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Economics Case Study

The Global Financial Stability Report is a semiannual report published by the International Capital Markets division of the International Monetary Fund. The report includes an assessment of the risks facing the global financial markets. Locate and download (see attached) the latest report to get an overview of the most important issues currently under discussion. Also, download a report from five years ago.

How do issues from five years ago compare with financial issues identified in the current report?

The report is too big, the attached files contain executive summary for 2022 and 2017. Use the summaries to compare the issues.

Also, cite peer-reviewed sources to support the answer. Need 1-2 pages.

Global Financial Stability Report, October 20

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G
lobal Financial Stability R

eport Global Financial Stability Report

Wo r l d E c o n o m i c a n d F i n a n c i a l S u r v e y s

I N T E R N A T I O N A L M O N E T A R Y F U N D

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Is Growth at Risk?

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Global Financial Stability Report
October 2017

Is Growth at Risk?

Wo r l d E c o n o m i c a n d F i n a n c i a l S u r v e y s
I N T E R N A T I O N A L M O N E T A R Y F U N D

©2017 International Monetary Fund

Cover and Design: Luisa Menjivar and Jorge Salazar
Composition: AGS, An RR Donnelley Company

Cataloging-in-Publication Data

Joint Bank-Fund Library

Names: International Monetary Fund.
Title: Global financial stability report.
Other titles: GFSR | World economic and financial surveys, 0258-7440
Description: Washington, DC : International Monetary Fund, 2002- | Semiannual | Some issues also have thematic

titles. | Began with issue for March 2002.
Subjects: LCSH: Capital market—Statistics—Periodicals. | International finance—Forecasting—Periodicals. |

Economic stabilization—Periodicals.
Classification: LCC HG4523.G557

ISBN 978-1-48430-839-4 (Paper)
978-1-48432-056-3 (ePub)
978-1-48432-057-0 (Mobipocket)
978-1-48432-059-4 (PDF)

Disclaimer: The Global Financial Stability Report (GFSR) is a survey by the IMF staff published twice
a year, in the spring and fall. The report draws out the financial ramifications of economic issues high-
lighted in the IMF’s World Economic Outlook (WEO). The report was prepared by IMF staff and has
benefited from comments and suggestions from Executive Directors following their discussion of the
report on September 21, 2017. The views expressed in this publication are those of the IMF staff and
do not necessarily represent the views of the IMF’s Executive Directors or their national authorities.

Recommended citation: International Monetary Fund. 2017. Global Financial Stability Report: Is
Growth at Risk? Washington, DC, October.

Please send orders to:
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International Monetary Fund | October 2017 iii

CONTENTS

Assumptions and Conventions vi

Further Information and Data vii

Preface viii

Foreword ix

Executive Summary x

IMF Executive Board Discussion Summary xiv

Chapter 1 Is Growth at Risk? 1
Financial Stability Overview 1
Large Systemic Banks and Insurers: Adapting to the New Environment 2
Monetary Policy Normalization: A Two-Sided Risk 17
Has the Search for Yield Gone Too Far? 23
The Rise in Leverage 32
Could Rising Medium-Term Vulnerabilities Derail the Global Recovery? 42
Box 1.1. A Widening Divergence between Financial and Economic Cycles 47
Box 1.2. Cyberthreats as a Financial Stability Risk 49
References 51

Chapter 2 Household Debt and Financial Stability 53
Summary 53
Introduction 54
How Does Household Debt Affect Macroeconomic and Financial Stability? 56
Developments in Household Debt around the World 58
Financial Stability Risks of Household Debt: Empirical Analysis 62
Conclusions and Policy Implications 70
Box 2.1. Long-Term Growth and Household Debt 72
Box 2.2. Distributional Aspects of Household Debt in China 73
Box 2.3. A Comparison of US and Canadian Household Debt 75
Box 2.4. The Nexus between Household Debt, House Prices, and Output 77
Box 2.5. The Impact of Macroprudential Policies on Household Credit 79
Annex 2.1. Data Sources 81
Annex 2.2. Methodology 84
References 87

Chapter 3 Financial Conditions and Growth at Risk 91
Summary 91
Introduction 92
Financial Conditions and Risks to Growth: Conceptual Issues 93
How Do Changes in Financial Conditions Indicate Risks to Growth? 96
How Well Do Changes in Financial Conditions Forecast Downside Risks to Growth? 100
Policy Implications 108
Annex 3.1. Financial Vulnerabilities and Growth Hysteresis in Structural Models 109
Annex 3.2. Estimating Financial Conditions Indices 113

iv International Monetary Fund | October 2017

G LO B A L F I N A N C I A L S TA B I L I T Y R E P O R T: I S G R O W T H AT R I S K ?

Annex 3.3. The Conditional Density of Future GDP Growth 115
References 116

Tables

Table 1.1. Sovereign and Nonfinancial Private Sector Debt-to-GDP Ratios 34
Annex Table 2.1.1. Countries Included in the Sample for Household Debt and Data Sources 81
Annex Table 2.1.2. Household Survey Data Sources 82
Annex Table 2.1.3. Description of Explanatory Variables Used in the Chapter 83
Annex Table 2.2.1. Logit Analysis: Probability of Systemic Banking Crisis 84
Annex Table 2.2.2. Panel Regression Estimates for Three-Year-Ahead Growth Regression on

Household Debt and Policy Interaction Variables 86
Table 3.1. Forecast of GDP Growth Distribution for the Global Financial Crisis with and

without Financial Conditions Indices 104
Table 3.2. Market Consensus Forecasts for the Global Financial Crisis Were Considerably

More Optimistic Than Forecasts Based on Financial Conditions 104
Table 3.3. Forecast of GDP Growth Distribution for the Global Financial Crisis: Comparing

Partitioned and Univariate Financial Conditions Indices with Autoregressions 105
Annex Table 3.2.1. Country Coverage 113
Annex Table 3.2.2. Data Sources 114
Annex Table 3.2.3. Partitioning of Financial Indicators into Groups 115

Figures
Figure 1.1. Global Financial Stability Map: Risks and Conditions 2
Figure 1.2. Global Financial Stability Map: Assessment of Risks and Conditions 3
Figure 1.3. Search for Yield, Asset Valuations, and Volatility 4
Figure 1.4. Global Systemically Important Banks: Significance and Business Model Snapshot 6
Figure 1.5. Global Systemically Important Banks: Capital, Liquidity, and Legacy Challenges 7
Figure 1.6. Global Systemically Important Banks: Market Activity 9
Figure 1.7. Global Systemically Important Banks’ International Activity 10
Figure 1.8. Global Systemically Important Banks: Financial Performance Gaps 12
Figure 1.9. Life Insurance Companies’ Profitability and Capital 13
Figure 1.10. Changes in Life Insurance Companies’ Business Models 14
Figure 1.11. Life Insurers’ Market Valuations and Risk Outlook 16
Figure 1.12. Simulated Mark-to-Market Shocks to Assets and Liabilities 17
Figure 1.13. Central Bank Balance Sheets and the Sovereign Sector 19
Figure 1.14. Policy Rates, 10-Year Government Bond Yields, and Term Premiums 20
Figure 1.15. Emerging Market Economy Capital Flows 22
Figure 1.16. Global Fixed Income Markets and US Corporate Credit Investor Base 24
Figure 1.17. Emerging Market Economies: Debt Issuance, Portfolio Flows, and Asset Prices 25
Figure 1.18. Low-Income Country External Borrowing and Vulnerabilities 26
Figure 1.19. US and Emerging Market Corporate Bond Spread Decomposition and Leverage 27
Figure 1.20. Long-Term Drivers of the Low-Volatility Regime 29
Figure 1.21. Leveraged and Volatility-Targeting Strategies 30
Figure 1.22. Vulnerability of the US Corporate Credit Investor Base to Shocks 31
Figure 1.23. Group of Twenty Nonfinancial Sector Credit Trends 33
Figure 1.24. Group of Twenty Nonfinancial Private Sector Borrowing 35
Figure 1.25. Group of Twenty Nonfinancial Private Sector Credit and Debt Service Ratios 36
Figure 1.26. Chinese Banking System Developments 38
Figure 1.27. China: Regulatory Tightening Has Helped Contain Financial Sector Risks 39
Figure 1.28. Chinese Banks: Financial Policy Tightening and Credit Growth Capacity 40
Figure 1.29. Bank Profitability and Liquidity Indicators 41
Figure 1.30. Global Financial Dislocation Scenario 43
Figure 1.31. Emerging Market Economy External Vulnerabilities and Corporate Leverage 45
Figure 1.1.1. Financial and Economic Cycles 48

C o n t e n t s

International Monetary Fund | October 2017 v

Figure 2.1. Household Debt-to-GDP Ratio in Advanced and Emerging Market Economies 54
Figure 2.2. First- and Second-Round Effects of the Buildup of Household Debt on Financial Stability 57
Figure 2.3. Growth and Composition of Household Debt by Region 60
Figure 2.4. Household Debt: Evidence from Cross-Country Panel Data 61
Figure 2.5. Effects of Household Debt on GDP Growth and Consumption 64
Figure 2.6. Effects of Household Debt on GDP Growth: Robustness Tests 65
Figure 2.7. Micro-Level Evidence Corroborating the Macro Impact 66
Figure 2.8. Banking Crises and the Role of Household Debt 67
Figure 2.9. Bank Equity Returns and Household Debt 68
Figure 2.10. The Impact of Household Debt by Country and Institutional Factors 69
Figure 2.1.1. Long-Term per Capita GDP Growth and Household Debt 72
Figure 2.2.1. Characteristics of China’s Household Debt 73
Figure 2.3.1. US and Canadian Household Debt Developments and Characteristics 75
Figure 2.4.1. Panel Vector Autoregression Dynamic Analysis 77
Figure 2.4.2. Consumption Response to House Prices 78
Figure 2.5.1. Macroprudential Policy Tools and Household Credit Growth 79
Annex Figure 2.1.1. Loan Characteristics, Rules, and Regulations 82
Figure 3.1. Tighter Financial Conditions Forecast Greater Downside Tail Risk to Global Growth 97
Figure 3.2. Risk of Severe Recessions Is Especially Sensitive to a Tightening of Financial Conditions

in Major Advanced and Emerging Market Economies 98
Figure 3.3. In Emerging Market Economies, Changes in Financial Conditions Also Affect Upside Risks 99
Figure 3.4. Higher Price of Risk Is a Significant Predictor of Downside Growth Risks within One Year 101
Figure 3.5. Rising Leverage Signals Higher Downside Growth Risks at Longer Time Horizons 102
Figure 3.6. Waning Global Risk Appetite Signals Imminent Downside Risks to Growth 102
Figure 3.7. Probability Densities of GDP Growth for the Depths of the Global Financial Crisis 103
Figure 3.8. In-Sample and Recursive Out-of-Sample Quantile Forecasts: One Quarter Ahead 106
Figure 3.9. In-Sample and Recursive Out-of-Sample Quantile Forecasts: Four Quarters Ahead 107
Annex Figure 3.1.1. Conditional Densities of Growth with High and Low Asset

Prices—One-Period-Ahead Forecasts 110
Annex Figure 3.1.2. One-Period-Ahead GDP and Financial Conditions 111
Annex Figure 3.1.3. Asset Prices and Credit Aggregates before and after a Financial Crisis 111
Annex Figure 3.1.4. Simple Debt Tax Ameliorates Risk of Leverage-Induced Recessions 112

vi International Monetary Fund | October 2017

ASSUMPTIONS AND CONVENTIONS

The following conventions are used throughout the Global Financial Stability Report (GFSR):

. . . to indicate that data are not available or not applicable;

— to indicate that the figure is zero or less than half the final digit shown or that the item does not exist;

– between years or months (for example, 2016–17 or January–June) to indicate the years or months covered,
including the beginning and ending years or months;

/ between years or months (for example, 2016/17) to indicate a fiscal or financial year.

“Billion” means a thousand million.

“Trillion” means a thousand billion.

“Basis points” refers to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of
1 percentage point).

If no source is listed on tables and figures, data are based on IMF staff estimates or calculations.

Minor discrepancies between sums of constituent figures and totals shown reflect rounding.

As used in this report, the terms “country” and “economy” do not in all cases refer to a territorial entity that is a state
as understood by international law and practice. As used here, the term also covers some territorial entities that are
not states but for which statistical data are maintained on a separate and independent basis.

The boundaries, colors, denominations, and any other information shown on the maps do not imply, on the part
of the International Monetary Fund, any judgment on the legal status of any territory or any endorsement or
acceptance of such boundaries.

1CHAPTE
R

International Monetary Fund | October 2017 vii

This version of the Global Financial Stability Report (GFSR) is available in full through the IMF eLibrary (www.
elibrary.imf.org) and the IMF website (www.imf.org).

The data and analysis appearing in the GFSR are compiled by the IMF staff at the time of publication. Every effort
is made to ensure, but not guarantee, their timeliness, accuracy, and completeness. When errors are discovered,
there is a concerted effort to correct them as appropriate and feasible. Corrections and revisions made after publica-
tion are incorporated into the electronic editions available from the IMF eLibrary (www.elibrary.imf.org) and on
the IMF website (www.imf.org). All substantive changes are listed in detail in the online tables of contents.

For details on the terms and conditions for usage of the contents of this publication, please refer to the IMF
Copyright and Usage website, www.imf.org/external/terms.htm.

FURTHER INFORMATION AND DATA

viii International Monetary Fund | October 2017

The Global Financial Stability Report (GFSR) assesses key risks facing the global financial system. In normal
times, the report seeks to play a role in preventing crises by highlighting policies that may mitigate systemic
risks, thereby contributing to global financial stability and the sustained economic growth of the IMF’s member
countries.

The analysis in this report has been coordinated by the Monetary and Capital Markets (MCM) Department
under the general direction of Tobias Adrian, Director. The project has been directed by Peter Dattels and Dong
He, both Deputy Directors, as well as by Claudio Raddatz and Matthew Jones, both Division Chiefs. It has ben-
efited from comments and suggestions from the senior staff in the MCM Department.

Individual contributors to the report are Ali Al-Eyd, Zohair Alam, Adrian Alter, Sergei Antoshin, Magally
Bernal, André Leitão Botelho, Luis Brandão-Marques, Jeroen Brinkhoff, John Caparusso, Sally Chen, Shiyuan
Chen, Yingyuan Chen, Charles Cohen, Claudia Cohen, Fabio Cortes, Dimitris Drakopoulos, Kelly Eckhold,
Martin Edmonds, Jesse Eiseman, Jennifer Elliott, Aquiles Farias, Alan Xiaochen Feng, Caio Ferreira, Tamas
Gaidosch, Rohit Goel, Hideo Hashimoto, Sanjay Hazarika, Dong He, Geoffrey Heenan, Dyna Heng, Paul
Hiebert, Henry Hoyle, Nigel Jenkinson, David Jones, Mitsuru Katagiri, Will Kerry, Jad Khallouf, Robin Koepke,
Romain Lafarguette, Tak Yan Daniel Law, Feng Li, Yang Li, Peter Lindner, Xiaomeng Lu, Sheheryar Malik,
Rebecca McCaughrin, Kei Moriya, Aditya Narain, Machiko Narita, Vladimir Pillonca, Thomas Piontek,
Breanne Rajkumar, Mamoon Saeed, Luca Sanfilippo, Jochen Schmittmann, Yves Schüler, Dulani Seneviratne,
Juan Solé, Ilan Solot, Yasushi Sugayama, Jay Surti, Narayan Suryakumar, Nico Valckx, Francis Vitek, Changchun
Wang, Jeffrey Williams, Christopher Wilson, and Xinze Yao. Magally Bernal, Breanne Rajkumar, and Claudia
Cohen were responsible for word processing.

Gemma Diaz from the Communications Department led the editorial team and managed the report’s produc-
tion with support from Linda Kean and editorial assistance from Sherrie Brown, Lorraine Coffey, Susan Graham,
Lucy Scott Morales, Nancy Morrison, Katy Whipple, AGS, and Vector.

This particular issue of the GFSR draws in part on a series of discussions with banks, securities firms, asset
management companies, hedge funds, standard setters, financial consultants, pension funds, central banks, national
treasuries, and academic researchers.

This GFSR reflects information available as of September 22, 2017. The report benefited from comments and
suggestions from staff in other IMF departments, as well as from Executive Directors following their discussion of
the GFSR on September 21, 2017. However, the analysis and policy considerations are those of the IMF staff and
should not be attributed to Executive Directors or their national authorities.

PREFACE

T
wice a year, the Global Financial Stability
Report (GFSR) assesses the degree to which
developments in the financial sector may
affect future economic conditions by

analyzing macro-financial linkages and then identifies
policies to mitigate risks to growth from the financial
sector. At the current juncture, investor risk appetite
is buoyant globally: since the last report in April,
funding conditions have continued to improve, asset
return volatility has receded to multiyear lows across
markets, and global capital flows have surged. This
easing of financial conditions has supported global
growth and financial inclusion, with credit being
allocated to benefit a broad range of borrowers.
These favorable conditions create a window of
opportunity to strengthen the financial system that
should be seized, since experience has taught us that
it is during times of easy financial conditions that
vulnerabilities build.

Chapter 1 of this GFSR documents how the con-
tinuation of monetary accommodation in advanced
economies—necessary to support activity and boost
inflation—is associated with rising asset valuations
and higher leverage, and how this environment makes
the system more vulnerable to future shocks. Chapter
2 focuses on household leverage, showing that ample
credit growth portends benign conditions in the
near term but larger downside risks in the medium
term—and thus creates an intertemporal tradeoff.
Chapter 3 takes this logic a step further and directly
links the easing of financial conditions to downside
risks to GDP growth. Easy financial conditions fuel
growth in the shorter term, but when those condi-
tions are coupled with a buildup in leverage, risks to
growth rise in the medium term. In fact, we propose
to measure financial stability by a measure of Growth

at Risk, defined as the value at risk of future GDP
growth as a function of financial vulnerability.

The analysis in all three chapters underscores that
some of the factors that have contributed to recent
gains in financial stability could put growth at risk in
the medium term in the absence of appropriate policies
to address rising financial vulnerabilities. Macropru-
dential policies, such as those that address underwriting
standards, are the primary tool for guarding against
future risks to growth from the global financial system.
Now is the time to further strengthen that system,
particularly by focusing on nonbank institutions, whose
vulnerabilities are rising. Macroprudential policies that
mitigate the buildup of medium-term risks can also
help to better balance monetary policy tradeoffs.

Whereas vulnerabilities are rising in the nonbank
financial system, the safety of the global systemically
important banks (GSIBs) has improved significantly.
Those banks have more capital and more liquidity and
are subject to tighter supervision, thanks to the pivotal
reforms undertaken after the 2008 global financial
crisis. Yet some GSIBs still struggle to adapt their
business models to ensure their continued health and
profitability, which is critical if they are to fulfill their
primary mandate: lending to the real economy. A
review of the unintended consequences of the postcri-
sis regulatory reforms will likely lead to some stream-
lining in the implementation of banking regulations,
but it is essential that the overall high level of capital
and liquidity be preserved, regulatory uncertainty be
avoided, and the global financial regulatory reform
agenda be completed. Equally essential is continuing
international regulatory cooperation.

Tobias Adrian
Financial Counsellor

International Monetary Fund | October 2017 ix

FOREWORD

x International Monetary Fund | October 2017

Near-Term Risks Are Lower
The global financial system continues to strengthen

in response to extraordinary policy support, regulatory
enhancements, and the cyclical upturn in growth. The
health of banks in many advanced economies contin-
ues to improve, as progress has been made in resolv-
ing some weaker banks, while a majority of systemic
institutions are adjusting business models and restoring
profitability. The upswing in global economic activity,
discussed in the October 2017 World Economic Outlook
(WEO), has boosted market confidence while reducing
near-term threats to financial stability.

But beyond these recent improvements, the environ-
ment of continuing monetary accommodation—neces-
sary to support activity and boost inflation—is also
leading to rising asset valuations and higher leverage.
Financial stability risks are shifting from the bank-
ing system toward nonbank and market sectors of the
financial system. These developments and risks call
for delicately balancing the eventual normalization of
monetary policies, while avoiding a further buildup of
financial risks outside the banking sector and address-
ing remaining legacy problems.

The Two Sides of Monetary Policy
Normalization

The baseline path for the global economy, envisaged
by central banks and financial markets, foresees contin-
ued support from accommodative monetary policies, as
inflation rates are expected to recover only slowly. Thus,
the gradual process of normalizing monetary policies
is likely to take several years. Too fast a pace of nor-
malization would remove needed support for sustained
recovery and desired increases in core inflation across
major economies. Unconventional monetary policies
and quantitative easing have forced substantial portfolio
adjustments in the private sector and across borders,
making the adjustment of financial markets much less
predictable than in previous cycles. Abrupt or ill-timed
shifts could cause unwanted turbulence in financial
markets and reverberate across borders and markets. Yet
the prolonged monetary support envisaged for the major

economies may lead to the buildup of further financial
excesses. As the search for yield intensifies, vulnerabilities
are shifting to the nonbank sector, and market risks are
rising. There is too much money chasing too few yield-
ing assets: less than 5 percent ($1.8 trillion) of the cur-
rent stock of global investment-grade fixed-income assets
yields over 4 percent, compared with 80 percent ($15.8
trillion) before the crisis. Asset valuations are becoming
stretched in some markets as investors are pushed out of
their natural risk habitats, and accept higher credit and
liquidity risk to boost returns.

At the same time, indebtedness among the major
global economies is increasing. Leverage in the non-
financial sector is now higher than before the global
financial crisis in the Group of Twenty economies as
a whole. While this has helped facilitate the economic
recovery, it has left the nonfinancial sector more vul-
nerable to changes in interest rates. The rise in leverage
has led to a rise in private sector debt service ratios in
several of the major economies, despite the low level
of interest rates. This is stretching the debt servicing
capacity of weaker borrowers in some countries and
sectors. Debt servicing pressures and debt levels in the
private nonfinancial sector are already high in several
major economies (Australia, Canada, China, Korea),
increasing their sensitivity to tighter financial condi-
tions and weaker economic activity.

The key challenge confronting policymakers is to
ensure that the buildup of financial vulnerabilities is
contained while monetary policy remains supportive
of the global recovery. Otherwise, rising debt loads
and overstretched asset valuations could undermine
market confidence in the future, with repercussions
that could put global growth at risk. This report exam-
ines such a downside scenario, in which a repricing
of risks leads to sharp increases in credit costs, falling
asset prices, and a pullback from emerging markets.
The economic impact of this tightening of global
financial conditions would be significant (about one-
third as severe as the global financial crisis) and more
broad-based (global output would fall 1.7 percent
relative to the WEO baseline with varying cross-coun-
try effects). Monetary normalization would go into

EXECUTIVE SUMMARY

e x e C u t I v e s u M M a r y

International Monetary Fund | October 2017 xi

reverse in the United States and would stall elsewhere.
Emerging market economies would be disproportion-
ately affected, resulting in an estimated $100 billion
reduction in portfolio flows over four quarters. Bank
capital would take the biggest hit where leverage is
highest and where banks are most exposed to the
housing and corporate sectors.

Deleveraging in China: Challenges Ahead
Steady growth in China and financial policy tighten-

ing in recent quarters have eased concerns about a
near-term slowdown and negative spillovers to the
global economy. However, the size, complexity, and
pace of growth in China’s financial system point to
elevated financial stability risks. Banking sector assets,
at 310 percent of GDP, have risen from 240 percent
of GDP at the end of 2012. Furthermore, the grow-
ing use of short-term wholesale funding and “shadow
credit” to firms has increased vulnerabilities at banks.
Authorities face a delicate balance between tightening
financial sector policies and slowing economic growth.
Reducing the growth of shadow credit even modestly
would weigh on the profitability and broader provision
of credit by small and medium-sized banks.

Global Banks’ Health Is Improving
The health of global systemically important banks

(GSIBs) continues to improve. Balance sheets are stron-
ger because of improved capital and liquidity buffers,
amid tighter regulation and heightened market scrutiny.
Considerable progress has been made in addressing
legacy issues and restructuring challenges. At the same
time, while many banks have strengthened their profit-
ability by reorienting business models, several continue
to grapple with legacy issues and business model chal-
lenges. Banks representing about $17 trillion in assets,
or about one-third of the GSIB total, may continue
to generate unsustainable returns, even in 2019. As
problems in even a single GSIB could generate systemic
stress, supervisory actions should remain focused on
business model risks and sustainable profitability. Life
insurers have also been adapting their business strate-
gies in the low-yield environment following the global
financial crisis. They have done this by reducing legacy
exposures, steering the product mix away from high
guaranteed returns, and seeking higher yields in invest-
ment portfolios. Meanwhile, supervisors need to moni-
tor rising exposure to market and credit risks.

Policymakers Must Take Proactive Measures
Policymakers must take advantage of the improving

global outlook and avoid complacency by addressing
rising medium-term vulnerabilities.
• Policymakers and regulators should fully address

crisis legacy problems and require banks and insur-
ance companies to strengthen their balance sheets
in advanced economies. This includes putting a
resolution framework for international banks into
operation, focusing on risks from weak bank busi-
ness models to ensure sustainable profitability, and
finalizing Basel III. Regulatory frameworks for life
insurers should be enhanced to increase reporting
transparency and incentives to build resilience. A
global and coordinated policy response is needed for
resilience to cyberattacks (see Box 1.2).

• Major central banks should ensure a smooth
normalization of monetary policy through well-
communicated plans on unwinding their holdings
of securities and guidance on prospective changes to
policy frameworks. Providing clear paths for policy
changes will help anchor market expectations and
ward off undue market dislocations or volatility.

• Financial authorities should deploy macroprudential
measures, and consider extending the boundary of
such tools, to curb rising leverage and contain grow-
ing risks to stability. For instance, borrower-based
measures should be introduced and/or tightened to
slow fast-growing overvalued segments, and bank
stress tests must assume more stressed asset valua-
tions. Capital requirements should be increased for
banks that are more exposed to vulnerable borrowers
to act as a cushion for already accumulated expo-
sures and incentivize banks to grant new loans to
less risky sectors.

• Regulation of the nonbank financial sector should
be strengthened to limit risk migration and excessive
capital market financing. Transition to risk-based
supervision should be accelerated, and harmonized
regulation of insurance companies—with emphasis
on capital—should be introduced. Tighter micro-
prudential requirements should be implemented in
highly leveraged segments.

• Debt overhangs—especially among the largest
borrowers as potential originators of shocks—must
be addressed. Discouraging further debt buildup
through measures that encourage business invest-
ment and discourage debt financing will help curb
financial risk taking.

xii International Monetary Fund | October 2017

G LO B A L F I N A N C I A L S TA B I L I T Y R E P O R T: I S G R O W T H AT R I S K ?

• Emerging market economies should continue to
take advantage of supportive external conditions
to enhance their resilience, including by continu-
ing to strengthen external positions where needed,
and reduce corporate leverage where it is high. This
would put these economies in a better position to
withstand a reduction in capital inflows as a result
of monetary normalization in advanced economies
or waning global risk appetite. Similarly, frontier
market and low-income-country borrowers should
develop the institutional capacity to deal with risks
from the issuance of marketable securities, including
formulating comprehensive medium-term debt man-
agement strategies. This will enable them to take
advantage of broader financial market development
and access, while containing the associated risks.

• In China, the authorities have taken welcome steps to
address risks in the financial system, but there is still
work to do. Vulnerabilities will be difficult to address
without slower credit growth. Recent policies to
improve the risk management and transparency of the
banking system and reduce the buildup of maturity
and liquidity transformation risks in banks’ shadow
credit activities are essential and must continue. How-
ever, policies should also target balance sheet vulnera-
bilities at weak banks. The government’s commitment
to reducing corporate leverage is welcome and should
remain a priority as part of a broader effort to insulate
the economy against slower credit growth.

• Although significant progress has been made in
developing the postcrisis policy response, progress
remains uneven across the various sectors, with
several design and implementation issues remain-
ing outstanding. Ensuring that the reform mea-
sures are completed and implemented is essential
to minimize the likelihood of another disruptive
crisis. Completing the reform agenda will also allow
policymakers to conduct a comprehensive evalua-
tion of the impact of the reforms and fine-tune the
agreed measures. This will allow them to address
any material unintended effects their cumulative
implementation might have on the provision of key
financial services. This is critical to provide contin-
ued assurance that reforms have delivered on their
objectives and to stave off emerging pressures to roll
back these measures, which would only make the
financial system more vulnerable.

• Finally, implementation of structural reforms and
supportive fiscal policies (as examined in Scenario

Box 1 of the October 2017 World Economic Outlook)
would lift global growth and generate positive eco-
nomic spillovers, reinforcing financial policy efforts.

Household Debt and Economic Growth
Chapter 2 examines the short- and medium-term

implications for economic growth and financial stability
of the past decades’ rise in household debt. The chapter
documents large differences in household debt-to-GDP
ratios across countries but a common increasing trajec-
tory that was moderated but not reversed by the global
financial crisis. In advanced economies, with notable
exceptions, household debt to GDP increased gradu-
ally, from 35 percent in 1980 to about 65 percent in
2016, and has kept growing since the global financial
crisis, albeit more slowly. In emerging market econo-
mies, the same ratio is still much lower, but increased
relatively faster over a shorter period, from 5 percent in
1995 to about 20 percent in 2016. Moreover, the rise
has been largely unabated in recent years. The chapter
finds a trade-off between a short-term boost to growth
from higher household debt and a medium-term risk to
macroeconomic and financial stability that may result
in lower growth, consumption, and employment and a
greater risk of banking crises. This trade-off is stronger
when household debt is higher and can be attenuated
by a combination of good policies, institutions, and
regulations. These include appropriate macroprudential
and financial sector policies, better financial supervision,
less dependence on external financing, flexible exchange
rates, and lower income inequality.

Financial Conditions Can Predict Growth
The global financial crisis showed policymakers

that financial conditions offer valuable information
about risks to future growth and provide a basis for
targeted preemptive action. Chapter 3 develops a new
macroeconomic measure of financial stability by link-
ing financial conditions to the probability distribution
of future GDP growth and applies it to a set of 21
major advanced and emerging market economies. The
chapter shows that changes in financial conditions
shift the whole distribution of future GDP growth.
Wider risk spreads, rising asset price volatility, and
waning global risk appetite are significant predictors
of increased downside risks to growth in the near
term, and higher leverage and credit growth provide

e x e C u t I v e s u M M a r y

International Monetary Fund | October 2017 xiii

relevant signals of such risks in the medium term.
Today’s prevailing low funding costs and financial
market volatility support a sanguine view of risks to
the global economy in the near term. But increasing
leverage signals potential risks down the road, and
a scenario of a rapid decompression in spreads and
volatility could significantly worsen the risk outlook
for global growth. A retrospective real-time analysis

of the global financial crisis shows that forecasting
models augmented with financial conditions would
have assigned a considerably higher likelihood to
the economic contraction that followed than those
based on recent growth alone. This confirms that the
analytical approach developed in the chapter can be a
significant addition to policymakers’ macro-financial
surveillance toolkit.

xiv International Monetary Fund | October 2017

E
xecutive Directors broadly shared the assess-
ment of global economic prospects and
risks. They observed that global activity has
strengthened further and is expected to rise

steadily into next year. The pickup is broad based
across countries, driven by investment and trade. Nev-
ertheless, the recovery is not complete, with medium-
term global growth remaining modest, especially
in advanced economies and fuel exporters. In most
advanced economies, inflation remains subdued amid
weak wage growth, while slow productivity growth and
worsening demographic profiles weigh on medium-
term prospects. Meanwhile, several emerging markets
and developing economies continue to adjust to a
range of factors, including lower commodity revenues.

Directors noted that, while risks are broadly bal-
anced in the near term, medium-term risks remain
skewed to the downside, with rising financial vulnera-
bilities. These include the possibility of a sudden tight-
ening of global financial conditions, a rapid increase in
private sector debt in key emerging market economies,
low bank profitability and pockets of still-elevated non-
performing loan ratios, and policy uncertainty about
financial deregulation. Directors also pointed to risks
associated with inward-looking policies, rising geopo-
litical tensions, and weather-related factors.

Given this landscape, Directors underscored the
continued importance of employing a range of policy
tools, in a comprehensive, consistent, and well-
communicated manner, to secure the recovery and
improve medium-term prospects. They recognized that
major central banks have made every effort to commu-
nicate their monetary normalization policies to markets.
The cyclical upturn in economic activity provides a
window of opportunity to accelerate critical structural
reforms, increase resilience, and promote inclusiveness.

Directors stressed that a cooperative multilateral
framework remains vital for amplifying the mutual
benefits of national policies and minimizing any

cross-border spillovers. Common challenges include
maintaining the rules-based, open trading system;
preserving the resilience of the global financial system;
avoiding competitive races to the bottom in taxation
and financial regulation; and further strengthening the
global financial safety net. Multilateral cooperation is
also essential to tackle various noneconomic challenges,
among which are refugee flows, cyberthreats and, as
most Directors highlighted, mitigating and adapting
to climate change. Concerted effort is also needed to
reduce excess global imbalances, through a recalibra-
tion of policies with a view to achieving their domestic
objectives as well as strengthening prospects for strong,
sustainable, and balanced global growth. In this con-
text, as a few Directors emphasized, the IMF also has a
role to play by continuing to strengthen its multilateral
analysis of external imbalances and exchange rates.

Directors agreed that continued accommodative
monetary policy is still needed in countries with low
core inflation, consistent with central banks’ mandates.
Fiscal policy should gear toward long-term sustain-
ability, avoid procyclicality, and promote inclusive
growth. At the same time, fiscal policy should be as
growth friendly as possible, using space, where avail-
able, to support productivity and growth-enhancing
structural reforms. In many cases, policymakers should
prioritize rebuilding buffers, improving medium-term
debt dynamics, and enhancing resilience. Efforts to
raise potential output should be prioritized based on
country-specific circumstances, including increasing
the supply of labor, upgrading skills and human capi-
tal, investing in infrastructure, and lowering product
and labor market distortions. Social safety nets remain
important to protect those adversely affected by tech-
nological progress and other structural transformation.

Directors noted that income disparities among
countries have narrowed, but inequality has increased
in some economies. They saw a role that well-designed
fiscal policies can play in achieving redistributive

IMF EXECUTIVE BOARD DISCUSSION SUMMARY

The following remarks were made by the Chair at the conclusion of the Executive Board’s discussion of the
Fiscal Monitor, Global Financial Stability Report, and World Economic Outlook on September 21, 2017.

I M F e x e C u t I v e B o a r d d I s C u s s I o n s u M M a r y

International Monetary Fund | October 2017 xv

objectives without necessarily undermining growth and
incentives to work. Directors generally concurred that
there may be scope for strengthening means-testing
of transfers in many countries and for increasing the
progressivity of taxation in some others. Most Direc-
tors noted that any consideration of a universal basic
income would have to be weighed carefully against a
host of country-specific factors—including existing
social safety schemes, financing modalities, fiscal cost,
and social preferences, as well as its impact on incen-
tives to work—which, in the view of many Directors,
raised questions about its attractiveness and practical-
ity. Directors emphasized that improving education
and health care is key to reducing inequality and
enhancing social mobility over time.

Directors underlined the continued need for emerg-
ing market and developing economies to bolster
economic and financial resilience to external shocks,
including through enhanced macroprudential policy
frameworks and exchange rate flexibility. They noted
that a common challenge across these economies is how
to speed up their convergence toward living standards in
advanced economies. While priorities differ across coun-
tries, many need to improve governance, infrastructure,
education, and access to health care. In several countries,
policies should also facilitate greater labor force partici-
pation, reduce barriers to entry into product markets,
and enhance the efficiency of credit allocation.

Directors observed that the global financial system
continues to strengthen, and market confidence has
improved generally. They recognized the substan-
tial progress made in resolving weak banks in many
advanced economies, while a majority of systemic
institutions are adjusting business models and restoring
profitability. However, a prolonged period of monetary
accommodation could lead to further increases in asset
valuations and a buildup of leverage in the nonfi-
nancial sector that could signal higher risks to finan-
cial stability. These developments call for continued
vigilance about household debt ratios and investors’
exposure to market and credit risks. In this context,
Directors stressed the need to calibrate the path of nor-
malization of monetary policies carefully, implement
macro- and microprudential measures as needed, and
address remaining legacy problems.

Directors noted a generally subdued outlook for
commodity prices. They encouraged low-income
developing countries that are commodity export-
ers to continue improving revenue mobilization and
strengthening debt management, while safeguarding
social outlays and capital expenditures. Countries with
more diversified export bases should further strengthen
fiscal positions and foreign exchange buffers. Across all
low-income developing countries, an overarching chal-
lenge is to maintain progress toward their Sustainable
Development Goals.

202

2

APR

GLOBAL
FINANCIAL
STABILITY
REPORT

Shockwaves from the War in Ukraine
Test the Financial System’s Resilience

INTERNATIONAL MONETARY FUND

2022
APR
GLOBAL
FINANCIAL
STABILITY
REPORT

INTERNATIONAL MONETARY FUND

Shockwaves from the War in Ukraine
Test the Financial System’s Resilience

©2022 International Monetary Fund

IMF CSF Creative Solutions Division
Composition: AGS, An RR Donnelley Company

Cataloging-in-Publication Data

IMF Library

Names: International Monetary Fund.
Title: Global financial stability report.
Other titles: GFSR | World economic and financial surveys, 0258-744

0

Description: Washington, DC : International Monetary Fund, 2002- | Semiannual | Some issues also have thematic

titles. | Began with issue for March 2002.
Subjects: LCSH: Capital market—Statistics—Periodicals. | International finance—Forecasting—Periodicals. |

Economic stabilization—Periodicals.
Classification: LCC HG4523.G557

ISBN 979-8-40020-529-3 (Paper)
979-8-40020-559-0 (ePub)
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Disclaimer: The Global Financial Stability Report (GFSR) is a survey by the IMF staff published twice
a year, in the spring and fall. The report draws out the financial ramifications of economic issues high-
lighted in the IMF’s World Economic Outlook (WEO). The report was prepared by IMF staff and has
benefited from comments and suggestions from Executive Directors following their discussion of the
report on April 11, 2022. The views expressed in this publication are those of the IMF staff and do not
necessarily represent the views of the IMF’s Executive Directors or their national authorities.

Recommended citation: International Monetary Fund. 2022. Global Financial Stability Report—Shockwaves
from the War in Ukraine Test the Financial System’s Resilience. Washington, DC, April.

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International Monetary Fund | April 2022 iii

CONTENTS

Assumptions and Conventions vi

Further Information vii

Preface viii

Foreword ix

Executive Summary xi

IMF Executive Board Discussion of the Outlook, April 2022 xv

Chapter 1 The Financial Stability Implications of the War in Ukraine 1
Chapter 1 at a Glance 1
The War in Ukraine Raises Immediate Financial Stability Risks and

Questions about the Longer-Term Impact on Markets 1
Implications of Higher Commodity Prices for Monetary Policy 7
Transmission Channels of the War through Financial Intermediaries and Markets

12

Emerging Markets Have Come under Pressure, with Notable Differences across Countries 2

4

Financial Vulnerabilities Remain Elevated in China amid Ongoing Stress in the

Property Development Sector and COVID-19 Risks 29
Selected Medium-Term Structural Challenges Policymakers Will Need to Confront

30

Policy Recommendations 34
Policy Recommendations to Address Specific Financial Stability Risks 3

5

Box 1.1. Extreme Volatility in Commodities: The Nickel Trading Suspension 3

8

References

40

Chapter 2 The Sovereign-Bank Nexus in Emerging Markets: A Risky Embrace 41
Chapter 2 at a Glance 41
Introduction 41
Sovereign-Bank Interlinkages: Conceptual Framework 4

6

Relevance of the Sovereign-Bank Nexus in Emerging Markets: Some Stylized Facts 47
Deepening of the Sovereign-Bank Nexus during the COVID-19 Pandemic 50
Measuring the Strength of the Sovereign-Bank Nexus 50
Evidence about the Transmission Channels 52
Conclusion and Policy Recommendations 59
Box 2.1. The Drivers of Banks’ Sovereign Debt Exposure in Emerging Markets 62
References 64

Chapter 3 The Rapid Growth of Fintech: Vulnerabilities and Challenges for Financial Stability 65
Chapter 3 at a Glance 65
Introduction 65
Fintechs in Banking: Conceptual Framework and Risks 67
Case Study: Neobanks 68
Case Study: Fintechs in the US Home Mortgage Market 72
Decentralized Finance: Vulnerable Efficiency 7

3

Financial Stability and Policy Issues 81
References 83

G LO B A L F I N A N C I A L S TA B I L I T Y R E P O R T: S H O C K WAV E S F R O M T H E WA R I N U K R A I N E T E S T T H E F I N A N C I A L S Y S T E M ’ S R E S I L I E N C E

iv International Monetary Fund | April 2022

Tables
Table 3.1. Comparison of Decentralized Finance and Traditional Financial Services 75

Figures
Figure 1.1. Russian and Ukrainian Assets Have Come under Heavy Pressure Following the

War in Ukraine 3
Figure 1.2. Impact of the War in Ukraine on Commodities 4
Figure 1.3. Impact of the War in Ukraine on Financial Assets 5
Figure 1.4. Financial Market Volatility Has Picked Up Dramatically 6
Figure 1.5. Global Financial Conditions 6
Figure 1.6. Global Growth-at-Risk 7
Figure 1.7. Drivers of Advanced Economy Bond Yields 8
Figure 1.8. Increase in Advanced Economy Policy Rates

10

Figure 1.9. A Challenging Normalization Process 11
Figure 1.10. Inflation and Interest Rates in Emerging Markets 12
Figure 1.11. Foreign Bank Exposures to Russia and Ukraine

14

Figure 1.12. Over-the-Counter Derivative Exposures of International and Domestic Banks in

Russia, End-2021

15

Figure 1.13. Exposure to Russian Assets by Foreign Nonbank Financial Intermediaries

16

Figure 1.14. Investor Challenges in Russian Security Markets

18

Figure 1.15. Impact from Russia’s Exclusion from Global Benchmark Indices 19
Figure 1.16. Commodity Trading Companies Have Been Exposed to a Spike in Volatility

20

Figure 1.17. Short-Term Dollar Funding Tensions and Market Liquidity 21
Figure 1.18. Corporate Sector amid the War in Ukraine 23
Figure 1.19. Emerging Market Financial Spillovers

25

Figure 1.20. Emerging Market Portfolio Flow Pressures Have Intensified 27
Figure 1.21. Crypto Asset Markets 28
Figure 1.22. Stress in the Chinese Property Development Sector 30
Figure 1.23. Chinese Property Development Spillovers 31
Figure 1.24. The War in Ukraine Tests the Climate Challenge 32
Figure 1.1.1. The Nickel Market Short Squeeze in March 2022 39
Figure 2.1. Developments in Emerging Market Public Debt and Banks’ Sovereign Exposures 42
Figure 2.2. Fiscal Vulnerabilities in Emerging Markets 44
Figure 2.3. Banks’ Exposure to Sovereign Debt in Emerging Markets 45
Figure 2.4. Key Channels of the Sovereign-Bank Adverse Feedback Loop 46
Figure 2.5. Association between Emerging Market Sovereign and Banking Sector

Default Risk 48
Figure 2.6. Sovereign Debt and Banking Crises in a Historical Context:

Emerging Markets versus Advanced Economies 49
Figure 2.7. Sovereign-Bank Nexus in Emerging Markets during the COVID-19 Pandemic 51
Figure 2.8. Transmission of Risks through the Sovereign-Bank Nexus:

Strength of the Main Channels across Emerging Markets 52
Figure 2.9. Sovereign and Bank Default Risk and Tightening of Global Financial

Conditions in Emerging Markets 53
Figure 2.10. Transmission of Sovereign Risk through the Exposure Channel 54
Figure 2.11. The Banking Sector Safety Net in Emerging Market Economies 56
Figure 2.12. The Effects of Sovereign Downgrades on Firms 58
Figure 2.1.1. Bank Holdings of Sovereign Debt 62
Figure 2.1.2. Drivers of Bank Holdings of Sovereign Debt in Emerging Markets 63
Figure 3.1. The Rise of Fintech Firms and Decentralized Finance 66
Figure 3.2. Fintechs in the Core Banking Intermediation Chain 68
Figure 3.3. The Increasing Relevance of Neobanks 69
Figure 3.4. Client Profile of Neobanks 70
Figure 3.5. Credit Risk Profile 71

C o n t e n t s

International Monetary Fund | April 2022 v

Figure 3.6. Margins, Profitability, and Liquidity Profiles of Neobanks 72
Figure 3.7. Fintechs in the US Home Mortgage Market 74
Figure 3.8. Recent Development of DeFi Lending 76
Figure 3.9. Decentralized Finance Market Risks 77
Figure 3.10. Decentralized Finance Liquidity Risks 78
Figure 3.11. Cyberattacks on Decentralized Finance 79
Figure 3.12. Efficiency and Risks of Decentralized Finance

80

Online Boxes and Annexes
Online Box 1.1. Indicator-Based Framework Update
Online Annex 2.1. Data Sources and Sample
Online Annex 2.2. The Role of Nonbank Financial Institutions in the Nexus
Online Annex 2.3. Additional Stylized Fac

ts

Online Annex 2.4. The Drivers of Banks’ Holdings of Sovereign Debt in Emerging Markets
Online Annex 2.5. Measuring the Strength of the Nexus
Online Annex 2.6. Exposure Channel Analysis
Online Annex 2.7. Safety Net Channel Analysis
Online Annex 2.8. The Macroeconomic Channel Analysis
Online Annex 3.1. Case Study on Neobanks
Online Annex 3.2. Case Study: US Mortgage Market
Online Annex 3.3. Risk Analysis on DeFi Lending
Online Annex 3.4. Efficiency Analysis on Financial Institutions and DeFi Platforms

Editor’s Note (May 18, 2022)

This online version of the GFSR has been updated to reflect the following changes to the version
published online on April 13, 2022:

– Chapter 3, Figure 3.11, panel 1 subtitle on page 79: “(Billions of US dollars)” was corrected to
“(Millions of US dollars)”

– Chapter 2, Box 2.1, on page 62: country labels in Figure 2.1.1 were amended and the last three
countries mentioned in the second sentence of the first paragraph were corrected to “China,
Hungary, and Pakistan.”

vi International Monetary Fund | April 2022

ASSUMPTIONS AND CONVENTIONS

The following conventions are used throughout the Global Financial Stability Report (GFSR):

. . . to indicate that data are not available or not applicable;

— to indicate that the figure is zero or less than half the final digit shown or that the item does not exist;

– between years or months (for example, 2021–22 or January–June) to indicate the years or months covered,
including the beginning and ending years or months;

/ between years or months (for example, 2021/22) to indicate a fiscal or financial year.

“Billion” means a thousand million.

“Trillion” means a thousand billion.

“Basis points” refers to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of
1 percentage point).

If no source is listed on tables and figures, data are based on IMF staff estimates or calculations.

Minor discrepancies between sums of constituent figures and totals shown reflect rounding.

As used in this report, the terms “country” and “economy” do not in all cases refer to a territorial entity that is a state
as understood by international law and practice. As used here, the term also covers some territorial entities that are
not states but for which statistical data are maintained on a separate and independent basis.

The boundaries, colors, denominations, and any other information shown on the maps do not imply, on the part
of the International Monetary Fund, any judgment on the legal status of any territory or any endorsement or
acceptance of such boundaries.

International Monetary Fund | April 2022 vii

FURTHER INFORMATION

Corrections and Revisions
The data and analysis appearing in the Global Financial Stability Report are compiled by the IMF staff at the

time of publication. Every effort is made to ensure their timeliness, accuracy, and completeness. When errors are
discovered, corrections and revisions are incorporated into the digital editions available from the IMF website and
on the IMF eLibrary (see below). All substantive changes are listed in the online table of contents.

Print and Digital Editions
Print

Print copies of this Global Financial Stability Report can be ordered from the IMF bookstore at imfbk.st/516157.

Digital

Multiple digital editions of the Global Financial Stability Report, including ePub, enhanced PDF, and HTML,
are available on the IMF eLibrary at www.elibrary.imf.org/APR22GFSR.

Download a free PDF of the report and data sets for each of the charts therein from the IMF website at
www.imf.org/publications/gfsr or scan the QR code below to access the Global Financial Stability Report web page
directly:

Copyright and Reuse
Information on the terms and conditions for reusing the contents of this publication are at www.imf.org/

external/terms.htm.

viii International Monetary Fund | April 2022

PREFACE

The Global Financial Stability Report (GFSR) assesses key vulnerabilities the global financial system is exposed
to. In normal times, the report seeks to play a role in preventing crises by highlighting policies that may mitigate
systemic risks, thereby contributing to global financial stability and the sustained economic growth of the IMF’s
member countries.

The analysis in this report was coordinated by the Monetary and Capital Markets (MCM) Department under
the general direction of Tobias Adrian, Director. The project was directed by Fabio Natalucci, Deputy Director;
Ranjit Singh, Assistant Director; Nassira Abbas, Deputy Division Chief; Antonio Garcia Pascual, Deputy Division
Chief; Evan Papageorgiou, Deputy Division Chief; Mahvash Qureshi, Division Chief; and Jérôme Vandenbussche,
Deputy Division Chief. It benefited from comments and suggestions from the senior staff in the MCM
Department.

Individual contributors to the report were Jose Abad, Sergei Antoshin, Parma Bains, Liumin Chen,
Yingyuan Chen, Fabio Cortes, Reinout De Bock, Andrea Deghi, Mohamed Diaby, Dimitris Drakopoulos, Tor-
sten Ehlers, Salih Fendoglu, Charlotte Gardes-Landolfini, Deepali Gautam, Rohit Goel, Sanjay Hazarika, Frank
Hespeler, Henry Hoyle, Shoko Ikarashi, Tara Iyer, Phakawa Jeasakul, Esti Kemp, Oksana Khadarina, Sheheryar
Malik, Fabiana Melo, Junghwan Mok, Kleopatra Nikolaou, Natalia Novikova, Thomas Piontek, Patrick Schneider,
Nobuyasu Sugimoto, Hamid Reza Tabarraei, Tomohiro Tsuruga, Jeffrey David Williams, Hong Xiao, Yizhi Xu,
Dmitry Yakovlev, Mustafa Yenice, Akihiko Yokoyama, Zhichao Yuan, and Xingmi Zheng. Javier Chang, Monica
Devi, Olga Tamara Maria Lefebvre, and Srujana Sammeta were responsible for word processing.

Gemma Rose Diaz from the Communications Department led the editorial team and managed the report’s
production with editorial assistance from David Einhorn, Harold Medina (and team), Lucy Scott Morales,
Nancy Morrison, Grauel Group, and TalentMEDIA Services.

This issue of the GFSR draws in part on a series of discussions with banks, securities firms, asset management
companies, hedge funds, standard setters, financial consultants, pension funds, trade associations, central banks,
national treasuries, and academic researchers.

This GFSR reflects information available as of April 7, 2022. The report benefited from comments and sugges-
tions from staff in other IMF departments, as well as from Executive Directors following their discussions of the
GFSR on April 11, 2022. However, the analysis and policy considerations are those of the contributing staff and
should not be attributed to the IMF, its Executive Directors, or their national authorities.

International Monetary Fund | April 2022 ix

FOREWORD

T
he backdrop of this Global Financial
Stability Report is a challenging one. Rising
risks to the inflation outlook and rapidly
changing views about the likely pace of

monetary policy tightening have been dominant
themes affecting financial stability. Juxtaposed against
financial stability risks is the Russian invasion of
Ukraine, which will exert a material drag on the
global recovery and pose significant uncertainties to
the outlook. The balance of risks to growth has tilted
more firmly to the downside as outlined in the April
2022 World Economic Outlook. These developments
have occurred just as the world is slowly bringing the
pandemic under control and as the global economy
continues to recover from COVID-19.

The sharp rise in commodity prices—in concert
with more prolonged supply disruptions—have
exacerbated preexisting inflation pressures and led to a
significant rise in inflation expectations. Central banks
face heightened challenges in credibly bringing infla-
tion to target while safeguarding economic recovery.
They will have to navigate a delicate balancing act
between removing accommodation at a pace that
prevents an unmooring of inflation expectations while
avoiding a disorderly tightening of financial condi-
tions that could interact with financial vulnerabilities
and weigh on growth.

Financial stability risks have risen along several
dimensions and the resilience of the global financial
system may be tested. A sudden repricing of risk from
an intensification of the war may expose, and interact
with, some of the vulnerabilities built up during the
pandemic, and lead to a sharp decline in asset prices.
Potential transmission channels of the war in Ukraine
on global financial markets include inflation pressure
from commodity price shocks, direct and indirect
exposures of banks and nonbank financial intermedi-
aries and firms, disruptions in commodity markets,
counterparty risk exposures, poor market liquidity
and funding strains, and cyberattacks affecting the
resilience of financial market utilities and broader
market functioning. While the financial system has

proven resilient to recent shocks, future shocks could
be more harmful.

Emerging and frontier markets are facing tighter
external financial conditions on the back of mon-
etary policy normalization and heightened geopoliti-
cal uncertainty, which is increasing downside risks
for portfolio flows. Emerging market sovereigns
have become more reliant on domestic banks for
funding, and bank holdings of domestic sovereign
debt have surged to historic highs. Distress in
emerging markets could trigger an adverse feed-
back loop between sovereigns and banks through
multiple channels—the sovereign-bank nexus—
potentially reducing bank soundness and lending
to the economy. In China, the ongoing stress in the
real estate sector and the increase in COVID cases
has raised concerns about a growth slowdown, with
potential feedback effects and possible spillovers to
other emerging markets.

Policymakers will need to confront these chal-
lenges by taking decisive actions to address finan-
cial vulnerabilities and rein in rising inflation. To
manage the delicate balance between containing
inflation and supporting the recovery from the pan-
demic, interest rates might have to rise beyond what
is currently priced in markets to get inflation back
to target in a timely manner. For many countries,
this may entail pushing interest rates well above
their neutral level.

While taking relevant steps to address energy
security concerns, policymakers should intensify
their efforts to implement the COP26 roadmap.
Although notable progress has been made to
strengthen the climate information architecture
in terms of disclosure standards and bridging data
gaps, focused policies aimed at scaling up private
finance in the transition to a greener economy
remain a major imperative.

The war in Ukraine has also brought to the
fore a number of medium-term structural issues
policymakers will need to confront in coming years.
The geopolitics of energy security may put climate

G LO B A L F I N A N C I A L S TA B I L I T Y R E P O R T: S H O C K WAV E S F R O M T H E WA R I N U K R A I N E T E S T T H E F I N A N C I A L S Y S T E M ’ S R E S I L I E N C E

x International Monetary Fund | April 2022

transition at risk. Capital markets might become
more fragmented, with possible implications for
the role of the US dollar. And the fragmentation of
payment systems could be associated with the rise
of central bank digital currency blocs. In addition,
more widespread use of crypto assets in emerging

markets could undermine domestic policy objectives.
Multilateral cooperation will remain key to overcome
these medium-term challenges.

Tobias Adrian
Financial Counsellor

International Monetary Fund | April 2022 xi

EXECUTIVE SUMMARY

G
lobal financial conditions have tightened nota-
bly and downside risks to the economic outlook
have increased as a result of the war in Ukraine
(Figure 1). The tightening has been particularly

pronounced in eastern Europe and Middle East countries with
close ties to Russia, reflecting lower equity valuations and
higher funding costs. This has occurred just as most of the
world was slowly bringing the pandemic under control and the
global economy was recovering from COVID-19.

Financial stability risks have risen on several fronts, even
though so far, no global systemic event affecting financial
institutions or markets has materialized. A sudden repricing of
risk resulting from an intensification of the war and associated
escalation of sanctions may expose, and interact with, some of
the vulnerabilities built up during the pandemic, leading to a
sharp decline in asset prices.

With the sharp rise in commodity prices anticipated to
add to preexisting inflation pressure, central banks are faced
with a challenging trade-off between fighting record-high
inflation and safeguarding the post-pandemic recovery at a
time of heightened uncertainty about prospects for the global
economy (Figure 2). Bringing inflation back down to target
and preventing an unmooring of inflation expectations require
a delicate act in removing accommodation while preventing a
disorderly tightening of financial conditions that could interact
with financial vulnerabilities and weigh on growth. Incoming
inflation data suggest that more decisive tightening of mon-
etary policy is necessary in many countries

After rising early in the year on concerns about the inflation
outlook, advanced economy nominal bond yields have increased
further since the invasion, amid heightened volatility of rates
(Figure 3). Inflation break-evens (a market-implied proxy for
future inflation) have risen significantly on the back of sharply
higher commodity prices.

Repercussions of the Russian invasion of Ukraine and ensu-
ing sanctions continue to reverberate globally and will test
the resilience of the financial system through various potential
amplification channels, including direct and indirect exposures
of banks and nonbanks; market disruptions in commodity
markets and increased counterparty risk; poor market liquidity
and funding strains; acceleration of cryptoization in emerging
markets; and possible cyber-related events.

The war has already had an impact on financial interme-
diaries, nonfinancial firms, and markets directly or indirectly
exposed to Russia and Ukraine. Europe bears a higher risk than
other regions due to its proximity, reliance on Russia for energy

United States
Euro area
China
Europe, Middle East, and Africa
excluding Russia and Ukraine

Figure 1. Financial Conditions in Selected Regions
(Standard deviations from the mean)

–3

–2

–1

0
1
2
3
4
5

6
October

2021
GFSR

Tightening

2006 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

Source: IMF staff calculations.
Note: GFSR = Global Financial Stability Report.

Figure 2. Near-Term Growth Forecast Densities
(Probability density)

Sources: Bloomberg Finance L.P.; and IMF staff calculations.

0.00

0.10

0.05

0.15

0.20

0.25

0.30

0.

35

0.40

0.45

–4 –2 0 42
Global growth rate (percent)

6 8

Density for
year 2022:
at 2021:Q3

Unconditional density

Fifth percentiles

Density for
year 2022:
at 2022:Q1

Change in real yields Change in breakevens
Change in nominal yields

Figure 3. Year-to-Date Change in Yields
(Percentage points)

0.5

2.0

0.0

0.5

1.0

1.5

US Euro area AustraliaUK Japan Canada

10
y

ea
r

5

ye

ar
5y

r5
yr

10
y
ea
r
5
ye
ar
5y
r5
yr
10
y
ea
r
5
ye
ar
5y
r5
yr
10
y
ea
r
5
ye
ar
5y
r5
yr
10
y
ea
r
5
ye
ar
5y
r5
yr
10
y
ea
r
5
ye
ar
5y
r5
yr

Sources: Bloomberg Finance L.P.; and IMF staff calculations.
Note: 5yr5yr (5-year, 5-year forward) corresponds to a five-year period that begins
five years from the current date.

G LO B A L F I N A N C I A L S TA B I L I T Y R E P O R T: S H O C K WAV E S F R O M T H E WA R I N U K R A I N E T E S T T H E F I N A N C I A L S Y S T E M ’ S R E S I L I E N C E

xii International Monetary Fund | April 2022

needs, and the non-negligible exposure of some banks and other
financial institutions to Russian financial assets and markets.

Banks’ direct exposures to Russia are relatively small except
for some non-systemic European banks (Figure 4). Banks’
indirect exposures are more difficult to identify and assess
because they are less well known (especially the extent of
interconnectedness) as it is difficult to quantify them in the
absence of detailed and consistent disclosures by country or by
specific activity types. The risk is that indirect exposures could
be meaningful and surprise investors once revealed, leading to
a sharp rise in counterparty risk and risk premia. Foreign non-
bank financial intermediaries (NBFIs) have sizable investments
in Russian assets, with US and European investment funds
accounting for most of the exposures. As a share of total assets,
however, their exposure to Russia is small.

Dedicated emerging market funds have maintained a cautious
stance on their exposures to Russian debt since the Crimea
occupation in 2014, reducing their share of Russian debt from
more than 10 percent before 2014 to just over 4 percent in
2022. Funds benchmarked to global indices have had a much
smaller exposure to Russia, with an average 0.2 percent of their
assets invested in Russian debt in 2022.

Severe disruptions in commodity markets and supply chains
across the globe have caused extreme volatility in commodity
prices, amplified by pressures in commodity trade finance and
derivatives markets (Figure 5). Dealer banks play a crucial role
and have significant exposures in these markets, including by
providing liquidity and credit to a small group of large energy
trading firms that operate globally, are largely unregulated, and
are mostly privately owned. Pressures in commodity markets,
often magnified by poor liquidity, have led to lower risk appetite
and rising counterparty risk concerns, with implications for
funding conditions.

Emerging and frontier markets are facing tighter financial
conditions and higher risks of capital outflows. Since the
war in Ukraine began, emerging market (EM) hard currency
yields have increased at a rapid pace, akin to earlier episodes of
emerging market stress, before retracing some in mid-March
(Figure 6). The number of issuers trading at distressed levels
has surged to nearly 25 percent of issuers (Figure 7), surpassing
pandemic-peak levels. The deterioration in spreads, combined
with the increase in US yields, has pushed financing costs well
above their pre-pandemic levels for many borrowers. Markets
remain open for issuance at those higher levels of funding costs.
Flows in local currency bonds and equities have come under
pressure, experiencing the largest weekly redemptions since
March 2020. Tighter external financial conditions on the back
of US monetary policy normalization and heightened geopo-
litical uncertainty are likely to increase the downside risks for
portfolio flows (Figure 8).

International claims: Russia
Local claims: Russia
Total: Russia
International claims: Ukraine
Local claims: Ukraine
Total: Ukraine

Figure 4. Foreign Banks’ Gross Claims on Russia and Ukraine
(Billions of US dollars)

Sources: Bank for International Settlements Consolidated Banking Statistics; and
IMF staff calculations.
Note: Data labels use International Organization for Standardization (ISO) country
codes.

0

140

20
40

60

80

100

120

0
35
5
10
15
20
25
30

Total FRA ITA AUT USA JPN DEU NLD CHE GBR KOR

Right scale

Left scale

Weekly percent change

Figure 5. Commodity Price Changes, 1962–2022
(Percent)

15

15

–1

0

–5

0
5

10

Sources: Bloomberg Finance L.P.; and IMF staff calculations.

Ja
n.

1
96

2
Ja
n.

6
6

Ja
n.

7
0

Ja
n.

7
4

Ja
n.

7
8

Ja
n.

8
2

Ja
n.

8
6

Ja
n.

9
0

Ja
n.

9
4

Ja
n.

9
8

Ja
n.

2
00

2
Ja
n.

0
6

Ja
n.

1
0

Ja
n.

1
4

Ja
n.

1
8

Ja
n.

2
2

Median EM
75th percentile of EM index
High yield (sub-investment grade)

Figure 6. Emerging Market Hard Currency Yields
(Percent)

2.5

12.5

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

11.5

Jan.
2016

July
16

Jan.
17

July
17

Jan.
18

July
18

Jan.
19

July
19

Jan.
20

July
20

Jan.
21

July
21

Jan.
22

Sources: Bloomberg Finance L.P.; and IMF staff estimates.
Note: EM = emerging market; HY = high-yield. Yields based on JPMorgan
Emerging Market Bond Index.

e X e C U t I V e s U M M A R Y

International Monetary Fund | April 2022 xiii

In China, the recent equity sell-off, particularly in the tech
sector, and the increase in COVID-19 cases have raised concerns
about a growth slowdown, with possible spillovers to emerg-
ing markets. Ongoing stress in the battered real estate sector has
increased financial stability risks and added to growth pressures.
Extraordinary financial support measures may be necessary to ease
pandemic-driven balance sheet pressures but would add further to
medium-term debt vulnerabilities.

The interlinkages between emerging market sovereigns and
domestic banks have intensified over the past two years as
additional government financing needs to cushion the impact of
the pandemic have been mostly met by banks (see Chapter 2).
As a result, bank holdings of domestic sovereign debt surged to
historic highs in 2021 (Figure 9). Distress in emerging markets
could trigger an adverse feedback loop between sovereigns and
banks through multiple channels—the so-called sovereign-bank
nexus—potentially reducing bank soundness and lending to the
economy.

The war in Ukraine has brought to the fore a number of
medium-term structural issues policymakers will need to con-
front in coming years, including the possibility that the geopoli-
tics of energy security may put climate transition at risk; the risk
of fragmentation of capital markets and possible implications for
the role of the US dollar; the risk of fragmentation in payment
systems and the creation of blocs of central bank digital curren-
cies; more widespread use of crypto assets in emerging markets;
and more complex and bespoke asset allocations in an effort to
preempt the possible imposition of sanctions.

The war has made evident the urgency to cut dependency
on carbon-intensive energy and to accelerate the transition to
renewables. However, in the face of growing concerns about
energy security and access to energy sources (Figure 10), the
energy transition strategy may face setbacks for some time. The
current energy crisis may alter the speed of phasing out fossil
fuel subsidies in emerging market and developing economies,
while rising inflation pressure may also lead authorities to
resort to subsidies or other forms of fiscal support to households
or firms.

Crypto asset trading volumes against some emerging market
currencies have spiked following the introduction of sanctions
against Russia and the use of capital restrictions in Russia and
Ukraine. This is occurring against a longer-term increase in such
cross-border transactions, bringing to the fore the challenges of
applying capital flow measures and sanctions.

While technological innovation in financial activities (fintech)
can support inclusive growth by strengthening competition,
financial development, and inclusion (Chapter 3), the rapid
growth of risky business segments can be a cause of concern for
financial stability when fintech firms (fintechs) are subject to less
stringent regulation (Figure 11).

Figure 9. Bank-Sovereign Debt Exposure, 2005–21
(Percent)

0
20
2
4
6
8
10
12
14
18
16

Sources: IMF, Monetary and Financial Statistics; and IMF staff calculations.
Note: See Figure 2.1, panel 2 of Chapter 2 for more information. AEs = advanced
economies; EMs = emerging markets.

2005–09 2010–14 2015–19 2020 2021

Pe
rc

en
t o

f b
an

ki
ng

s
ec

to
r

as
se

ts

AEs EMs

Share Distressed EMs (spread >1,000 bps)

Figure 7. Distressed Sovereign Hard Currency Issuers
(Number of sovereigns with spreads above 1,000 basis points;
share of total)

0
40
5
10
15
20
25
30
35
2006 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

Sources: JPMorgan Chase & Co.; and IMF staff calculations.
Note: bps = basis points; EMs = emerging markets.

Hard currency bonds

Equities (China)
Local currency bonds

Equities (EMs excluding China)
EMs excluding Chinese equities

Figure 8. Fund Flows to Emerging Markets
(Billions of US dollars, two-week moving sum)

–10

20

–5

0
5
10
15
Ja
n.

2
02

1

Fe
b.

2
1

M
ar

. 2
1

Ap
r.

2
1

M
ay

2
1

Ju
ne

2
1

Ju
ly

2
1

Au
g.

2
1

Se
p.

2
1

O
ct

. 2
1

N
ov

. 2
1

D
ec

. 2
1
Ja
n.
2
2
M
ar

. 2
2

Fe
b.
2
2

Sources: EPFR; and IMF staff calculations.
Note: EMs = emerging markets.

G LO B A L F I N A N C I A L S TA B I L I T Y R E P O R T: S H O C K WAV E S F R O M T H E WA R I N U K R A I N E T E S T T H E F I N A N C I A L S Y S T E M ’ S R E S I L I E N C E

xiv International Monetary Fund | April 2022

Policy Recommendations
Central banks should act decisively to prevent inflation

pressure from becoming entrenched and avoid an unmoor-
ing of inflation expectations. To avoid unnecessary volatility in
financial markets, it is crucial that central banks in advanced
economies provide clear guidance about the normalization pro-
cess while remaining data dependent.

Emerging markets remain vulnerable to a disorderly tighten-
ing of global financial conditions. Many central banks have
already significantly tightened policy. Further rate increases,
or policy normalization with respect to other measures taken
during the pandemic (such as asset purchases), should con-
tinue as warranted according to the country-specific inflation
and economic outlook to anchor inflation expectations and
preserve policy credibility.

Policymakers should tighten selected macroprudential tools
to tackle pockets of elevated vulnerabilities while avoiding a
disorderly tightening of financial conditions. Striking a balance
between containing the buildup of vulnerabilities and avoiding
procyclicality appears important given uncertainties about the
economic outlook, the ongoing monetary policy normaliza-
tion process, and limits on fiscal space in the aftermath of
the pandemic.

While taking steps to address energy security concerns,
policymakers should intensify their efforts to implement the
2021 United Nations Climate Change Conference (COP26) road
map to achieve net-zero targets. They should take measures to
increase the availability and lower the cost of fossil fuel alterna-
tives and renewables while improving energy efficiency; scale up
private finance in the transition to a greener economy; and con-
tinue to strengthen the climate finance information architecture.

Policymakers should develop comprehensive global standards
for crypto assets along the activity and risk spectrum. A more
robust oversight of fintech firms and decentralized finance (DeFi)
platforms is needed to take advantage of their benefits while
mitigating their risks. To preserve the effectiveness of capital flow
management measures in an environment of growing usage of
crypto assets, policymakers need to pursue a multifaceted policy
strategy. Recent measures taken in markets and exchanges in
response to elevated volatility in commodity prices highlight the
need for regulators to examine the broader implications, including
exchange governance mechanisms, resiliency of trading systems,
concentration of risk, margin setting, and trading transparency in
exchange and over-the-counter markets.

Share in production
Price change between February 23 and March 23, 2022 (right scale)

Figure 10. Russia’s Share in Global Production
(Percent)

0
18
2
4
6
8
10
12
14
16
–10
–5
0
5
10
15
20
25
30
35
40

Aluminum Copper Nickel CoalPlatinum Oil Gas

Sources: US Geological Survey, National Minerals Information Center; and IMF
staff calculations.

Stablecoins (others, left scale)
Stablecoins (USDC, left scale)
Stablecoins (USDT, left scale)
Stablecoins total (left scale)
DeFi total (right scale)

Figure 11. Value of DeFi Assets and Stablecoins
(Billions of US dollars)

0

180

20
40
60
80
100
120
140

160

0
120
20
40
60
80
100

Sources: CoinGecko; DeFi Pulse; and IMF staff calculations.
Note: DeFi = decentralized finance; USDC = USD Coin; USDT = USD Tether.

Ja
n.
2
02
0
M
ar

.

2
0

M
ay
2
0
Ju
ly
2
0
Se
p.
2
0
N
ov

. 2
0

Ja
n.
2
1
M
ar
. 2
1
M
ay
2
1
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ly
2
1
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p.
2
1
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ov
. 2
1
Ja
n.
2
2

International Monetary Fund | April 2022 xv

IMF EXECUTIVE BOARD DISCUSSION OF THE OUTLOOK,
APRIL 2022

E
xecutive Directors broadly agreed with staff’s
assessment of the global economic outlook,
risks, and policy priorities. They noted
that the war in Ukraine has led to a costly

humanitarian crisis, with economic and financial
repercussions and spillovers—through commodity mar-
kets, confidence, trade, and financial channels—that
have prompted a downgrade to the global economic
outlook and increased inflationary pressures at a time
when the global economy has not yet recovered from
the COVID-19 crisis. Directors concurred that the
sharp increase in uncertainty could make economic
projections especially volatile. They agreed that emerg-
ing risks—from an intensification of the war, further
sanctions on Russia, fragmentation in financial and
trade markets, and a sharper-than-expected slowdown
in China due to COVID-19 outbreaks—on top of
the continued risk of new, more virulent COVID-19
strains have further tilted the balance of risks to the
downside. Moreover, Directors noted that the war in
Ukraine has increased the likelihood of food short-
ages and wider social tensions given higher food and
energy prices, which would further adversely impact
the outlook.

Against this backdrop, Directors agreed that policy
priorities differ across countries, reflecting local
circumstances and differences in trade and financial
exposures. Directors emphasized that the layering of
strains—slowing economic growth, persistent and
rising inflation pressures, increased food and energy
insecurity, continued supply chain disruptions, and
COVID-19 flare-ups—further complicates national
policy choices, particularly for countries where policy
space shrank after the necessary response to the
COVID-19 pandemic. At the global level, Directors
stressed that multilateral cooperation and dialogue
remain essential to defuse geopolitical tensions and
avoid fragmentation, end the pandemic, and respond

to the myriad challenges facing our interconnected
world, particularly climate change.

Directors concurred that, in many countries, fiscal
policy is operating in a highly uncertain environ-
ment of elevated inflation, slowdown in growth, high
debt, and tightening borrowing conditions. While
acknowledging that fiscal policy has a role to play in
moments of large adverse shocks, Directors considered
that, particularly for countries with tighter budget
constraints, fiscal support should focus on priority
areas and target the most vulnerable. They emphasized
that, in countries where economic growth is strong and
where inflation is elevated, fiscal policy should phase
out pandemic-related exceptional support, moving
toward normalization. Directors acknowledged that
many emerging markets and low-income countries face
difficult choices given limited fiscal space and higher
demands on governments due to energy disruptions
and the pressing need to ensure food security. In this
context, they underscored that a sound and credible
medium-term fiscal framework, including spending
prioritization and measures to raise revenues, can help
manage urgent needs while ensuring debt sustain-
ability. Directors stressed that short-term measures
to mitigate high food and energy prices should not
undermine actions to ensure greater resilience through
investment in health, food, and cleaner energy sources.

Directors concurred that monetary authorities
should act decisively to prevent inflationary pressures
from becoming entrenched and avoid a de-anchoring
of inflation expectations. They noted that central banks
in many advanced and emerging market economies
need to continue tightening the monetary policy stance
to bring inflation credibly back to target and preserve
hard-built policy credibility. Directors stressed that
transparent, data-driven, and clearly communicated
monetary policy is critical to avoid financial insta-
bility. They considered that, should global financial

The following remarks were made by the Chair at the conclusion of the Executive Board’s discussion of the
Fiscal Monitor, Global Financial Stability Report, and World Economic Outlook on April 11, 2022.

G LO B A L F I N A N C I A L S TA B I L I T Y R E P O R T: S H O C K WAV E S F R O M T H E WA R I N U K R A I N E T E S T T H E F I N A N C I A L S Y S T E M ’ S R E S I L I E N C E

xvi International Monetary Fund | April 2022

conditions tighten suddenly, emerging and developing
economies could face capital outflows and should
be ready to use all available tools, including foreign
exchange interventions and capital flow management
measures, when needed and in line with the Fund’s
Institutional View on the Liberalization and Manage-
ment of Capital Flows and without substituting for
exchange rate flexibility and warranted macroeconomic
adjustments.

Directors agreed that the war in Ukraine will test
the resiliency of the financial system. They noted that,
although no systemic event has materialized so far,
financial stability risks have risen along many dimen-
sions while global financial conditions have tightened
significantly. Directors concurred that, in those emerg-
ing markets where the sovereign-bank nexus could pose
vulnerabilities, it should be closely monitored. They
also noted risks of fragmentation of capital markets
and payment systems, the creation of blocks of central
bank digital currencies, a more widespread use of
crypto assets, and more frequent cyberattacks. Direc-
tors recommended tightening selected macroprudential
tools to tackle pockets of elevated vulnerabilities while
avoiding procyclicality and a disorderly tightening of
financial conditions. They also called for comprehen-
sive global standards and a multifaceted strategy for
crypto assets and for a more robust oversight of fintech
firms and decentralized finance platforms.

Directors agreed that strong multilateral coopera-
tion is essential to respond to existing and unfold-
ing humanitarian crises, safeguard global liquidity,

manage debt distress, ensure food security, mitigate
and adapt to climate change, and end the pandemic.
Noting that many countries are coping with higher
volatility, increased spending from the pandemic and
humanitarian crises, and tightening financial condi-
tions, Directors called on the Fund and other multi-
lateral institutions to stand ready to provide financial
support. At the same time, they noted that prompt
and orderly debt restructuring, particularly by improv-
ing the G20 Common Framework, will be necessary in
cases where liquidity support is insufficient. Directors
noted that increasingly dire climate change develop-
ments heighten the urgency for tangibly advancing
the green economic transformation. They stressed the
importance of intensifying efforts to implement the
COP26 roadmap together with appropriate measures
to address energy security concerns. Directors con-
sidered that international cooperation in corporate
taxation and carbon pricing could also help mobilize
resources to promote the necessary investments and
reduce inequality. As the pandemic persists, Directors
underscored that prompt, equitable, and wider access
to vaccinations, testing, and treatments remains a key
priority. They also reiterated that measures to address
the scars from the pandemic remain crucial to boost
long-term prospects and create a more resilient and
inclusive global economy. Above all, Directors called
for a peaceful resolution of the war in Ukraine, an end
to the resulting humanitarian crisis, and a return to the
rules-based international order that helped lift millions
out of poverty over the past decades.

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