially in the U.S., the IMF said Wednesday in its semi-annual Global Financial Stability Report. Yet vulnerabilities from several sectors are high, including among sovereign and corporate borrowers, the fund said.

The IMF’s report covers an eventful six months for financial markets, which saw a steep selloff in risk assets at the end of 2018. Global stocks have bounced back since the start of the year, helping to ease some of the tightening of credit conditions that accompanied the selloff, the fund noted.

“Given buoyant market sentiment, financial vulnerabilities -- such as high leverage and liquidity, maturity, and currency mismatches -- may continue to build, raising medium-term risks to global financial stability,” the IMF said.

Vulnerabilities are increasing in the U.S. corporate sector and nonbank financial intermediaries, while the impact is more pronounced in the sovereign sector of the euro-area, where government debt is elevated or still rising for some nations, the report said. Household leverage remains a concern in other advanced economies, the IMF said.

Stretched Assets

Asset valuations have declined since October, but remain “somewhat stretched,” said the Washington-based fund.

A host of risks could trigger a renewed selloff in risk assets, including a sharper-than-expected global growth slowdown, the IMF warned. The IMF this week downgraded its forecast for 2019 global growth to the slowest pace since the financial crisis, as factories scaled back amid trade tensions and the market selloff at the end of last year.

Other threats include unexpected shifts to less dovish outlooks for monetary policy in advanced economies, an escalation of trade tensions between the U.S. and China, and a stalemate in the U.K.’s exit from the European Union, the fund said.

Policymakers should act now to reduce financial vulnerabilities while they can, said Tobias Adrian, director of the IMF’s monetary and capital-markets department. “Monetary policies
should remain data dependent and well communicated to avoid market overreaction and prevent further growth deceleration,” he said in a foreword to the report.

To contact the reporter on this story: Andrew Mayeda in Washington at amayeda@bloomberg.net

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Sarah McGregor, Robert Jameson

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