Global Markets Still Vulnerable to Systemic Risk - IMF

Despite recent policy interventions to mitigate the effects of the subrime crisis, global financial markets continue to be fragile and systemic risks remain elevated, the International Monetary Fund says in its latest assessment.

“Credit quality across many loan classes has begun to deteriorate with declining house prices and slowing economic growth. Although banks have succeeded in raising additional capital, balance sheets are under renewed stress and bank equity prices have fallen sharply,” according to the IMF’s Global Financial Stability Report Market Update.

The Update notes that banks have been fairly successful in raising equity so far, amounting to about three-fourths of the writedowns to date, adding that IMF analysts had little reason to change earlier estimates of aggregate potential losses from the crisis of $945 billion published in April.

…the renewed stress has made raising additional capital more difficult and increased the likelihood of a negative interaction between banking system adjustment and the real economy.

The IMF’s market assessment said that as banks seek to deleverage and economize on capital, assets are being sold and lending conditions are tightening, which will result in slower credit growth in the United States and euro area. (Click chart to enlarge.)

 

With inflation risks on the rise, the scope for monetary policy to be supportive of financial stability has become more constrained. In the first quarter of 2008, total U.S. private sector borrowing growth fell to 5.2 percent—a level last seen after the 2001 recession. With continuing pressures on banks to deleverage, this growth might slow further.

Emerging markets remain relatively resilient to the credit turmoil thus far. However, as the crisis remains protracted, external funding conditions are tightening, and some emerging markets are coming under increased scrutiny.

The report stressed the need to stem the decline in the U.S housing market to help both households and financial institutions to recover.

At the moment, a bottom for the housing market is not visible.

The progression of the crisis has underscored the importance of moving forward with needed reforms, the report said. Recently passed US legislation will support the GSEs (Fannie Mae and Freddie Mac) and create an independent regulator.

 

“The policy challenge is now to find a clear and permanent solution.” the report said.

Comments

[Jason Rines...:]

Incentivize performance. It works with government and business.

2008 Jul 28 02:56 PM