Transcript

Transcript of April 2021 Global Financial Stability Report Press Conference

April 6, 2021

Ms. Elnagar:

Good morning and welcome to the press briefing of the Global Financial Stability Report. I am Randa Elnagar of the IMF's Communications Department. Let me start by introducing our panelists here. We have with us, from the IMF’s Monetary and Capital Markets Department, Tobias Adrian, Financial Counsellor and Director; Fabio Natalucci, Deputy Director; and Evan Papageorgiou, Deputy Division Chief.

Tobias will give some opening remarks, and then we will take your questions through the Media Briefing Center and on WebEx. Tobias, please go ahead

Mr. Adrian:

Ladies and gentlemen, thank you for joining us as we launch the new edition of this year's Global Financial Stability Report. The global economy is beginning to emerge from the economic shock caused by the COVID‑19 virus. The economy has benefited from extraordinary policy measures that have eased financial conditions, preventing a deeper economic downturn. But those actions may have unintended consequences. Valuations for risk assets have become stretched. Financial vulnerabilities have intensified. Continuing policy support remains necessary, but a range of policy measures are needed to address vulnerabilities and to protect economic recovery.

We see three priorities: First, addressing corporate sector vulnerabilities and repairing balance sheets is a priority. Second, tightening some macroprudential tools in advanced economies is important to safeguard financial stability and to enhance supervision and regulation of nonbank financial institutions. Third, rebuilding buffers in emerging markets is a policy priority to prepare for a potential repricing of risk and the reversal of capital flows.

Central bankers have proven to be highly skillful during this past year as they successfully engineered the financial rescue. In the year ahead, the creativity is likely to be severely tested again, as they confront the challenge of guiding their economies through asynchronous recoveries, stretched market valuations, and strained social divisions.

Ms. Elnagar:

Thank you very much, Tobias. There is a question that is on everyone's mind on emerging markets, which you have just mentioned. One thing is: What if the United States hikes interest rates, and what is the effect going to be on emerging markets?

Mr. Adrian:

Indeed, global markets are nervously watching the current moves in interest rates. Since the summer, yields on the 10‑year U.S. treasury note have more than tripled and are now back to their pre‑pandemic level. The good news is that the interest rate increase has been spurred by strengthening growth and improving vaccination prospects. The bad news is that the increase also reflects uncertainty about the future path of Treasury supply and central bank asset purchases, as reflected by term premia, which have risen sharply.

Both nominal interest rates and real interest rates have risen, but nominal yields have risen more, suggesting market‑implied inflation is recovering — an intended consequence of easy monetary policy. For the moment, global rates remain low by historical standards; yet the speed of adjustment in rates could generate unwelcome volatility in global financial markets. It could potentially trigger a tightening of global financial conditions and potentially trigger a sudden return of risk‑off sentiment.

Thus far, overall financial conditions remain accommodative. That is good news, and policymakers must continue to promote those easy conditions until the strength of the recovery is ensured. By contrast, in countries where the recovery is slower and where vaccinations are lagging, policymakers may be forced to lean against unwarranted tightening. The recovery is thus expected to be asynchronous, with a stark divergence between advanced economies on the one hand and emerging market and developing economies on the other hand.

Given their large external financing needs and their slow progress on vaccinations, emerging markets are likely to face daunting challenges. Earlier this year, international investor flows into emerging market debt had a sudden reversal for several weeks — a change not witnessed since last summer. Moreover, the recent rise in U.S. real yields has also spilled over to funding costs in emerging markets. With their sizable financing needs this year, emerging markets are exposed to rollover risk which will be complicated further if domestic inflation rises or if global long‑term interest rates continue to rise. For many frontier market economies, market access remains impaired.

Ms. Elnagar:

Thank you, Tobias. Let me follow‑up on one other thing please. The pandemic has taken a toll on businesses across a variety of sectors, with all the strains placed on the corporate sector. Can you please give us a bit of an overview about the corporate sector and how it is affected by this pandemic and the financial stability at this point?

Mr. Adrian:

Yes. In many countries the corporate sector is emerging from the pandemic overindebted, although with notable differences across firm size and economic sectors. To help policymakers recalibrate the support to the corporate sector, this GFSR presents a decision‑tree to assess whether firms should rely on market financing, should seek government support, should be restructured, or should be liquidated. Whether the economic recovery will be uneven and whether it would suffer from scarring effects will depend on the ability and willingness of banks to lend once support is unwound by the governments. Concerns about the credit quality of hard‑hit borrowers and about the profitability outlook are likely to weigh on the risk appetite of banks. Even if most banks have ample capital buffers, only a few may be willing to use the buffers to lend and support the recovery.

Ms. Elnagar:

Thank you, Tobias. Now we are going to take your questions from OMBC and WebEx. I am going to start with the Online Media Briefing Center. And since emerging markets has been the topic today, Tobias, we have a question: Given the large external financing needs and rising U.S. interest rates and potential capital outflows, which you have mentioned, Tobias, what is your take on the possibility of an emerging markets financial crisis? Does the IMF have enough resources to provide liquidity support for emerging markets and developing countries?

Mr. Adrian:

Thank you so much for this important question. Let me start by answering and then I’ll also turn to my colleagues. So we have, indeed, seen a sharp rise in interest rates globally, and advanced economies are oftentimes able to insulate themselves from this rise in yields globally, but emerging markets are not always capable to insulate their economies from the rise in yields, and so some emerging markets have, indeed, seen a rise in their funding costs. However, by historical standards, yields are still fairly low, and global financial conditions do remain easy — but, of course, there is continued uncertainty about the outlook ahead. One is about the recovery of advanced economies. That might put upward pressure. The other one is about setbacks in some emerging markets.

So we could certainly see some volatility in financial conditions and in capital flows associated with the realization of uncertainty. The IMF has a large balance sheet and has large financing capacities to assist our membership. To date, we have provided rapid financing to a very, very large number of countries. This is the largest and broadest rapid financing rollout that we have ever done at the IMF, and we stand ready with additional financing to any members who need it.

Let me turn to Fabio and Evan to see whether they want to complement my thinking around this.

Mr. Papageorgiou:

Thank you, Tobias. I could add that, along with the IMF, the international community has also helped a lot. We applauded the efforts of the G‑20 to extend the Debt Service Suspension Initiative to June 30 of this year, and we have recommended for this extension to be moved down even further, perhaps to the end of this year. In addition, the G‑20 has put forward the guidelines for the Common Framework for Debt Treatment beyond the DSSI. As it is right now, it covers the same sample of countries in a relatively more limited fashion for the DSSI‑eligible countries. But, as we say in the report, we think that the Common Framework being able to apply to a broader set of countries may also be a way forward.

Ms. Elnagar:

Let me stay on the topic here of emerging markets. The question is about the assessment of the capital markets in Sub‑Saharan African countries, and also about the monetary policy in the same region, Sub‑Saharan Africa. So we’ll start with Tobias and then follow.

Mr. Adrian:

Thank you. So Sub‑Saharan Africa has been hit by this pandemic just like every other country. Every country in our membership has been hit by the pandemic. However, the numbers coming out of Southern Africa in terms of the pandemic have been somewhat lower than in other countries, so that is good news. There has been some resurgence in infections recently, and we do hope that the medical situation will get under control.

Of course, there are two major challenges. One is that the economic headwinds from the global economy have hit Sub‑Saharan Africa hard, and countries have been depressed, even though the medical conditions might have been less severe than elsewhere, so the economic headwinds are strong.

Secondly, many of the Sub‑Saharan African countries have not been able to provide as much fiscal support as advanced economies or emerging markets, so on average, in 2020, advanced economies have provided 15 percent of fiscal support to the companies and the households. In emerging markets, the number was about half of that, 7 to 8 percent. But in Sub‑Saharan Africa, it is only between 1 and 2 percent of fiscal support. So when we look forward, we see that the recovery is going to be slower in Sub‑Saharan Africa compared to emerging markets or advanced economies, and so that means that there is an asynchronous recovery that could put financial stability at risk. Of course, we have started a number of new programs, and we are very actively engaged with governments in the region in order to make sure that we help in any way we can.

Mr. Papageorgiou:

Perhaps I could add something to Tobias' point here. The monetary policy stance in Sub‑Saharan Africa, as well as the rest of the world's emerging markets overall, as well, has been accommodative for the reasons that Tobias mentioned, and it is expected to remain so for the foreseeable future in order to accommodate more policy support. Uganda, where you mentioned the policy rate has been lowered to 7 percent, still has positive real policy rates, so there is still quite a lot of accommodation in the system, and that is expected to continue.

In terms of the capital markets, obviously much like the rest of the world, Sub‑Saharan African spreads had widened a lot during the top of the pandemic. They have recovered somewhat, but they still remain above pre‑pandemic levels. We are heartened by the fact that recently we have seen some hard currency bond issuance as well coming out of the region after a long pause. We expect this to continue. We hope this will continue.

Ms. Elnagar:

OK. We move now to our WebEx viewers here. This also goes into emerging markets questions.

Question:

Thank you for taking my question. My question is for Tobias. The report estimates that liquidity stress is high at small firms in more sectors and across countries, while solvency stress is high at small firms but also notable at medium‑size and even large firms in the most affected sectors. What are the required procedures to deal such serious situation in emerging markets and developing countries, including a country like Egypt? Thank you so much.

Mr. Adrian:

Thank you for this question. The corporate sector is going to be a policy priority for our membership going forward, including emerging markets such as Egypt, so what we are seeing is that in countries where the recovery is taking longer to realize, the stress on the corporate sector is higher, and that is particularly so in contact‑intensive industries. Tourism, of course, has been hit extremely hard, but also entertainment, restaurants, are particularly adversely impacted by this crisis.

We do hope that governments are able to bridge to the recovery, and we provide the kind of policy framework to assess which companies should get additional support in terms of equity or should have a restructuring of their liabilities; but, of course, there are some companies that do need to be resolved as well. These are key priorities, and the evolution in the corporate sector, of course, importantly impacts the health of the banking sector as well, and so having a very timely, holistic view that is data sensitive and is collecting all of the necessary information for further policy steps is key. So, to the extent that countries can provide further fiscal support, that would certainly be helpful in order to bridge to the recovery and get economies back on track, including in the corporate sector.

Mr. Natalucci:

Some of this liquidity risk and solvency risk cuts across different dimensions — across different firm sizes, across regions, and across some other sectors. Some sectors have been hit harder than others. One important difference between advanced economies and emerging markets is the firms in advanced economies may have access to capital market, so this has been one of the positives of the unprecedented policy support in terms of monetary policy, fiscal policy, financial policy, is that capital markets have reopened, and larger advanced economies benefit more than emerging markets from access to global capital markets, particularly for large firms.

So smaller firms, SMEs, have a harder time accessing capital markets. They are more bank‑reliant, and often their business model is oriented towards sectors that are more contact‑intensive. So for emerging markets, the important thing is that there are targeted fiscal measures, particularly to address both liquidity risk, for example, through loan guarantees, or solvency risks to equity injection, as Tobias has mentioned.

The other point for emerging markets is also enhanced resolution regimes so that some of these issues can be addressed out of court in a quicker and more efficient way.

Ms. Elnagar:

Thank you, Fabio. We continue on WebEx.

Question:

Thank you very much. My question is, according to the report, China has recovered more rapidly than other countries, but at the cost of a further buildup in vulnerabilities, particularly risky corporate debt. What would be your suggestion to tackle this problem? Thank you very much.

Mr. Adrian:

Let me start, and then I’ll pass this on to my colleagues as well.

So China, of course, has re-emerged from the crisis more quickly than any other country in the world. The measures that were taken to contain the pandemic were very quick and very effective, and as a result, the Chinese economy recovered to pre‑crisis levels already last year in 2020. And so that places China in a very good situation; but as you point out correctly, there were measures that were deployed that did lead to further increase in leverage and in certain vulnerabilities. Of course, in China there have been preexisting vulnerabilities already prior to the pandemic, such as certain weaknesses in small and provincial banks, as well as leverage in some segments of the corporate sector. So having a policy approach that is addressing those vulnerabilities and is balancing wanting to stimulate the economy on the one hand but doing it in a way that is safe on the other hand, and so is getting the intertemporal tradeoffs in between easy policy and the medium‑term buildup of vulnerabilities, getting this balance in the policy mix right is very much first order.

Mr. Papageorgiou:

Perhaps I could add as well to the points that Tobias made that it is also very important to unwind the implicit guarantees that are embedded in the system. It is a very delicate act but an urgent one in order to achieve financial stability. The issues relating to perhaps guarantees that are taken by investors as having a support by either the local or some other sort of government create an artificial or perhaps compress spreads unduly but have very little relation to fundamentals for the particular debtor and that has to be resolved in order to have a sustainable recovery and also a long‑term financial stability.

Ms. Elnagar:

Thank you so much. We are still on WebEx. We will take a question, and then we will go on OMBC and revert to WebEx. We have a lot of questions today.

Question:

Thank you. So I have two questions. One is from skyrocketing bitcoin to GameStop price turmoil to the recent Archegos, so how would you evaluate the brief increasing risk and the market volatilities; to what extent is it related to the U.S. unprecedented stimulus package? And also how would the spillover effects to emerging markets down the road including China? Thank you.

Mr. Adrian:

Thanks. That is a very relevant question. So monetary policy has been easy in most economies around the world and above all in some of the major central banks, such as the U.S. Federal Reserve, the European Central Bank, and the Bank of Japan. So easy financial conditions is an attendant consequence of the monetary policy accommodation. Easy financial conditions means that companies can borrow, can issue debt, and can issue equity, and, indeed, we do see a boom in the IPO markets through special purpose acquisition vehicles. This is to some extent the intended outcome of policies. Of course, we do not want risk‑taking to be excessive, so, again, there is a question about the balance of wanting to stimulate credit supply and the restart of the economy while making sure that it is safe. We do see valuations that are stretched in some segments. Of course, the run‑up in the valuations of bitcoins has been spectacular this year, and there is certainly uncertainty about future valuations that are very relevant.

We also see some stretching in some segments of the technology sector around the world which could be leading to volatility going forward. But having said that, of course, economies are recovering; so on the one hand you have like a tug of war in between the recovering economies, the easy monetary policy, and then valuations that might be stretched; so exactly how it is going to play out, we do not know, but there is certainly a possibility of further volatility.

In terms of emerging market flows, I would distinguish in between flows to China‑‑China, of course, is the largest emerging market in the world‑‑and other emerging markets. A lot of the flows to China that have been very large by historical standards have to do with structural changes in global capital markets. Both stocks and bonds of Chinese issuers are now included in the benchmark indices globally, and so investors are allocating capital that is likely to stay.

Of course, there are other capital flows that are more fickle and that could be subject to bursts in global risk appetite. Financial conditions do remain easy globally, and when we talk to investors, they are continuing to be bullish about emerging markets as an asset class, so I think the baseline outlook is one of continued flows of capital; but, of course, there are risks around that baseline.

Mr. Natalucci:

I think some of these episodes that you mentioned, whether it is the GameStop and the level of retail investor, whether this is the special purpose acquisition companies, or whether it is the Archegos episode that we have witnessed, in some sense can be thought of as manifestation of some excess at the late cycle, late financial cycle. Per se, those are not necessarily systemic; we have seen perhaps imposing some losses on some banks, but those are not large numbers that we at this point given what we know deem as systemic.

It does raise an issue which we have highlighted in the past Financial Stability Report several times, which is the connection between elevated vulnerabilities and elevated stretched valuations. This is that when there is an overlap between the two, so there is an elevated valuation that gets unwound, and that interacts essentially with elevated vulnerabilities, in this case financial leverage. That is when I think it gets more concerning from a financial stability perspective, and this is even more pernicious when this interaction between stretched valuation and elevated vulnerabilities occur in the nonbank financial intermediation sector, in this case involving, for example, some family offers and hedge funds. That is where we have less visibility, where we have fewer data, where it is more difficult for policymakers to assess risk at that point.

In addition to that, even more concerning when there is still interconnection with the traditional banking sector, and that was the prime brokerage providing leverage to these hedge funds, so it is the connection essentially between vulnerabilities, stretched valuation, occurring in the nonbank financial intermediation, and particularly when there are still connections to the banking sector.

I think that raises some question, for example, whether the assessment framework, monitoring framework, we have is actually able to assess and catch in time this episode, also whether we have enough data to track and monitor these vulnerabilities, whether disclosure regimes in place now are appropriate or need to be expanded, and more generally, whether the regulatory perimeter around the nonbank financial intermediation should be expanded or not and whether or not we have the tools. And so toward this goal, the IMF is working with the Financial Stability Board to look back at the March 2020 turmoil that involved some of these nonbank financial intermediaries trying to come up and assess whether the framework, again, and the tools are appropriate or more work is needed.

Ms. Elnagar:

Thank you, Fabio. You spoke about turmoil and tantrums. Let me move to Market Watch. Greg is asking about some former policymakers in the US noting that if the Fed tightens suddenly, there is going to be a tantrum there. Can you please give us your views on this theme?

Mr. Adrian:

Thank you for this important question. The way I look at monetary policy today‑‑and this question was specific to the US‑‑is that there are two main tools. One is the short‑term interest rate, the Federal Funds Rate, and forward guidance around the Federal Funds Rate; and the FOMC has been very clear that it expects the Federal Funds Rate to be very low for an extended period of time.

The second tool are the asset purchases, and, of course, we have seen historically large amounts of asset purchases last year that has cushioned the financial markets and has eased financial conditions so that despite being in a global pandemic with an economic contraction as sharp as we have not seen in 100 years, still, financial conditions were easy. That is a tremendous success of policymaking of central banks around the world and of the Federal Reserve in particular.

Going forward, there is also a question about these asset purchases, so what is going to be the path of asset purchases; and, of course, that is in a context where treasury supply is going to increase as fiscal policy continues to remain accommodative; so there is some uncertainty about the supply or the net supply of treasuries. So what is issued net of what is being bought by the central bank, so how much net supply is that; and this uncertainty is visible in markets, so market‑implied interest rate volatility has been rising; and in line with this rise in market‑implied interest rate volatility, the treasury term premium has also been rising, so the term premium is the compensation that investors in longer‑term treasuries securities earn for taking on interest rate risks. This rise in the term premium and the implied interest rate volatility really is a reflection of the uncertainty of the net supply of treasuries.

How this is going to play out is an important challenge for monetary policymakers in the US in particular but also in other countries, and forward guidance really has to include not just the overnight Federal Funds Rate, but also the future path of asset purchases.

A very important backdrop, of course, is the change in the monetary policy framework that the Federal Reserve announced last August in Jackson Hole. The Fed now aims to have a temporary inflation overshooting as it reemerges from the crisis. As you know, PC inflation, core PC inflation, which is the target in U.S. monetary policy, has been below the 2 percent level that the Fed is trying to achieve, and so the expectation is that there will be a temporary overshooting. This is what is called the average inflation targeting framework. So the forward guidance about the Federal Funds Rate, but also about the asset purchases, are really aiming to get at this temporary overshoot of inflation.

Mr. Papageorgiou:

Perhaps I can come in here as well. I can't help but mention emerging markets every time Taper Tantrum is mentioned. As we say in the report, a persistent and sudden increase in U.S. rates could have a strong impact on emerging markets as well. The analysis we have done in the report shows that a 1 percentage point increase in U.S. term premia can have up to 1 percentage point increase for emerging market term premia if these are associated as well with an increase in inflation expectations, as has been the case for some emerging markets in recent weeks. And that can have a destabilizing effect, and so that is one other spillover, if you will, to emerging markets that authorities should guard against.

Ms. Elnagar:

We are going to still continue on central banking here. We have a question from Daniel in Central Banking Publications: What factors could cause a natural rise in interest rates, and would this be a problem or a lesson for central banks? How can they handle it?

Mr. Adrian:

Let me give a quick answer and then pass it to Fabio as well. As I explained in the previous question, interest rates have two components. One is the expectation of the future path of short‑term interest rates, and that is being controlled by forward guidance. The other component is the risk premium or term premium that is embedded in longer‑term yields, and that is the compensation for investors to hold long‑term interest rate risk. That term premium in some sense is controlled via asset purchases and forward guidance around asset purchases; but, of course, it is very importantly impacted as well by treasury supply, which is expected to change.

The policy framework really has to aim at those two components, and the spillovers can be decomposed into those two components as well. This year we really have seen a rapid rise in the term premium that has spilled over into other countries, and the forward path of the Fed Funds Rate continues to be very shallow. So expectations, market‑implied expectations for the future overnight rates are close to zero through the end of 2022 and actually into 2023, so many years at the zero lower bound.

As the economy is recovering and inflation is coming back, of course, there will be a reassessment of policy. Policy is always conditional on what is happening in the economy, and that could lead to further adjustments in expectations.

Mr. Natalucci:

There is something healthy in interest rate moving higher because of like good economic performance, so to the extent that higher interest rates reflect a stronger rebound in economic activity in the U.S. and improvement in the outlook for the global economy, and also higher inflation, so central banks have been trying for years to make up for past misses of inflation objectives, and so that allows them to achieve the mandated objective in coming years.

I will start with the positive. There are other positive effects, for example, that remove some of the pressure on bank profitability because the yield curve steepens, for example, and also more generally, the incentives that we have seen in the nonbank financial institutions sector to reach for yield when rates were very low; so some of this incentive or pressure may be relieved as rates move higher. So that is the positive.

I think the concern is when we see rapid and persistent increase in interest rates, so very sharp increase of a narrow window. That is where one of the concerns, for example, when we saw the real rates move higher in the US, we were concerned about asset valuation, particularly equity valuation; that is the gap between some of the returns of holding equity vis‑a‑vis interest rates was narrowing. So it is the persistent rapid rise in interest rates that raise questions about the ability of this financial system to absorb over such a narrow window, but it is the positive of it reflects improved outlook and inflation moving higher towards inflation objective. I think we should welcome that development.

Ms. Elnagar:

Thank you very much. We are going to go to WebEx now again.

Question:

Thank you for doing this. I wanted to ask you about IMF's stand on cryptocurrency. Should it be banned, or should it be allowed in some format? Also, what is the view on government‑controlled digital currencies like digital rupee?

Mr. Adrian:

Thanks very much for the question about this very important policy priority of the moment. So we are in a technology revolution in the financial sector, and I would frame the debate in just pointing out that technologies will be able to be used for payments and for lending operations in ways that we might not yet be able to envision. So we have seen technology's impact, in particular in the cryptocurrency space for the moment; so cryptocurrencies such as bitcoin did not exist ten years ago, and now they are very visible, and more and more investors are investing into bitcoins and other cryptocurrencies.

It is important to keep in mind that the technologies, DLT, distributed ledger technology, and blockchains, those technologies can be applied in other domains as well. For example, we have seen stablecoins emerge. We have seen some of the technologies being used for clearing in securities markets; and more generally, the operations of the financial system can be greatly improved and be more effective by using new technologies. That I think is the opportunity, and policymakers are very focused on making sure that all countries and the population at large will really benefit from these technological improvements.

Of course, there are risks as well, and so policies always have to balance taking advantage of opportunities with minimizing risks. Some of the risks are visible today in cryptocurrencies; for example, valuations are stretched in some of the cryptocurrencies, so investors could be exposed to a further rise or a fall in valuations.

Secondly, there are concerns about the integrity of some of these means of payments and investment vehicles, so integrity here refers to the overall ability of law enforcement and of governments to make sure that payment flows and capital flows are used in legitimate, legal manners, so that is another policy priority. So taking advantage of technologies to make access more broad, to have financial inclusion for everybody, but also to make sure that new forms of payments and new forms of investment are used for legitimate purchases, so that is what financial integrity means.

There are multiple policy objectives. Last year the G‑20 released an important report that is laying out the way in which international financial institutions, together with the central banks around the world, are working together to enhance the cross‑border payment system. The IMF is working alongside the BIS, the Bank for International Settlements, and the FSB, the Financial Stability Board, as well as the central banks around the world, to really improve global cross‑border payments to make sure that they are cheap, accessible and safe.

Ms. Elnagar:

We will take a couple more on WebEx, and then we are going to take one on OMBC, so please go ahead.

Question:

Thank you for taking my question. I would like to ask a question about one of the elements that you have outlined in your report about the strong increase of market assets related to ESG standards. I would like to ask if you think that this could be eventually a bubble or if you think that this is a structural change in the market, and so these assets will continue to grow even in future, also when eventually some measures of stimulus from the public policy will have to be withdrawn. Thank you.

Mr. Adrian:

Thank you, and let me start and then pass to both Fabio and Evan, who are real experts in this field.

I think there is a shift in sentiment around ESG. ESG stands for environmental, social, and governance investment. The population at large is more and more aware of the risks in terms of climate, of the costs of having poor governance, and of having social conflicts. So there is a reallocation that is very broad across institutions, including individual investors, pension funds, insurance companies, as well as mutual funds and other investment vehicles. I think the first order trigger for that is the change in awareness, the change in investor preference.

Secondly, the policy framework around ESG is changing, and it is continuing to be improved. And let me turn to Fabio, who is very actively working on the policy side in this segment.

Mr. Natalucci:

I think one way to think about it is to just step back for a second and think about what is the right architecture that we need to have around sustainable finance, to make sure that they become an important engine to support a greener recovery. So it is a chain of things that we need, to start with data. We need robust, we need consistent, we need high‑quality data, and it needs to be more granular, more forward‑looking. There are a number of initiatives both in the public and private sector to foster better high‑quality data.

Then we need also taxonomy. There are a number of taxonomies around the world. Does it mean at some point there would be a need to have some sort of minimal globally accepted taxonomy so that we can use the same language on the policymaking side as well as in the private sector, that we use the same definition? That would make the pricing of climate risk, the assessment of financial stability, clearly easier, both, again, for the public sector, as well as for the investor side.

We also need a convergence toward frameworks, climate‑related sustainability framework, and then we need the last step in this architecture. It is a link between sustainability standard, as well as a link to financial variables. That is what really in the end matters for investors. In this chain and in this architecture, there is a chain of data that goes from the borrowers, the corporates, the household, to the lenders, whether those are banks or nonbanks, all the way to the investor. So I think the right way to think of this is to look at the bigger picture and how the data, taxonomy, and infrastructure are related. That is what we need in terms of accelerating the green engine to support the recovery.

Mr. Papageorgiou:

If you could allow me a ten‑second intervention. As with any asset class that is just starting, it is true there is a very fast growth on ESG‑dedicated assets, but as a whole, the asset class is still quite small. Take, for example, the European sovereign bond market. There are several large economies that have issued green bonds lately with Italy that have amassed a huge interest from the investor community. And yet the whole stock of green sovereign bonds in the euro area amounts for less than 1 percent than the entire outstanding amount.

Ms. Elnagar:

Thank you. We are going to take one more question because we are running out of time here.

Question:

Thank you very much for taking my question. In light of the failure of [Archegos] capital management recently and the recently related losses by big banks like Credit Suisse and Nomura, I am wondering how much we should be worried about this incident, and do you think this is a sort of isolated event or there will be more to come, like big losses, and what is the implication for the global financial stability for this?

Mr. Adrian:

Thank you for this question, and we have all followed the headlines this morning about further losses in some institutions, so the question is whether it is the canary in the gold mine that we are seeing such losses. Our assessment for the moment is that this incident is not systemic, that it remains manageable by financial institutions, and that it is an incident that is specific to one particular fund. Having said that, it does illustrate that many of the major bank dealers have common exposures to their clients and that counterparty risk management and the prudential regulation in the segment continues to be a top priority.

Mr. Natalucci:

Maybe I can add one point. The report called for a pressing need to act to avoid a legacy and preempt a legacy of vulnerabilities, and vulnerabilities is a good example of financial vulnerabilities, whether it is financial leverage that has been used to enhance and boost returns or whether it is the interconnectedness between the nonbank financial institution as well as the banking sector.

So because there are possible lags between activation and the impact of macroprudential policy tools, we call for policymakers to take early action. In particular, they should tighten selected macroprudential policy tools to tackle pockets of vulnerabilities, at the same time avoiding a broad tightening of financial conditions. That is not what we need for the recovery.

In addition to that, because in some cases such tools are not available, for example, in the nonbank financial intermediation sector, we argue that policymakers should very quickly develop such tool. Also, finally, given the challenges in terms of designing and implementing tools within the existing macroprudential policy framework, policymakers should consider whether there is a need to raise buffers elsewhere in the system so that the system is more resilient and able to absorb losses.

What we have seen here is that, of course, banks have higher capital, higher liquidity, so given what we know at this point, they would probably be able to absorb some of these losses, but it still raises the question of the interconnection between stretched valuation, elevated financial vulnerability. They are particularly pernicious when they occur in the nonbank financial institutions with links back to the banking sector.

Ms. Elnagar:

Thank you very much. We now come to the end of our press briefing here. Thank you to everyone who followed us today. Thank you to Tobias, to Fabio, and to Evan. We invite you to follow us tomorrow for the release of the Fiscal Monitor. Thank you, everyone. I will stop here.