Heat Wave: Rising Financial Risks in the United States


By Serkan Arslanalp, David Jones, and Sanjay Hazarika

Six years after the start of the global financial crisis, low interest rates and other central bank policies in the United States remain critical to encourage economic risk-taking—increased consumption by households, and greater willingness to invest and hire by businesses. However, this prolonged monetary ease also may have encouraged excessive financial risk-taking. Our analysis in the latest Global Financial Stability Report suggests that although economic benefits are becoming more evident, U.S. officials should remain alert to excessive financial risk-taking, particularly in lower-rated corporate debt markets.

Bullish financial risk-taking bears monitoring

Persistently low global interest rates have prompted investors to search for higher returns in a wide range of markets, such as stocks, and investment-grade and high-yield bonds. This has resulted in escalating asset prices, and enabled issuers to sell assets with a reduced degree of protection for investors (we give you an example below). The combined trends of more expensive assets and a weakening quality of issuance could pose risks to stability.

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Avoiding Another Year of Living Dangerously: Time to Secure Financial Stability


By José Viñals

In various guises, the “Year of Living Dangerously” has been used to describe the global financial crisis, the policy response to the crisis, and its aftermath.

But, we’ve slipped well beyond a year and the financial system is still flirting with danger. Durable financial stability has, so far, proven elusive.

Financial stability risks may have eased, reflecting improvements in the economic outlook and continuing accommodative policies. But those supportive policies—while necessary to restart the economy—have also masked serious, underlying financial vulnerabilities that need to be addressed as quickly as possible. Continue reading

Government Bonds: No Longer a World Without Risk


By José Viñals

The risk free nature of government bonds, one of the cornerstones of the global financial system, has come into question as the global crisis unfolds.

One thing is now very clear: government bonds are no longer the risk-free assets they once were. This carries far reaching implications for policymakers, central bankers, debt managers, and how the demand and supply sides of government bond markets function.

After a recent IMF conference on a new approach to government risk, I’d like to highlight three key aspects: Continue reading

Financial System Fragilities – Achilles’ Heel of Economic Recovery


By José Viñals

It would be unfair for any assessment of global economic and financial stability not to acknowledge that tremendous progress has been made in repairing and strengthening the financial system since the onset of the global crisis.

Still, the key message from the IMF’s October 2010 Global Financial Stability Report (GFSR) is clear. Progress toward global financial stability has suffered a setback over the past six months—the financial system remains the Achilles’ heel of the economic recovery. Continue reading

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