Global Financial News

Transcript of April 2021 Global Financial Stability Report Press Conference

April 6, 2021















Ms. Elnagar:

Good morning and welcome to the press briefing of the Global Financial
Stability Report. I am Randa Elnagar of the IMF’s Communications
Department. Let me start by introducing our panelists here. We have with
us, from the IMF’s Monetary and Capital Markets Department, Tobias Adrian,
Financial Counsellor and Director; Fabio Natalucci, Deputy Director; and
Evan Papageorgiou, Deputy Division Chief.

Tobias will give some opening remarks, and then we will take your questions
through the Media Briefing Center and on WebEx. Tobias, please go ahead

Mr. Adrian:

Ladies and gentlemen, thank you for joining us as we launch the new edition
of this year’s Global Financial Stability Report. The global economy is
beginning to emerge from the economic shock caused by the COVID‑19 virus.
The economy has benefited from extraordinary policy measures that have
eased financial conditions, preventing a deeper economic downturn. But
those actions may have unintended consequences. Valuations for risk assets
have become stretched. Financial vulnerabilities have intensified.
Continuing policy support remains necessary, but a range of policy measures
are needed to address vulnerabilities and to protect economic recovery.

We see three priorities: First, addressing corporate sector vulnerabilities
and repairing balance sheets is a priority. Second, tightening some
macroprudential tools in advanced economies is important to safeguard
financial stability and to enhance supervision and regulation of nonbank
financial institutions. Third, rebuilding buffers in emerging markets is a
policy priority to prepare for a potential repricing of risk and the
reversal of capital flows.

Central bankers have proven to be highly skillful during this past year as
they successfully engineered the financial rescue. In the year ahead, the
creativity is likely to be severely tested again, as they confront the
challenge of guiding their economies through asynchronous recoveries,
stretched market valuations, and strained social divisions.

Ms. Elnagar:

Thank you very much, Tobias. There is a question that is on everyone’s mind
on emerging markets, which you have just mentioned. One thing is: What if
the United States hikes interest rates, and what is the effect going to be
on emerging markets?

Mr. Adrian:

Indeed, global markets are nervously watching the current moves in interest
rates. Since the summer, yields on the 10‑year U.S. treasury note have more
than tripled and are now back to their pre‑pandemic level. The good news is
that the interest rate increase has been spurred by strengthening growth
and improving vaccination prospects. The bad news is that the increase also
reflects uncertainty about the future path of Treasury supply and central
bank asset purchases, as reflected by term premia, which have risen
sharply.

Both nominal interest rates and real interest rates have risen, but nominal
yields have risen more, suggesting market‑implied inflation is recovering —
an intended consequence of easy monetary policy. For the moment, global
rates remain low by historical standards; yet the speed of adjustment in
rates could generate unwelcome volatility in global financial markets. It
could potentially trigger a tightening of global financial conditions and
potentially trigger a sudden return of risk‑off sentiment.

Thus far, overall financial conditions remain accommodative. That is good
news, and policymakers must continue to promote those easy conditions until
the strength of the recovery is ensured. By contrast, in countries where
the recovery is slower and where vaccinations are lagging, policymakers may
be forced to lean against unwarranted tightening. The recovery is thus
expected to be asynchronous, with a stark divergence between advanced
economies on the one hand and emerging market and developing economies on
the other hand.

Given their large external financing needs and their slow progress on
vaccinations, emerging markets are likely to face daunting challenges.
Earlier this year, international investor flows into emerging market debt
had a sudden reversal for several weeks — a change not witnessed since last
summer. Moreover, the recent rise in U.S. real yields has also spilled over
to funding costs in emerging markets. With their sizable financing needs
this year, emerging markets are exposed to rollover risk which will be
complicated further if domestic inflation rises or if global long‑term
interest rates continue to rise. For many frontier market economies, market
access remains impaired.

Ms. Elnagar:

Thank you, Tobias. Let me follow‑up on one other thing please. The pandemic
has taken a toll on businesses across a variety of sectors, with all the
strains placed on the corporate sector. Can you please give us a bit of an
overview about the corporate sector and how it is affected by this pandemic
and the financial stability at this point?

Mr. Adrian:

Yes. In many countries the corporate sector is emerging from the pandemic
overindebted, although with notable differences across firm size and
economic sectors. To help policymakers recalibrate the support to the
corporate sector, this GFSR presents a decision‑tree to assess whether
firms should rely on market financing, should seek government support,
should be restructured, or should be liquidated. Whether the economic
recovery will be uneven and whether it would suffer from scarring effects
will depend on the ability and willingness of banks to lend once support is
unwound by the governments. Concerns about the credit quality of hard‑hit
borrowers and about the profitability outlook are likely to weigh on the
risk appetite of banks. Even if most banks have ample capital buffers, only
a few may be willing to use the buffers to lend and support the recovery.

Ms. Elnagar:

Thank you, Tobias. Now we are going to take your questions from OMBC and
WebEx. I am going to start with the Online Media Briefing Center. And since
emerging markets has been the topic today, Tobias, we have a question:
Given the large external financing needs and rising U.S. interest rates and
potential capital outflows, which you have mentioned, Tobias, what is your
take on the possibility of an emerging markets financial crisis? Does the
IMF have enough resources to provide liquidity support for emerging markets
and developing countries?

Mr. Adrian:

Thank you so much for this important question. Let me start by answering
and then I’ll also turn to my colleagues. So we have, indeed, seen a sharp
rise in interest rates globally, and advanced economies are oftentimes able
to insulate themselves from this rise in yields globally, but emerging
markets are not always capable to insulate their economies from the rise in
yields, and so some emerging markets have, indeed, seen a rise in their
funding costs. However, by historical standards, yields are still fairly
low, and global financial conditions do remain easy — but, of course, there
is continued uncertainty about the outlook ahead. One is about the recovery
of advanced economies. That might put upward pressure. The other one is
about setbacks in some emerging markets.

So we could certainly see some volatility in financial conditions and in
capital flows associated with the realization of uncertainty. The IMF has a
large balance sheet and has large financing capacities to assist our
membership. To date, we have provided rapid financing to a very, very large
number of countries. This is the largest and broadest rapid financing
rollout that we have ever done at the IMF, and we stand ready with
additional financing to any members who need it.

Let me turn to Fabio and Evan to see whether they want to complement my
thinking around this.

Mr. Papageorgiou:

Thank you, Tobias. I could add that, along with the IMF, the international
community has also helped a lot. We applauded the efforts of the G‑20 to
extend the Debt Service Suspension Initiative to June 30 of this year, and
we have recommended for this extension to be moved down even further,
perhaps to the end of this year. In addition, the G‑20 has put forward the
guidelines for the Common Framework for Debt Treatment beyond the DSSI. As
it is right now, it covers the same sample of countries in a relatively
more limited fashion for the DSSI‑eligible countries. But, as we say in the
report, we think that the Common Framework being able to apply to a broader
set of countries may also be a way forward.

Ms. Elnagar:

Let me stay on the topic here of emerging markets. The question is about
the assessment of the capital markets in Sub‑Saharan African countries, and
also about the monetary policy in the same region, Sub‑Saharan Africa. So
we’ll start with Tobias and then follow.

Mr. Adrian:

Thank you. So Sub‑Saharan Africa has been hit by this pandemic just like
every other country. Every country in our membership has been hit by the
pandemic. However, the numbers coming out of Southern Africa in terms of
the pandemic have been somewhat lower than in other countries, so that is
good news. There has been some resurgence in infections recently, and we do
hope that the medical situation will get under control.

Of course, there are two major challenges. One is that the economic
headwinds from the global economy have hit Sub‑Saharan Africa hard, and
countries have been depressed, even though the medical conditions might
have been less severe than elsewhere, so the economic headwinds are strong.

Secondly, many of the Sub‑Saharan African countries have not been able to
provide as much fiscal support as advanced economies or emerging markets,
so on average, in 2020, advanced economies have provided 15 percent of
fiscal support to the companies and the households. In emerging markets,
the number was about half of that, 7 to 8 percent. But in Sub‑Saharan
Africa, it is only between 1 and 2 percent of fiscal support. So when we
look forward, we see that the recovery is going to be slower in Sub‑Saharan
Africa compared to emerging markets or advanced economies, and so that
means that there is an asynchronous recovery that could put financial
stability at risk. Of course, we have started a number of new programs, and
we are very actively engaged with governments in the region in order to
make sure that we help in any way we can.

Mr. Papageorgiou:

Perhaps I could add something to Tobias’ point here. The monetary policy
stance in Sub‑Saharan Africa, as well as the rest of the world’s emerging
markets overall, as well, has been accommodative for the reasons that
Tobias mentioned, and it is expected to remain so for the foreseeable
future in order to accommodate more policy support. Uganda, where you
mentioned the policy rate has been lowered to 7 percent, still has positive
real policy rates, so there is still quite a lot of accommodation in the
system, and that is expected to continue.

In terms of the capital markets, obviously much like the rest of the world,
Sub‑Saharan African spreads had widened a lot during the top of the
pandemic. They have recovered somewhat, but they still remain above
pre‑pandemic levels. We are heartened by the fact that recently we have
seen some hard currency bond issuance as well coming out of the region
after a long pause. We expect this to continue. We hope this will continue.

Ms. Elnagar:

OK. We move now to our WebEx viewers here. This also goes into emerging
markets questions.

Question:

Thank you for taking my question. My question is for Tobias. The report
estimates that liquidity stress is high at small firms in more sectors and
across countries, while solvency stress is high at small firms but also
notable at medium‑size and even large firms in the most affected sectors.
What are the required procedures to deal such serious situation in emerging
markets and developing countries, including a country like Egypt? Thank you
so much.

Mr. Adrian:

Thank you for this question. The corporate sector is going to be a policy
priority for our membership going forward, including emerging markets such
as Egypt, so what we are seeing is that in countries where the recovery is
taking longer to realize, the stress on the corporate sector is higher, and
that is particularly so in contact‑intensive industries. Tourism, of
course, has been hit extremely hard, but also entertainment, restaurants,
are particularly adversely impacted by this crisis.

We do hope that governments are able to bridge to the recovery, and we
provide the kind of policy framework to assess which companies should get
additional support in terms of equity or should have a restructuring of
their liabilities; but, of course, there are some companies that do need to
be resolved as well. These are key priorities, and the evolution in the
corporate sector, of course, importantly impacts the health of the banking
sector as well, and so having a very timely, holistic view that is data
sensitive and is collecting all of the necessary information for further
policy steps is key. So, to the extent that countries can provide further
fiscal support, that would certainly be helpful in order to bridge to the
recovery and get economies back on track, including in the corporate
sector.

Mr. Natalucci:

Some of this liquidity risk and solvency risk cuts across different
dimensions — across different firm sizes, across regions, and across some
other sectors. Some sectors have been hit harder than others. One important
difference between advanced economies and emerging markets is the firms in
advanced economies may have access to capital market, so this has been one
of the positives of the unprecedented policy support in terms of monetary
policy, fiscal policy, financial policy, is that capital markets have
reopened, and larger advanced economies benefit more than emerging markets
from access to global capital markets, particularly for large firms.

So smaller firms, SMEs, have a harder time accessing capital markets. They
are more bank‑reliant, and often their business model is oriented towards
sectors that are more contact‑intensive. So for emerging markets, the
important thing is that there are targeted fiscal measures, particularly to
address both liquidity risk, for example, through loan guarantees, or
solvency risks to equity injection, as Tobias has mentioned.

The other point for emerging markets is also enhanced resolution regimes so
that some of these issues can be addressed out of court in a quicker and
more efficient way.

Ms. Elnagar:

Thank you, Fabio. We continue on WebEx.

Question:

Thank you very much. My question is, according to the report, China has
recovered more rapidly than other countries, but at the cost of a further
buildup in vulnerabilities, particularly risky corporate debt. What would
be your suggestion to tackle this problem? Thank you very much.

Mr. Adrian:

Let me start, and then I’ll pass this on to my colleagues as well.

So China, of course, has re-emerged from the crisis more quickly than any
other country in the world. The measures that were taken to contain the
pandemic were very quick and very effective, and as a result, the Chinese
economy recovered to pre‑crisis levels already last year in 2020. And so
that places China in a very good situation; but as you point out correctly,
there were measures that were deployed that did lead to further increase in
leverage and in certain vulnerabilities. Of course, in China there have
been preexisting vulnerabilities already prior to the pandemic, such as
certain weaknesses in small and provincial banks, as well as leverage in
some segments of the corporate sector. So having a policy approach that is
addressing those vulnerabilities and is balancing wanting to stimulate the
economy on the one hand but doing it in a way that is safe on the other
hand, and so is getting the intertemporal tradeoffs in between easy policy
and the medium‑term buildup of vulnerabilities, getting this balance in the
policy mix right is very much first order.

Mr. Papageorgiou:

Perhaps I could add as well to the points that Tobias made that it is also
very important to unwind the implicit guarantees that are embedded in the
system. It is a very delicate act but an urgent one in order to achieve
financial stability. The issues relating to perhaps guarantees that are
taken by investors as having a support by either the local or some other
sort of government create an artificial or perhaps compress spreads unduly
but have very little relation to fundamentals for the particular debtor and
that has to be resolved in order to have a sustainable recovery and also a
long‑term financial stability.

Ms. Elnagar:

Thank you so much. We are still on WebEx. We will take a question, and then
we will go on OMBC and revert to WebEx. We have a lot of questions today.

Question:

Thank you. So I have two questions. One is from skyrocketing bitcoin to
GameStop price turmoil to the recent Archegos, so how would you evaluate
the brief increasing risk and the market volatilities; to what extent is it
related to the U.S. unprecedented stimulus package? And also how would the
spillover effects to emerging markets down the road including China? Thank
you.

Mr. Adrian:

Thanks. That is a very relevant question. So monetary policy has been easy
in most economies around the world and above all in some of the major
central banks, such as the U.S. Federal Reserve, the European Central Bank,
and the Bank of Japan. So easy financial conditions is an attendant
consequence of the monetary policy accommodation. Easy financial conditions
means that companies can borrow, can issue debt, and can issue equity, and,
indeed, we do see a boom in the IPO markets through special purpose
acquisition vehicles. This is to some extent the intended outcome of
policies. Of course, we do not want risk‑taking to be excessive, so, again,
there is a question about the balance of wanting to stimulate credit supply
and the restart of the economy while making sure that it is safe. We do see
valuations that are stretched in some segments. Of course, the run‑up in
the valuations of bitcoins has been spectacular this year, and there is
certainly uncertainty about future valuations that are very relevant.

We also see some stretching in some segments of the technology sector
around the world which could be leading to volatility going forward. But
having said that, of course, economies are recovering; so on the one hand
you have like a tug of war in between the recovering economies, the easy
monetary policy, and then valuations that might be stretched; so exactly
how it is going to play out, we do not know, but there is certainly a
possibility of further volatility.

In terms of emerging market flows, I would distinguish in between flows to
China‑‑China, of course, is the largest emerging market in the world‑‑and
other emerging markets. A lot of the flows to China that have been very
large by historical standards have to do with structural changes in global
capital markets. Both stocks and bonds of Chinese issuers are now included
in the benchmark indices globally, and so investors are allocating capital
that is likely to stay.

Of course, there are other capital flows that are more fickle and that
could be subject to bursts in global risk appetite. Financial conditions do
remain easy globally, and when we talk to investors, they are continuing to
be bullish about emerging markets as an asset class, so I think the
baseline outlook is one of continued flows of capital; but, of course,
there are risks around that baseline.

Mr. Natalucci:

I think some of these episodes that you mentioned, whether it is the
GameStop and the level of retail investor, whether this is the special
purpose acquisition companies, or whether it is the Archegos episode that
we have witnessed, in some sense can be thought of as manifestation of some
excess at the late cycle, late financial cycle. Per se, those are not
necessarily systemic; we have seen perhaps imposing some losses on some
banks, but those are not large numbers that we at this point given what we
know deem as systemic.

It does raise an issue which we have highlighted in the past Financial
Stability Report several times, which is the connection between elevated
vulnerabilities and elevated stretched valuations. This is that when there
is an overlap between the two, so there is an elevated valuation that gets
unwound, and that interacts essentially with elevated vulnerabilities, in
this case financial leverage. That is when I think it gets more concerning
from a financial stability perspective, and this is even more pernicious
when this interaction between stretched valuation and elevated
vulnerabilities occur in the nonbank financial intermediation sector, in
this case involving, for example, some family offers and hedge funds. That
is where we have less visibility, where we have fewer data, where it is
more difficult for policymakers to assess risk at that point.

In addition to that, even more concerning when there is still
interconnection with the traditional banking sector, and that was the prime
brokerage providing leverage to these hedge funds, so it is the connection
essentially between vulnerabilities, stretched valuation, occurring in the
nonbank financial intermediation, and particularly when there are still
connections to the banking sector.

I think that raises some question, for example, whether the assessment
framework, monitoring framework, we have is actually able to assess and
catch in time this episode, also whether we have enough data to track and
monitor these vulnerabilities, whether disclosure regimes in place now are
appropriate or need to be expanded, and more generally, whether the
regulatory perimeter around the nonbank financial intermediation should be
expanded or not and whether or not we have the tools. And so toward this
goal, the IMF is working with the Financial Stability Board to look back at
the March 2020 turmoil that involved some of these nonbank financial
intermediaries trying to come up and assess whether the framework, again,
and the tools are appropriate or more work is needed.

Ms. Elnagar:

Thank you, Fabio. You spoke about turmoil and tantrums. Let me move to
Market Watch. Greg is asking about some former policymakers in the US
noting that if the Fed tightens suddenly, there is going to be a tantrum
there. Can you please give us your views on this theme?

Mr. Adrian:

Thank you for this important question. The way I look at monetary policy
today‑‑and this question was specific to the US‑‑is that there are two main
tools. One is the short‑term interest rate, the Federal Funds Rate, and
forward guidance around the Federal Funds Rate; and the FOMC has been very
clear that it expects the Federal Funds Rate to be very low for an extended
period of time.

The second tool are the asset purchases, and, of course, we have seen
historically large amounts of asset purchases last year that has cushioned
the financial markets and has eased financial conditions so that despite
being in a global pandemic with an economic contraction as sharp as we have
not seen in 100 years, still, financial conditions were easy. That is a
tremendous success of policymaking of central banks around the world and of
the Federal Reserve in particular.

Going forward, there is also a question about these asset purchases, so
what is going to be the path of asset purchases; and, of course, that is in
a context where treasury supply is going to increase as fiscal policy
continues to remain accommodative; so there is some uncertainty about the
supply or the net supply of treasuries. So what is issued net of what is
being bought by the central bank, so how much net supply is that; and this
uncertainty is visible in markets, so market‑implied interest rate
volatility has been rising; and in line with this rise in market‑implied
interest rate volatility, the treasury term premium has also been rising,
so the term premium is the compensation that investors in longer‑term
treasuries securities earn for taking on interest rate risks. This rise in
the term premium and the implied interest rate volatility really is a
reflection of the uncertainty of the net supply of treasuries.

How this is going to play out is an important challenge for monetary
policymakers in the US in particular but also in other countries, and
forward guidance really has to include not just the overnight Federal Funds
Rate, but also the future path of asset purchases.

A very important backdrop, of course, is the change in the monetary policy
framework that the Federal Reserve announced last August in Jackson Hole.
The Fed now aims to have a temporary inflation overshooting as it reemerges
from the crisis. As you know, PC inflation, core PC inflation, which is the
target in U.S. monetary policy, has been below the 2 percent level that the
Fed is trying to achieve, and so the expectation is that there will be a
temporary overshooting. This is what is called the average inflation
targeting framework. So the forward guidance about the Federal Funds Rate,
but also about the asset purchases, are really aiming to get at this
temporary overshoot of inflation.

Mr. Papageorgiou:

Perhaps I can come in here as well. I can’t help but mention emerging
markets every time Taper Tantrum is mentioned. As we say in the report, a
persistent and sudden increase in U.S. rates could have a strong impact on
emerging markets as well. The analysis we have done in the report shows
that a 1 percentage point increase in U.S. term premia can have up to 1
percentage point increase for emerging market term premia if these are
associated as well with an increase in inflation expectations, as has been
the case for some emerging markets in recent weeks. And that can have a
destabilizing effect, and so that is one other spillover, if you will, to
emerging markets that authorities should guard against.

Ms. Elnagar:

We are going to still continue on central banking here. We have a question
from Daniel in Central Banking Publications: What factors could cause a
natural rise in interest rates, and would this be a problem or a lesson for
central banks? How can they handle it?

Mr. Adrian:

Let me give a quick answer and then pass it to Fabio as well. As I
explained in the previous question, interest rates have two components. One
is the expectation of the future path of short‑term interest rates, and
that is being controlled by forward guidance. The other component is the
risk premium or term premium that is embedded in longer‑term yields, and
that is the compensation for investors to hold long‑term interest rate
risk. That term premium in some sense is controlled via asset purchases and
forward guidance around asset purchases; but, of course, it is very
importantly impacted as well by treasury supply, which is expected to
change.

The policy framework really has to aim at those two components, and the
spillovers can be decomposed into those two components as well. This year
we really have seen a rapid rise in the term premium that has spilled over
into other countries, and the forward path of the Fed Funds Rate continues
to be very shallow. So expectations, market‑implied expectations for the
future overnight rates are close to zero through the end of 2022 and
actually into 2023, so many years at the zero lower bound.

As the economy is recovering and inflation is coming back, of course, there
will be a reassessment of policy. Policy is always conditional on what is
happening in the economy, and that could lead to further adjustments in
expectations.

Mr. Natalucci:

There is something healthy in interest rate moving higher because of like
good economic performance, so to the extent that higher interest rates
reflect a stronger rebound in economic activity in the U.S. and improvement
in the outlook for the global economy, and also higher inflation, so
central banks have been trying for years to make up for past misses of
inflation objectives, and so that allows them to achieve the mandated
objective in coming years.

I will start with the positive. There are other positive effects, for
example, that remove some of the pressure on bank profitability because the
yield curve steepens, for example, and also more generally, the incentives
that we have seen in the nonbank financial institutions sector to reach for
yield when rates were very low; so some of this incentive or pressure may
be relieved as rates move higher. So that is the positive.

I think the concern is when we see rapid and persistent increase in
interest rates, so very sharp increase of a narrow window. That is where
one of the concerns, for example, when we saw the real rates move higher in
the US, we were concerned about asset valuation, particularly equity
valuation; that is the gap between some of the returns of holding equity
vis‑a‑vis interest rates was narrowing. So it is the persistent rapid rise
in interest rates that raise questions about the ability of this financial
system to absorb over such a narrow window, but it is the positive of it
reflects improved outlook and inflation moving higher towards inflation
objective. I think we should welcome that development.

Ms. Elnagar:

Thank you very much. We are going to go to WebEx now again.

Question:

Thank you for doing this. I wanted to ask you about IMF’s stand on
cryptocurrency. Should it be banned, or should it be allowed in some
format? Also, what is the view on government‑controlled digital currencies
like digital rupee?

Mr. Adrian:

Thanks very much for the question about this very important policy priority
of the moment. So we are in a technology revolution in the financial
sector, and I would frame the debate in just pointing out that technologies
will be able to be used for payments and for lending operations in ways
that we might not yet be able to envision. So we have seen technology’s
impact, in particular in the cryptocurrency space for the moment; so
cryptocurrencies such as bitcoin did not exist ten years ago, and now they
are very visible, and more and more investors are investing into bitcoins
and other cryptocurrencies.

It is important to keep in mind that the technologies, DLT, distributed
ledger technology, and blockchains, those technologies can be applied in
other domains as well. For example, we have seen stablecoins emerge. We
have seen some of the technologies being used for clearing in securities
markets; and more generally, the operations of the financial system can be
greatly improved and be more effective by using new technologies. That I
think is the opportunity, and policymakers are very focused on making sure
that all countries and the population at large will really benefit from
these technological improvements.

Of course, there are risks as well, and so policies always have to balance
taking advantage of opportunities with minimizing risks. Some of the risks
are visible today in cryptocurrencies; for example, valuations are
stretched in some of the cryptocurrencies, so investors could be exposed to
a further rise or a fall in valuations.

Secondly, there are concerns about the integrity of some of these means of
payments and investment vehicles, so integrity here refers to the overall
ability of law enforcement and of governments to make sure that payment
flows and capital flows are used in legitimate, legal manners, so that is
another policy priority. So taking advantage of technologies to make access
more broad, to have financial inclusion for everybody, but also to make
sure that new forms of payments and new forms of investment are used for
legitimate purchases, so that is what financial integrity means.

There are multiple policy objectives. Last year the G‑20 released an
important report that is laying out the way in which international
financial institutions, together with the central banks around the world,
are working together to enhance the cross‑border payment system. The IMF is
working alongside the BIS, the Bank for International Settlements, and the
FSB, the Financial Stability Board, as well as the central banks around the
world, to really improve global cross‑border payments to make sure that
they are cheap, accessible and safe.

Ms. Elnagar:

We will take a couple more on WebEx, and then we are going to take one on
OMBC, so please go ahead.

Question:

Thank you for taking my question. I would like to ask a question about one
of the elements that you have outlined in your report about the strong
increase of market assets related to ESG standards. I would like to ask if
you think that this could be eventually a bubble or if you think that this
is a structural change in the market, and so these assets will continue to
grow even in future, also when eventually some measures of stimulus from
the public policy will have to be withdrawn. Thank you.

Mr. Adrian:

Thank you, and let me start and then pass to both Fabio and Evan, who are
real experts in this field.

I think there is a shift in sentiment around ESG. ESG stands for
environmental, social, and governance investment. The population at large
is more and more aware of the risks in terms of climate, of the costs of
having poor governance, and of having social conflicts. So there is a
reallocation that is very broad across institutions, including individual
investors, pension funds, insurance companies, as well as mutual funds and
other investment vehicles. I think the first order trigger for that is the
change in awareness, the change in investor preference.

Secondly, the policy framework around ESG is changing, and it is continuing
to be improved. And let me turn to Fabio, who is very actively working on
the policy side in this segment.

Mr. Natalucci:

I think one way to think about it is to just step back for a second and
think about what is the right architecture that we need to have around
sustainable finance, to make sure that they become an important engine to
support a greener recovery. So it is a chain of things that we need, to
start with data. We need robust, we need consistent, we need high‑quality
data, and it needs to be more granular, more forward‑looking. There are a
number of initiatives both in the public and private sector to foster
better high‑quality data.

Then we need also taxonomy. There are a number of taxonomies around the
world. Does it mean at some point there would be a need to have some sort
of minimal globally accepted taxonomy so that we can use the same language
on the policymaking side as well as in the private sector, that we use the
same definition? That would make the pricing of climate risk, the
assessment of financial stability, clearly easier, both, again, for the
public sector, as well as for the investor side.

We also need a convergence toward frameworks, climate‑related
sustainability framework, and then we need the last step in this
architecture. It is a link between sustainability standard, as well as a
link to financial variables. That is what really in the end matters for
investors. In this chain and in this architecture, there is a chain of data
that goes from the borrowers, the corporates, the household, to the
lenders, whether those are banks or nonbanks, all the way to the investor.
So I think the right way to think of this is to look at the bigger picture
and how the data, taxonomy, and infrastructure are related. That is what we
need in terms of accelerating the green engine to support the recovery.

Mr. Papageorgiou:

If you could allow me a ten‑second intervention. As with any asset class
that is just starting, it is true there is a very fast growth on
ESG‑dedicated assets, but as a whole, the asset class is still quite small.
Take, for example, the European sovereign bond market. There are several
large economies that have issued green bonds lately with Italy that have
amassed a huge interest from the investor community. And yet the whole
stock of green sovereign bonds in the euro area amounts for less than 1
percent than the entire outstanding amount.

Ms. Elnagar:

Thank you. We are going to take one more question because we are running
out of time here.

Question:

Thank you very much for taking my question. In light of the failure of
[Archegos] capital management recently and the recently related losses by
big banks like Credit Suisse and Nomura, I am wondering how much we should
be worried about this incident, and do you think this is a sort of isolated
event or there will be more to come, like big losses, and what is the
implication for the global financial stability for this?

Mr. Adrian:

Thank you for this question, and we have all followed the headlines this
morning about further losses in some institutions, so the question is
whether it is the canary in the gold mine that we are seeing such losses.
Our assessment for the moment is that this incident is not systemic, that
it remains manageable by financial institutions, and that it is an incident
that is specific to one particular fund. Having said that, it does
illustrate that many of the major bank dealers have common exposures to
their clients and that counterparty risk management and the prudential
regulation in the segment continues to be a top priority.

Mr. Natalucci:

Maybe I can add one point. The report called for a pressing need to act to
avoid a legacy and preempt a legacy of vulnerabilities, and vulnerabilities
is a good example of financial vulnerabilities, whether it is financial
leverage that has been used to enhance and boost returns or whether it is
the interconnectedness between the nonbank financial institution as well as
the banking sector.

So because there are possible lags between activation and the impact of
macroprudential policy tools, we call for policymakers to take early
action. In particular, they should tighten selected macroprudential policy
tools to tackle pockets of vulnerabilities, at the same time avoiding a
broad tightening of financial conditions. That is not what we need for the
recovery.

In addition to that, because in some cases such tools are not available,
for example, in the nonbank financial intermediation sector, we argue that
policymakers should very quickly develop such tool. Also, finally, given
the challenges in terms of designing and implementing tools within the
existing macroprudential policy framework, policymakers should consider
whether there is a need to raise buffers elsewhere in the system so that
the system is more resilient and able to absorb losses.

What we have seen here is that, of course, banks have higher capital,
higher liquidity, so given what we know at this point, they would probably
be able to absorb some of these losses, but it still raises the question of
the interconnection between stretched valuation, elevated financial
vulnerability. They are particularly pernicious when they occur in the
nonbank financial institutions with links back to the banking sector.

Ms. Elnagar:

Thank you very much. We now come to the end of our press briefing here.
Thank you to everyone who followed us today. Thank you to Tobias, to Fabio,
and to Evan. We invite you to follow us tomorrow for the release of the
Fiscal Monitor. Thank you, everyone. I will stop here.


IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Randa Elnagar

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson




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