IMF Releases Global Financial Stability Report Update

The International Monetary Fund has released its January 28 Update to the October Global Financial Stability Report:

Financial markets worldwide reflect ongoing deleveraging pressures amidst a deepening economic downturn. In spite of extensive policies, the global financial system remains under intense stress. Moreover, worsening economic conditions are producing new, large writedowns for financial institutions. In response, balance sheets are being cut back through asset sales and the retiring of maturing credits. These actions have increased downward pressure on asset prices and reduced credit availability. Restoring financial sector functionality and confidence are necessary elements of economic recovery. However, more aggressive actions by both policymakers and market participants are needed to ensure that the necessary deleveraging process is less disorderly. A broad three-pronged approach—including liquidity provision, capital injections, and disposal of problem assets—should be implemented fully and quickly so as to encourage balance sheet cleansing. At the same time, international cooperation will be required to ensure the policy coherence and consistency needed to re-establish financial stability.

They suggest:

International cooperation on a common framework for financial policies should receive high priority. The application of substantially different conditions when supporting financial institutions should be avoided in order to prevent unintended consequences that may arise from competitive distortions and regulatory arbitrage. International coordination is also needed to avoid excessive “national bias,” whereby domestic institutions are favored or local credit provision is encouraged, to the detriment of other countries. A more consistent insolvency framework for financial institutions would also help.

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