The International Monetary Fund says policy-makers have a window of opportunity to strengthen the global financial system before serious vulnerabilities emerge.
It has singled out Australia for its high debt levels, saying household leverage and high house prices have made it more susceptible to interest rate shocks.
The IMF’s latest Global Financial Stability Report (GFSR), released overnight, has given a generally positive assessment.
It says since its last GFSR in April, the financial system has continued to strengthen in response to extraordinary policy support, important regulatory enhancements, and the cyclical upturn in growth.
It says investor risk appetite is buoyant globally, funding conditions have continued to improve, and global capital flows have surged.
But it also warned that now was the time to be vigilant about emerging pressures.
Tobias Adrian, the IMF’s financial counsellor, said vulnerabilities were rising in the non-bank financial system, and policy-makers ought to seize the opportunity to strengthen the system.
“Experience has taught us that it is during times of easy financial conditions that vulnerabilities build,” Adrian said.
The report notes that as the global banking system continues to strengthen, financial stability risks are shifting toward non-bank and market sectors of the financial system.
It says unconventional monetary policies and quantitative easing have forced substantial portfolio adjustments in the private sector and across borders, making the adjustment of financial markets “much less predictable” than in previous cycles.
“There is too much money chasing too few yielding assets: less than 5% (US$1.8tn) of the current stock of global investment-grade fixed-income assets yields over 4%, compared with 80% (US$15.8tn) before the crisis,” the report warns.
Australia is singled out for its high debt levels. “Household leverage and high house prices in Australia and Canada make these economies more susceptible to risk premium shocks,” the report says.
“In economies where debt service ratios for the private non-financial sectors have risen to high levels - such as Australia, Brazil, Canada, China, and Korea - there is a particularly strong need for financial sector policy vigilance to guard against any further build-up of imbalances.”
The report notes the Reserve Bank of Australia has warned against the financial stability risks of high household debt and high debt-to-income ratios when inflation and wage growth are low.
On Wednesday the IMF released its latest World Economic Outlook (WEO), which dedicated an entire chapter to the impact of weather shocks and climate change on global economic activity.
The WEO said the world’s richest nations needed to have a greater sense of urgency about climate change, warning that coping with climate change would be one of the “fundamental challenges” of the 21st century.
It also called on the global community to mitigate greenhouse gas emissions before they create “more irreversible damage”, saying richer countries must help low-income economies adapt to rapidly increasing temperatures.
The financial stability report mentioned climate change once, saying most IMF directors believed it was important to mitigate and adapt to climate change.
