Three steps to global financial stability

More than seven years after the collapse of Lehman Brothers precipitated the most severe financial crisis since the depression of the 1930s, it may feel as if the debate about financial stability should be over. After all, the wave of European and US bank collapses is over, economies are stuttering back to life, consumer confidence is at least inching out of the trough, the US is poised to begin the normalisation of interest rates, and the UK will eventually follow suit. While it is hardly time to put out the flags in celebration, surely it is time to stow away the most potent weapons of economic fire-fighting?

Not according to José Viñals, Financial Counsellor and Director of the Monetary and Capital Markets Department at the International Monetary Fund. At a presentation of the IMF’s October 2015 Global Financial Stability Report hosted by the London Business School in November, he explained why the IMF believes a ‘policy upgrade’ is needed to deal with three remaining challenges which could still destabilise the global economy. 

First, there are the legacy issues which could undermine the recovery in advanced markets; these include the normalisation of economic policy in the US, the debt overhang in Europe and the need to continue economic stimulus in Europe and Japan. 

Second, there are ‘financial market fragilities’, including concern about the liquidity of financial markets. Finally, and perhaps most importantly, there is the concern that some of the travails of advanced economies have been exported to emerging markets and the risk that a downturn there will become the ‘third leg’ of the financial crisis.