(Yicai Global) April 16 -- Central banks across the world have taken “bold and decisive actions” to support economies broadsided by the coronavirus pandemic, the International Monetary Fund said in a new report, and they may think about introducing further measures.
“This crisis presents a very serious threat to the stability of the global financial system,” the Washington-based lender said in its Global Financial Stability Report published on April 14.
“Following the Covid-19 outbreak, financial conditions tightened at unprecedented speed, exposing some ‘cracks’ in global financial markets,” it said. “Market volatility spiked and borrowing costs surged on expectations of widespread defaults.”
In response, central banks eased monetary policy, bought assets, and provided liquidity to support credit supply, the IMF said. Markets have recouped some losses as a result, but a “risk of a further tightening in financial conditions” remains “that could expose financial vulnerabilities,” it added.
The IMF urged policy makers to balance economic support with the preservation of financial stability, while major market participants need to be very careful of risks.
For banks, “existing capital and liquidity buffers should be used to absorb losses and funding pressures,” the IMF said. Regulators will need to step in, such as getting lenders to draw up capital rebuilding plans when capital adequacy is impacted. They also need to push banks to discuss short-term changes to loan terms with businesses and households under strain. Fiscal support may also be needed, with authorities helping “borrowers to repay their loans and finance their operations, or provide credit guarantees to banks.”
As for asset managers, regulators should encourage them to “make full use of the available liquidity tools where it would be in the interests of unit holders to do so” in order to sensibly deal with liquidity risks related to big outflows, the IMF said.
Regarding financial markets, “market resilience should be promoted through well-calibrated, clearly defined, and appropriately communicated measures, such as circuit breakers.”
Emerging and frontier markets face a “perfect storm,” the report said. They have seen record reversals in portfolio flows. “This loss of external debt financing is likely to put pressure on more leveraged and less creditworthy borrowers. This may lead to a rise in debt restructurings, which could test existing debt resolution frameworks,” the IMF warned.
Editor: Ben Armour