In its latest Global Financial Stability Report, the IMF analyses the effects of central bank policies on banks and financial stability since the global crisis.
Central banks have taken bold policy actions that have reduced banking sector vulnerabilities and stabilised some markets, such as the interbank and mortgage securities markets. But the policies may have undesirable side-effects that could put financial stability at risk the longer they are in place.
The IMF said so far these risks are not showing up much in banks, but could be shifting to other parts of the financial sector, such as to so-called “shadow banks”. There is also some concern that the prolonged period of low interest rates is encouraging banks to roll over non-performing loans rather than repairing their balance sheets.
“So far, so good, but if the time that central banks have provided through their unconventional policies is not used productively by financial institutions and their regulators, at some point we can expect another round of financial distress”, said Laura Kodres, chief of global stability analysis in the IMF’s Monetary and Capital Markets Department and the head of the team that produced the analysis.
The report says that central bank policies should continue to support the economy and financial stability until the recovery is well established.
The IMF said policymakers need to be vigilant and assess the emergence of potential and emerging financial stability threats. They also should use targeted policies designed to foster bank balance-sheet repair and reduce their vulnerability to market disruptions. By reducing the risks in the financial sector, micro- and macro-prudential policies will allow greater leeway for monetary policy to support the economy.
The report identifies specific measures that could prove helpful to contain credit risk and funding challenges for banks, such as robust capital requirements, improved liquidity requirements, and well-designed dynamic forward-looking provisioning. Because the experience with some macro-prudential tools is still relatively limited, the IMF recommends that policymakers closely monitor the effectiveness of their policies and stand ready to adjust them as needed. Coordination with other economic policies, such as monetary and fiscal policy, will also help reduce the reliance on macro-prudential tools.
To minimise adverse effects on market sentiment, the IMF points out that it is important that central banks communicate clearly about their strategies to exit from their extraordinary policy measures, ahead of their implementation.
Full report
© International Monetary Fund
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