Washington, Sep 30 (Inditop.com) Global financial stability has improved following unprecedented policy actions and signs of economic recovery, but overall risks remain elevated and the risk of reversal remains significant, according to the International Monetary Fund (IMF).
IMF estimate of global losses arising from the crisis for 2007-10 now stands at roughly $3.4 trillion largely due to rising securities values, it said in the October Global Financial Stability Report (GFSR), released in Istanbul Wednesday. The new estimate is around $600 billion lower than the last GFSR.
While systemic risks have declined, the policy challenges are significant, the report said ahead of the Annual Meetings of the IMF-World Bank Group.
Policymakers, IMF said need to (i) ensure sufficient credit growth to support the nascent economic recovery; (ii) devise appropriate exit strategies; (iii) manage risks associated with sovereign balance sheet pressures; and (iv) maintain a balance between regulation and market forces in reducing future systemic risks.
Moving toward the medium-term, policymakers should seek to restore market discipline, address risks posed by systemic institutions, institute a macroprudential policy approach, and strengthen the oversight of cross-border financial institutions, it said.
Financial institutions continue to face three main challenges-rebuilding capital, strengthening earnings, and weaning themselves off government funding support, GFSR said.
Securities write downs by financials have begun to taper, but credit deterioration will continue to lead to higher loan losses over the next few years, the report said. Bank write downs on holdings of loans and securities realized between mid-2007 and mid-2009 have amounted to $1.3 trillion.
IMF estimates that $1.5 trillion of actual and potential writedowns through end-2010 has yet to be recognized. While the capital positions and outlook for banks have improved significantly since the last GFSR, earnings are not expected to fully offset forthcoming writedowns.
Banks have enough capital to survive, but they remain under deleveraging pressure, the report said. With steady-state earnings likely to be lower in the post-crisis environment, stronger action is needed to bolster bank capital and earnings capacity to support lending.
Private sector credit growth has continued to contract across the major economies as weak activity and household deleveraging restrain private sector credit demand and the financing capacity of both the bank and non-bank sectors remains limited, it said.
However, total borrowing needs are not decelerating as rapidly, due to burgeoning public sector deficits. The likely result is constrained credit availability, IMF said suggesting continued support by central banks may be required to help alleviate this constraint.
Tail risks in emerging markets have declined as a result of strong policy measures. Asia and Latin America have benefited most from the stabilisation of core markets and a recovery in portfolio inflows, the report said.
The situation is most acute in emerging Europe, where corporate revenues are declining sharply as a result of the recession and several large defaults have already occurred, it said.
