No complacency despite improving global financial stability

The IMF today said policymakers must take advantage of the improving global outlook and avoid complacency by addressing rising medium-term vulnerabilities that are building under the surface.

"This is no time for complacency. Action is required now because vulnerabilities are building. This could put growth at risk in the future," Tobias Adrian, International Monetary Fund Financial Counsellor told journalists on the release of its important Global Financial Stability Report.

Noting that vulnerabilities are building under the surface, Adrian said if left unattended, these could derail the global recovery.

According to the report, the key challenge confronting policymakers is to ensure that the buildup of financial vulnerabilities is contained while monetary policy remains supportive of the global recovery.

"Policymakers must take advantage of the improving global outlook and avoid complacency by addressing rising medium-term vulnerabilities," the IMF said in its report released ahead of the annual IMF and World Bank meetings here this week.

Policymakers and regulators should fully address crisis legacy problems and require banks and insurance companies to strengthen their balance sheets in advanced economies.

This includes putting a resolution framework for international banks into operation, focusing on risks from weak bank business models to ensure sustainable profitability, and finalising Basel III, it said.

Major central banks should ensure a smooth normalisation of monetary policy through well communicated plans on unwinding their holdings of securities and guidance on prospective changes to policy frameworks, the report said.

Providing clear paths for policy changes will help anchor market expectations and ward off undue market dislocations or volatility, it added.

The IMF said emerging market economies should continue to take advantage of supportive external conditions to enhance their resilience, including by continuing to strengthen external positions where needed, and reduce corporate leverage where it is high.

This would put these economies in a better position to withstand a reduction in capital inflows as a result of monetary normalisation in advanced economies or waning global risk appetite, it said.

Similarly, frontier market and low-income country borrowers should develop the institutional capacity to deal with risks from the issuance of marketable securities, including formulating comprehensive medium-term debt management strategies.

This will enable them to take advantage of broader financial market development and access, while containing the associated risks, the IMF said.

Observing that the upswing in global activity has gained further steam, laying hopes for a sustained recovery and allowing for the eventual normalisation of monetary policies, Adrian said the core of the global financial system is stronger.

"Systemically important banks and insurers continue to enhance their resilience by raising capital, addressing legacy issues, and adapting their business models to the evolving regulatory and market environment," he said.