A report from International Monetary Fund (IMF) has
cautioned that the weakening global financial crisis could enter a "more chronic
phase"if policymakers slip up in taking initiatives such as restructuring weak
banks.
The
report captioned ‘Global Financial Stability Report (GFSR): Old Risks, New
Challenges' says: "Risks to financial stability have declined since the
October 2012 GFSR, providing support to the economy and prompting a rally in
risk assets. These favorable conditions reflect a combination of deeper policy
commitments, renewed monetary stimulus, and continued liquidity
support."
The
report, however, notes: "Continued improvement will require further balance
sheet repair in the financial sector and a smooth unwinding of public and
private debt overhangs. If progress in addressing these medium-term challenges
falters, risks could reappear. The global financial crisis could morph into a
more chronic phase, marked by a deterioration of financial conditions and
recurring bouts of financial instability."
It
has thus proposed that policymakers must therefore take decisive action to
restructure weak banks and encourage the build-up of the new capital and
liquidity buffers as part of the implementation of Basel III rules on an
internationally consistent basis.
It
affirms: "What is needed now is a renewed political commitment at the global
and national levels to complete the reform agenda. This commitment is critical
to minimize regulatory uncertainty and arbitrage, and to reduce financial
fragmentation."
In
the euro area, acute near-term stability risks have been reduced significantly.
Funding conditions in the markets for sovereign, bank, and corporate debt have
improved. Despite this notable progress, many banks in the euro area periphery
remain challenged by elevated funding costs, deteriorating asset quality, and
weak profits.
As
typically occurs after a sustained period of strong credit growth, some asset
quality deterioration has begun to appear, even as nonperforming loan rates
remain low on a historical basis. Some major emerging market economies,
including Brazil, India, and Mexico, have seen upturns in delinquency rates for
certain types of loans. While many countries have been active in adopting more
stringent impaired loan recognition standards, there are concerns about asset
restructuring practices and lax definition of distressed assets in some cases.
The resulting risk of underestimating true asset quality problems appears
particularly relevant in China and India.
Based
on the recent Financial System Stability Assessment (FSSA) for Brazil, some
segments of the household sector may already be under stress, the report says.
Similarly for India, FSSA findings suggest that rapid credit growth and a
slower economy will likely put pressure on banks' asset quality, it adds.
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