Transcript of the Press Conference of the October 2019 Global Financial Stability Report
October 16, 2019
Tobias Adrian, Director, Monetary and Capital Markets Department
Fabio Natalucci, Deputy Director, Monetary and Capital Markets Department
Anna Ilyina, Division Chief, Monetary and Capital Markets Department
Evan Papageorgiou, Deputy Division Chief, Monetary and Capital Markets
Randa Elnagar, Senior Communications Officer, Communications Department
Ms. Elnagar – Good morning. Welcome to the 2019 Annual Meetings. This is
the press conference on the Global Financial Stability Report. I am Randa
Elnagar from the IMF’s Communications Department.
Let me start by introducing our panel: Tobias Adrian, Financial Counselor
and Director of the Monetary and Capital Markets Department; Fabio
Natalucci, Deputy Director of the Monetary and Capital Markets Department;
Anna Ilyina, she is the Division Chief that oversees the Global Financial
Stability Report in the Monetary and Capital Markets Department; and Evan
Papageorgiou, Deputy Division Chief in the Monetary and Capital Markets
Tobias is going to give some opening remarks, and then we are going to take
your questions. Tobias.
Mr. Adrian – Good morning, ladies and gentlemen. It is a pleasure to
present the new edition of the Global Financial Stability Report. Along
with the report, you will be interested in the leaflet that summarizes the
Global markets have been subjected to the twists and turns of trade
tensions and have been kept off balance by continuing policy uncertainty.
Against the backdrop of deteriorating business sentiment, weakening
economic activity, and intensifying downside risks, many central banks have
adopted an easier stance on monetary policy. About 70 percent of the
world’s economies, weighted by GDP, have done so.
Investors have interpreted the central bank actions as a turning point in
the monetary policy cycle. The shift has been accompanied by a sharp
decline in long-term yields. In some major economies, interest rates are
Remarkably, the amount of government and corporate bonds with negative
yields has increased to about $15 trillion. Moreover, markets expect about
one-fifth of government bonds will have negative yields for at least three
With rates staying lower for longer, financial conditions have eased,
helping contain downside risks and support global growth, for now. But
loose financial conditions have encouraged investors to take more risks in
a quest to achieve their return targets. Valuations appear stretched in
some important markets, including equity and credit markets, in both
emerging and frontier, as well as advanced economies.
As a result of easier financial conditions and stretched asset valuations,
vulnerabilities have continued to intensify, putting growth at risk in the
medium term. Let me draw your attention in particular to our assessment of
global vulnerabilities, summarized in the radar chart. The gray shading in
that chart shows where vulnerabilities now stand. As you can see, there has
been a notable increase in vulnerabilities in the section marked “Other
Vulnerabilities among non-bank financials, which include asset managers,
structured finance vehicles, and finance companies, are now elevated in 80
percent of economies, as measured by GDP. This is similar to what we have
seen at the height of the global financial crisis. The search for yield
among institutional investors, such as insurance companies, asset managers,
and pension funds, has led them to take on riskier and less-liquid
securities. These exposures may act as amplifiers to shocks.
In addition, corporations are taking on more debt, and their ability to
service that debt is weakening. In the event of a material economic
slowdown, the prospects would be sobering. Debt owed by firms unable to
cover interest expenses with earnings, which we refer to as corporate debt
at risk, could rise to $19 trillion in a scenario that is just half as
severe as the global financial crisis. That is almost 40 percent of total
corporate debt in the eight economies that we studied, which include the
United States, Japan, China, and some European countries, could be
addressed in such a downside scenario.
Among emerging and frontier economies, external debt is increasing, as they
attract capital flows from advanced economies, where interest rates are
lower. External debt has risen to 160 percent of exports on average, up
from 100 percent in 2008. A sharp tightening of financial conditions and
higher borrowing costs would make it more difficult for them to service
their debts. Overall, resilience of the banking sector has improved, thanks
to stricter regulations and supervision since the global financial crisis.
However, there are still pockets of weak institutions. Negative yields and
flatter yield curves have reduced expectations about bank profitability,
and the market capitalization of some banks has fallen to low levels. Among
banks outside the United States, US dollar funding liquidity remains a
source of vulnerability that could amplify the impact of a tightening in
funding conditions and could create spillovers to countries that receive
cross-border dollar loans.
Policymakers need to take urgent action to mitigate financial stability
risks. They should deploy and develop, as needed, new macroprudential tools
for non-bank financial firms to mitigate vulnerabilities, highlighted in
this report. They should address corporate vulnerabilities with stricter
supervisory and macroprudential oversight, including the creation of
targeted stress-testing of banks and the development of prudential tools
for highly levered firms, which can help restrain debt at risk. They should
tackle risks among institutional investors through strengthened oversight
and disclosures. Emerging and frontier economies should implement prudent
sovereign debt management practices and frameworks.
Greater multilateral cooperation is needed in several areas. Policymakers
should complete and implement the global regulatory reform agenda. They
should ensure that there is no rollback of regulatory reforms. In addition,
policymakers should foster the further development of sustainable finance,
an approach to investment that takes environmental, social, and governance
factors into account. To help promote awareness of climate threats and
other risks to the financial system, policymakers should encourage better
corporate disclosures and adequate standardization.
To sum up, with financial conditions still easy, and with vulnerabilities
building, policymakers should act now to reduce the vulnerabilities that
could exacerbate the next economic downturn.
Ms. Elnagar – Thank you, Tobias. We are ready to take your questions now.
Question – Can you be a little bit more specific on what types of debt that
you see as most concerning? In the 2008 financial crisis, it was subprime
loans that started everything. What areas are you looking at?
Also, can you be more specific on what you would recommend policymakers do?
They have taken steps to shore up the banking system. So what other steps
do they need to take? More specifically, though, what can they do to
address these non-bank problems?
Mr. Adrian – Absolutely. So the banking system is safer today. There is
more capital and more liquidity in the banking system, and stress tests are
commonly done across jurisdictions. At the same time, vulnerabilities in
the non-bank financial sector are building, so there is a growth of credit
intermediation in the non-bank financial sector, and corporate
vulnerabilities are rising. So what we urge policymakers to do is to
contain underwriting standards for those nonfinancial corporations at the
issuing stage. This could be done by a number of policy tools.
Ms. Ilyina – Let me elaborate a little bit on what can be done to contain
corporate sector vulnerabilities.
First, just to step back and maybe comment a bit on the 19 trillion USD
number. This is our estimate of debt at risk, which we define as debt owed
by nonfinancial firms with weak debt repayment capacity; that is, that do
not have enough earnings to cover interest payments. That is not
necessarily debt that will default immediately, but these are firms that
would be at risk of distress in a significant material economic slowdown.
So the estimate that we provide in the report is for eight major economies,
including the United States, China, Japan, and several European economies,
in a material downturn, which is about half of the severity of the global
The reason why this number is large — and the number is, indeed, large —
is because of, I would say, three things. I would highlight three things.
First, corporate debt levels have increased in major economies over the
last decade, significantly. Total corporate sector debt in these eight
major economies now stands at about 51 trillion US dollars, and that
compares to about 34 trillion in 2009, so this is a significant increase.
Second, corporate vulnerabilities are already elevated in a number of major
economies. In some of them, debt at risk is already at about 25 percent of
total corporate debt; and, of course, in an adverse scenario, it rises fast
and further. And what is particularly notable is that, even though the
shock is only half the severity of the global financial crisis, in many of
those countries, debt at risk rises to the same level as we have seen
during the financial crisis or even exceeds those levels. So that tells us
that there are quite a few weak nonfinancial firms in these economies that
are still able to roll over debt and continue to accumulate debt because of
very low interest rates. But, of course, the concern is that in an economic
downturn, these firms may come under pressure. They may experience
difficulty in servicing their debt, and would have to deleverage. And so
when they deleverage, they cut back on investment and employment, and that
exacerbates the recession, what we have seen during the euro area crisis.
To answer your question on what can be done, as Tobias already mentioned,
it should be done through a combination of more stringent supervision,
particularly of credit assessment practices and lending practices of banks,
which is what supervisors, presumably, already do. But perhaps there are
some areas where more attention is needed, like in regional banks that are
more exposed to small- and medium-sized firms. And if corporate debt is
viewed as reaching systemic levels, then macroprudential tools can be
activated as well, including sectoral tools, such as additional risk
weights or additional capital buffers on bank exposures to corporates.
If the main source of credit is not banks but, rather, non-bank financial
intermediaries, then this is somewhat more complicated because there are
fewer policy tools to address that. But, again, greater, more rigorous
supervision is needed, more disclosure perhaps by these financial
intermediaries to allow a more comprehensive assessment of risks by both
investors as well as supervisors. Of course, there are other tools that can
be considered as well; for example, some criteria on the credit quality of
securities that different financial intermediaries can invest in, and so on
Let me stop here.
Question – What you have outlined seems very familiar to those of us who
have been here for quite a long time: lots of risk, lots of debt, lots of
vulnerability, and a lack of policy action. How close do you think we are
to repeating the mistakes of 2008, when action was taken but taken too late
and only after the problem had exploded?
Mr. Adrian – Thanks for the question.
We are in a better place today, from the point of view of banking
regulations. Banks have more capital. There has been tremendous progress in
terms of banking regulation and, to some extent, insurance regulation as
well. So I do think that we have to acknowledge that overall capital and
liquidity levels in the banking sector are much better, and the banks
remain the core of the financial system.
Some estimates are that, depending on the country, high-quality capital is
about two to three times higher than it was prior to the last financial
crisis. So tremendous progress has been made there. But we do see a build
up of vulnerabilities in the non-bank financial sector and in the corporate
sector, in particular, as Anna has explained. And we particularly worry
about the risks in the medium term.
In the short run, say, over the next year or so, risks have been contained
to some extent by the sharp easing of monetary policy that has occurred in
many countries around the world. So that easing of monetary policy has
taken out some of the downside risks. But in the medium term, say, over two
to three years, we worry that vulnerabilities continue to build up. And in
the scenario of adverse shocks, these vulnerabilities are amplification
mechanisms that can make shocks worse. So financial vulnerabilities act as
amplifiers for any negative shocks. So we do worry about the medium term,
and we urge policymakers to take action today, using prudential policy
tools to contain the deterioration of underwriting standards to make sure
that the non-bank financial system is safe and that underwriting standards
in the corporate sector do not deteriorate too much.
Ms. Elnagar – The gentleman here.
Question – Good morning. How the trade wars, they would increase those
vulnerabilities and put the financial risk worldwide?
Mr. Adrian – The question was about trade tensions.
What we have seen over the past year — really, over the past two years is
that trade tensions have moved markets. And many times when the markets
became more pessimistic about trade, there have been significant moves. And
downside risks to economic activity have been a function of those trade
So we urge policymakers around the world to continue to work together in
order to resolve those trade tensions, as that is a significant source of
uncertainty, and a significant source of creation of downside risks is
Now, the trade uncertainty is interacting with the financial
vulnerabilities. So financial vulnerabilities are amplification mechanisms
for bad news. So when there is bad news on the trade front, then the higher
the financial vulnerability, the worse the amplification. That is our
thinking about financial stability. And, as we pointed out, these
vulnerabilities are rising, particularly in the corporate and the non-bank
Mr. Papageorgiou – I just wanted to make a very quick point.
In terms of the implications of trade tensions are, obviously, very
important on the real economy and, obviously, on trade; but as Tobias also
mentioned, there are real implications for portfolio flows, in particular,
to emerging markets. Clearly, we are very concerned about — the whole word
is very concerned about China and the US but there is also real spillovers
to emerging markets. We have seen that equity flows of the emerging markets
have reacted very closely to the ebbs and flows of that trade news. And
there seems to be a domino effect from the external factors on those
portfolio flows, rather than country-specific fundamentals. And we think
that is very important because, much like you had strong inflows during
periods of calm, during calm periods, you can have a sudden reversals of
Ms. Elnagar – Thank you.
Question – Yesterday we saw rather a spectacular explosion of an open-ended
Fund empire in the UK, the Woodford Funds. I just wonder what you thought
about the vulnerabilities of open-ended funds, and what steps should be
taken by regulators to try and address that vulnerability?
Mr. Natalucci – We have one chapter in the Global Financial Stability
Report that focused on the behavior of institutional investors in this
lower-for-longer environment. So the three investor types we focus are
asset management, pension funds, and insurance companies. So the open-ended
funds, which is one subset of the asset management industry, what we
highlight there is that in this low-for-longer environment, there is an
incentive for some of these players to reach out for yield in the form of
more liquid security, higher credit risk, to achieve their return targets,
whether they have nominal mandates or whether because they have nominal
return targets or because of investment mandates. So the two risks we
highlight there are that liquidity buffers, some of these funds have
decreased, and also that the portfolio seems to be much more correlated,
much more similar; and so the reason why we highlight those is that those
could become an issue of financial stability concerns. On the one hand
because those are the marginal bid for some of these assets, especially
credit, and so they are pushing down higher valuation for credit, and so if
that demand comes away, it could have a repercussion for asset valuation
but also because those could be amplifiers in the sense that if these funds
come under pressure, specifically those that provide the daily liquidity
and invest in more liquid assets, that once they run the box where we
provide a stress-test scenario where we look at what would happen in some
of these funds if there are, in fact, demands for withdrawal and liquidity,
and the number in terms of shock, it is about 160 billion, which is about
1.5 percent of the assets of the Fund under the scenario. The weakness
seems to be concentrated geographically more in Europe than other
jurisdictions and also more among the smaller funds than the larger funds.
So the point is, those are, as Tobias mentioned, amplifiers, if there are
shocks and you go to a fire sale episode, that could in fact, amplify the
price moves. So the recommendations were up there, so enhanced supervision
and disclosure. Specifically, for the Fund a couple examples of measures
that could be considered are, one, considering very strict liquidity risk
management as well as stress testing as well as stepping up efforts to
address leverage and maturity and liquidity mismatch in the funds.
Ms. Elnagar – We go to the gentleman here.
Question – Thank you. The Trump administration has been warning against
Chinese debt in Africa. Do you see any risk? Can you talk generally about
Africa and China in Africa, especially China loans? Thank you.
Mr. Papageorgiou – The issue of non-Paris Club creditors as we have looked
into it in this Global Financial Stability Report, you know, this is one of
the issues that we identify as potentially creating some instability or
some vulnerabilities. Not that the debt itself creates problems. We examine
some issues that debt has to be used for productive purposes, but usually
debt that is given under non-Paris Club or multilateral types of
agreements, more broadly in a lot of low-income countries, particularly a
lot of Sub-Saharan African countries, the issue of debt vulnerabilities is
becoming more and more prescient. It is already, as the IMF in the IMF’s
evaluation, is more than a dozen countries that are either in distress or
in high risk of debt distress, and there the issue again of either
collateralization of that debt or the type of this debt may create a more
difficult way of resolving it down the line through a debt restructuring,
Mr. Adrian – Let me just complement that by saying that, of course, capital
flows to Sub-Saharan Africa has to be dealt with in a responsible manner,
and so when we look across countries in Africa, there is a variety of
approaches, and so we do see an increase in overall debt levels, and there
are both costs and benefits to that.
Ms. Elnagar – OK. I will go to the gentleman with the glasses.
Question – Thank you. I see that the way of corporate debt at risk in
European countries as well as Japan has decreased in the past ten years, so
are these countries still a concern for you, and if yes, why? Thank you.
Ms. Ilyina – So the chart that you are referring to presents debt at risk
as of 2009 and as of 2019 relative to GDP. So in some cases, if we look at
debt at risk relative to total corporate debt, the share may be high; but
if overall corporate debt is not large relative to GDP, those numbers that
you see would be smaller. So we would worry both about the high share of
firms with weak debt repayment capacity in total corporate sectors as well
as the overall size of corporate debt because that tells us something about
how debt is distributed across firms that have various fundamentals. So in
several countries in the Euro Area in particular, debt at risk has declined
since the Euro Area crisis because of the deleveraging efforts that have
been undertaken, and that is true that in some of those cases, even in the
stress scenario, debt at risk stays below the levels seen during the
financial crisis. So in that sense, that would be less of a concern, yes.
Mr. Adrian – It is a differentiated picture. So in some countries things
have improved, and in others they have deteriorated, but the overall
picture is one of concern.
Ms. Elnagar – The gentleman in the third row with the glasses.
Question – Thank you. My question is that China has made efforts on reforms
to keep financial stability like structural deleveraging, control of local
government debt, regulatory reforms, and international cooperation, so how
do you evaluate the reforms and what are the vulnerabilities still
remaining, and what is the reason to trigger that? Thank you.
Mr. Adrian – We welcome the efforts of the Chinese authorities to increase
financial stability. As you mentioned, in a number of areas, financial
regulations have been tightening, and the authorities have made an effort
to deleverage some parts of the financial system, including the shadow
banking system. We do continue to urge the authorities to continue with
that path of tightening financial regulations. The shadow banking system,
while it has stopped growing, it continues to be large in size. We also
have concerns for small- and medium-sized banks and regional banks. As you
know, a number of banks have failed this year, and we continue to see some
vulnerabilities in that sector.
Mr. Natalucci – In terms of vulnerabilities, the experience of the three
small- and medium-sized banks over the summer in some sense highlight three
global vulnerabilities that remain in the system, especially in small and
medium banks in terms of reliance on outside funding on the liability side,
investing in riskier asset on the asset side; and for some of these banks,
the generally low level of capitalization, as well as profitability. That
The second vulnerability has to do with maturity mismatch and use of
leverage in the investment funds, so the shadow banking sector, so that is
why the progress of deleveraging is something that we welcome.
The third one has to do with the remaining interconnectedness between the
bank and non-bank sector, especially in a system that still continues to
have essentially a guarantee in the system, implicit guarantees. The point
is the tradeoff here is in some sense increasing the resilience, so
deleveraging the system, raising capital, raising liquidity, and on the
other hand, maintaining growth and maintaining credit growth so that that
can help boost the economy, that is the balance that in terms of
intertemporal tradeoff we tried to highlight in the report. In terms of
policy recommendation, the three banks’ experience suggests there is need
for crisis management framework, including resolution for banks, as well as
continue to implement the asset management reform and increasing the
solvency of the banking sector, especially the small and medium size.
Ms. Elnagar – I will take the gentleman in the blue shirt.
Question – In a previous answer to the question Anna was responding to
where you said that probably non-bank financial institutions could take
higher securities because there is limited scope for some of the other
pools to control debt distress, but specifically in economies like what is
coming out is that while they have been taking securities, the enforcement
of the securities have been problematic, which is why the eventual
recoveries of the loans have suffered considerably, and that is now turning
out to be a bigger crisis within the economy so in terms of the IMF’s
recommendation with respect to what could be the nature of the securities
and probably some of the enforcement tools that the government could
Mr. Papageorgiou – The question is about market structure, or what is
exactly the question? Securities markets? OK. So obviously on India, a lot
of steps have already been taken. In terms of NPL, for example, the NPL
recognition, which has accelerated in terms of recommendations related to
more aggressive public sector bank (PSU Bank) disinvestment, privatization,
and in general reducing the role of the public sector on the financial
system. Enhancing the bank lending capacity would come on the back of that
and could help reduce the fiscal contingency, if you will, from state
through the PSU banks.
Question – [microphone off]. With respect to the non-banking sector what
are the IMF’s recommendations?
Mr. Papageorgiou – That is obviously another channel of spillovers, but in
banks and the nonbanks, you also had an NBFI default this year, a non-bank
financial institution that is, default this year and a run on a COOP bank
more recently. There it is a matter of stricter supervision and encouraging
banks to divest or to manage their risks better.
Ms. Elnagar – Gentleman.
Question – Last time around, the financial crisis, the credit rating
agencies received a lot of criticism for falsely giving investors
confidence in both sovereign and corporate debt that was not warranted. The
efforts of reform are largely watered down. Does the IMF rely on those
credit rating agencies at all? What is your degree of confidence in those?
Mr. Adrian – That is an excellent question. So after the financial crisis,
there were initial reform efforts to change the governance of credit rating
agencies, but as you point out, there have been some reforms but perhaps
less than was originally envisioned, so there continue to be a number of
governance issues, conflict of interest in the credit rating agency model.
Now, having said that, last time around one of the particular challenges
was that there was a whole new asset class that was being rated, which was
subprime mortgages, and the historical data for subprime mortgages was
limited, so models were particularly deficient. Today what we are worrying
about are corporate sector vulnerabilities, and, of course, rating agencies
have assessed the corporate sector for more than 100 years by now, so I
would say that the model, so the analytics are probably more advanced in
the corporate sector than they were in the subprime mortgage sector ten or
fifteen years ago. There is very nice work that has been done at the Fund
and in other agencies that is documenting those failures of the models. It
is just like the models were not good for subprime mortgages. And I think
we do not see that particular problem.
So my answer is twofold. Yes, there continue to be certain governance
problems with rating agencies, but in terms of the analytics, I think we
are on a safer footing today. Having said that, of course, we do see that
CLOs are an important buyer of corporate debt, and those are structured
products. Now, CLOs fared well through the last crisis, which is one of the
reasons investors continued to buy CLOs, as opposed to some CDOs, say, on
mortgages. But we do observe that the quality of collateral that is
entering into those CLOs is deteriorating, and that is a source of concern.
Ms. Elnagar – I will take one question online: In this context that
describes vulnerabilities, what is the greatest risk in Mexico being an
emerging economy linked to trade tensions between the US and China but also
with high monetary policy rates.
Mr. Papageorgiou – Obviously Mexico has been directly in the forefront of
the trade war and being concerned with the impact on global trade, so
obviously having been exposed a lot to US manufacturing and trade would
have to — it is a very high priority for them. Our country team was
recently in Mexico for the Article IV consultation, and the recommendations
that came out of that visit was pursuing a more growth-friendly and
inclusive fiscal policy, easing monetary policy, to the extent that
inflation is in check and inflation expectations are anchored, boosting
financial inclusion to strengthen the financial system, and then
reinvigorating and promoting structural reforms, particularly on
Mr. Adrian – Let me just add to that, that Mexico is, of course, an
emerging market that relies on capital inflows, and trade tensions tend to
make capital flows more volatile, so Mexico, along with other emerging
markets, is exposed to the volatility in capital flows related to trade
Ms. Elnagar – We will go back to the room. The gentleman here.
Question – Good morning. Adrian, in your presentation, you highlighted the
fact that external debt in emerging and frontier markets have been on the
rise, which is the case we have seen in Nigeria; so would you recommend
that frontier markets and Nigeria focus more on domestic borrowing instead
of doing more external borrowing? Thank you.
Mr. Adrian – Both domestic and external debt markets are important for
economic growth and economic development, and both markets should be well
developed; but, of course, any borrowing has to be managed in a responsible
manner. There are both costs and benefits. So borrowing can be helpful for
economic growth and investment, but it can also be dangerous when negative
shocks hit. So we have done a lot of work at the Fund on debt
sustainability and debt management, and we have a host of recommendations
of how to manage debt in a responsible manner.
Mr. Papageorgiou – Can I make a specific point on Nigeria? You mentioned
local currency. Local currency borrowing could be preferred in some cases,
but it is not a panacea. The guiding principle, as Tobias mentioned, is
also prudent debt management. Over the summer, local currency flows have
been more volatile, and Nigeria was not an exception to that. Nigeria has a
large exposure to nonresident holders of domestic debt, particularly with
central bank bills; and then as we understand the central bank bills, there
is a lot of higher redemptions or has to deal with more rollovers of those
in the coming quarters, and so managing those risks, particularly with
respect to local currency debt and the behavior of nonresident investors is
Ms. Elnagar – We will go to the back.
Question – Thank you. My question is about China’s currency. Recently the
US Treasury has designated China as a currency manipulator, and they say
they are working with IMF on this regard. I am wondering is there an update
on this? Has the US Treasury reached out to the IMF to discuss the issue?
Mr. Adrian – So the IMF has an assessment of currencies, which is the
External Sector Report, and the Chinese currency was not viewed to be
excessively valued in either way.
Ms. Elnagar – The lady in the third row, and then we will wrap up.
Question – What are your recommendations on how to increase investment
flows in Nigeria? Thank you.
Mr. Adrian – So flows of investment to Sub-Saharan Africa have been strong
and are expected to reach record highs this year, so global financial
conditions are favorable to countries such as Nigeria at the moment.
Issuing bonds in hard currency and in domestic currency is currently
possible because of the favorable global financial conditions. Of course,
it is key what countries such as Nigeria are doing with those borrowed
funds, and as Evan was pointing out already, undertaking structural reforms
to develop the economy is key.
Ms. Elnagar – Thank you very much for coming. We will wrap up now, and
there is the Fiscal Monitor press conference after that. We will see you.
Thank you for coming.
IMF Communications Department
PRESS OFFICER: Randa Elnagar
Phone: +1 202 623-7100Email: MEDIA@IMF.org