Ever Evolving Financial Stability Monitoring

In a world which is as globally connected and interdependent as the one we live in today, it is imperative to monitor the health and outlook of the global economy and all member nations in order to maintain global economic stability and security. Because of this imperative importance of financial stability monitoring it has become one of the core functions of the International Monetary Fund. Today, the IMF’s Global Financial Stability Report, which was first released twenty years ago to strengthen the surveillance of global financial markets, has become one of the most important publications in this regard. This semiannual publication by the Monetary and Capital Markets Department has evolved through years of seismic shifts in the global economic and financial landscape into one of our key multilateral surveillance tools. Along with the World Economic Outlook and the Fiscal Monitor, this flagship report aims to foster international monetary and financial stability.

The Beginning

Monitoring the health and outlook of the global economy and member countries is one of the core aspects of the IMF’s work. This surveillance role, charges the IMF with overseeing and safeguarding the international monetary system.

In the early years, surveillance mainly focused on macroeconomic and exchange-rate policies of member nations, but growth in international banking in the early 1970s brought to light a need to better track global capital markets and assess financial-stability implications. Consequently, the IMF started discussions with monetary authorities in major financial centres and in 1974 initiated internal reports on market developments and prospects

From 1980, the report titled International Capital Markets  became the IMF’s main source to monitor and analyse conditions in financial markets, identify risks and issue advance warnings and study economic disruptions all over the world. However the meteoric expansion speed during that era and the financial crisis emanating from this in Asia and various other developing economies shed light on the need for better assessment of systemic risks. 

The introduction of the Global Financial Stability Report by the IMF was a crucial step towards developing a more comprehensive and frequent assessment of cross-border flows and financial market risks. 

The Turning Point

The Global Financial Stability Report has, since its introduction, focused on recognizing cyclical and structural vulnerabilities in the bank and nonbank sectors of all economies, the risks they bring and the policy options that can be employed to avoid these risks. These vulnerabilities tend to accumulate and grow when financial conditions are easy and investor risk appetite is strong. In such times the GFSR places more emphasis on potential threats in the making. 

One of the most vital moments that highlighted the importance of better connecting the dots between institutions, sectors and countries in this tightly integrated world was the 2007 US housing crisis which impacted economies all over the globe. Since then, the IMF has increased its efforts to analyse and understand interlinkages and systemic risks, cross border interconnections and spillovers and the role of macroprudential policies in strengthening the resilience of the financial sector. 

In recent years, the IMF has adopted a conceptual framework for more systematic assessment and monitoring of financial stability risks and vulnerabilities. The empirical application of this framework relies on two major tools, firstly, a wide array of key vulnerability indicators for the financial and real sectors, such as debt-servicing capacity and liquid assets to short term liabilities ratio, which can act as intermediate targets for macroprudential policies and secondly an aggregate measure of how financial stability risks could affect expected global economic activity which the IMF calls “Growth at Risk”. These tools work together for monitoring and policymaking purposes as singular level analysis of specific exposures yields the necessary details and depth to the aggregate measure of threats to economic growth.

Current Situation

Although the IMF has made  progress in financial stability monitoring, the continuous evolution of global markets with rapid technological innovation and application, regularly introduces new vulnerabilities and risks. This continuous process demands constant vigilance. Emerging technologies such as artificial intelligence and blockchain are revolutionizing the financial markets through fintech and crypto assets that carry opportunities but also come with their share of fundamental risks that the GFSR is constantly identifying. Climate change poses another stability threat that the IMF is increasingly analyzing, along with the role that sustainable finance and the private sector can play in fostering a green transition.

The IMF is working constantly at identifying and analyzing new risks and developments like the pandemic and the Russia-Ukraine war which, as highlighted in their recent reports, have further compounded financial risks by putting pressure on pre-existing failures, creating intensive inflationary pressures globally and introducing the risk of fragmentation to the global capital markets. 

Thus the rapid economic and technological development and varied shocks have, more than ever, made it clear the need for constant vigilance and surveillance for safeguarding international monetary and financial stability. It has become evidently clear the need to constantly adapt and sharpen our tools for assessing risk to better analyze the global financial landscape and strengthen its resilience.