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From 1980s Debt Crisis to Crypto Era, Financial Stability Monitoring Is Always Evolving – Analysis – Eurasia Review

Twenty years ago, the IMF announced its inauguration. Global Financial Stability Report Strengthen financial market oversight after a series of crises and dot combusts in emerging markets.

This semi-annual publication by the Department of Finance and Capital Markets has since evolved into one of our leading multilateral monitoring tools through years of seismic change in the global economic and financial situation.together World economic outlook And that Financial monitorThis flagship report aims to promote international finance and financial stability.

beginning

Monitoring the health and outlook of the world economy and member countries is the foundation of the fund’s activities. This oversight role is outlined in the amendments to the Agreement provisions first adopted at the 1944 Bretton Woods Conference and is responsible for overseeing and protecting the international monetary system.

Initially, surveillance focused on member countries’ macroeconomic and exchange rate policies, but the growth of international banks in the early 1970s better tracked global capital markets and assessed their impact on financial stability. It highlighted the need to do. As a result, the fund began discussions with the financial authorities of major financial centers and in 1974 began an internal report on market trends and outlook.

Since 1980 International capital markets It has become a major tool for monitoring financial market conditions, warning of risks, and analyzing turmoil such as the Latin American debt crisis of the 1980s and the crisis of the European exchange rate mechanism in the early 1990s. However, the rapid expansion and consolidation of global capital markets of that era, and the subsequent financial crisis in Asia and several other emerging markets, underscores the need for a better assessment of systemic risk. did.

Introduction of Global Financial Stability Report It has shown an important step towards a more comprehensive and frequent assessment of cross-border capital flows and financial market risk. For the first GFSR, Horst Kohler, then managing director, pointed out how this report is rooted in the crisis.

“The rapid expansion of financial markets emphasizes the importance of constantly assessing the flow of capital in the private sector, which is the driving force of global economic growth, but sometimes also the core of the crisis,” he wrote. rice field. “The opportunities offered by international capital markets to enhance global prosperity must be balanced by a commitment to prevent a debilitating financial crisis.”

turning point

Since then, the GFSR has focused on identifying periodic and structural vulnerabilities in the banking and non-banking sectors of developed and emerging market countries, the risks they pose, and policy options to mitigate these risks. I did.

Vulnerabilities such as leverage tend to accumulate when financial conditions are good and investors are willing to take risks. And in those times, our stability report puts more emphasis on the potential threats we think we are building.

One of the most important moments for GFSR came in 2007, when transmission from the US housing slump shook the world economy and markets. In a tightly integrated world, the global financial crisis emphasized how important it is to better connect points between institutions, sectors and countries.

Since then, the Fund has stepped up efforts to analyze and understand the role of macroprudential policies in strengthening interrelationships and systemic risk, cross-border interconnection and spillover, and resilience of the financial system. I have done it.

In recent years, we have adopted a conceptual framework for more systematically assessing and monitoring financial stability risk. It revolves around vulnerabilities that amplify negative shocks, creating an unfavorable feedback loop between falling asset prices and tightening fiscal conditions, de-leveraging by financial firms, and weakening economic activity.

The empirical implementation of the framework relies on two tools. A broad set of major financial and business vulnerability indicators (such as debt repayment capacity and the ratio of current assets to short-term liabilities) is a macroprudential policy (such as capital buffers and liquidity coverage ratios). Then, we will comprehensively measure how financial stability risk will affect expected global economic activities. This is called “risk growth.”

These tools complement the objectives of oversight and policymaking, as detailed analysis of specific exposures provides the nuances and depth needed to measure a summary of threats to economic growth.

The GFSR is also actively calling for a review of the international regulatory environment to address the gaps revealed by the global financial crisis. In addition, it has helped to strengthen the scrutiny of non-bank financial institutions, which have played a greater role in mediation since the crisis and could make the system more vulnerable.

Constant vigilance

We have made progress, but the continued evolution of global financial markets introduces new vulnerabilities and risks that require constant vigilance, especially due to the rapid pace of innovation. For example, the advent of high-speed, advanced computer technology has fueled the growth of high-frequency trading. This improves market efficiency, but it can also lead to market instability.

Other emerging technologies such as artificial intelligence and distributed ledgers are revolutionizing financial markets through fintech and crypto assets that not only bring opportunities, but also the fundamental risks that GFSR is pushing to the fore. Climate change poses another stability threat that we are increasingly analyzing, along with the role that sustainable finance and the private sector can play in facilitating the green transition.

And now, as our recent report emphasizes, lasting pandemics and wars in Ukraine exacerbate existing vulnerabilities, contribute to the greatest inflationary pressures in decades, and fragmentation. By facing the international capital markets with greater risk, financial risk was exacerbated.

More than ever, rapid technological changes and frequent and diverse shocks have made our oversight important to protect international financial and financial stability to promote growth and inclusion. And to do so, it is becoming increasingly clear that tools for assessing risk need to be constantly adapted and refined to better scan the global financial situation and strengthen its resilience. ..

* About the author:

  • Tobias Adrian He is a financial counselor and director of the IMF’s Financial Capital Markets Division. He leads the IMF’s work on financial sector oversight and capacity building, financial and macroprudential policies, financial regulation, debt management, and capital markets.
  • Fabio M. Natalucci Is the Deputy Director of the Financial and Capital Markets Division. He is responsible for the Global Financial Stability Report, which provides the IMF’s assessment of global financial stability risks.
  • Mahvash S. Cresi Head of the IMF’s Financial and Capital Markets Division, Head of the Global Financial Stability Analysis Division, and oversees the development of the Analysis Chapter of the Global Financial Stability Report.

Source: This article was published by the IMF blog

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