Abstract

Financial conditions have tightened since the October 2018 Global Financial Stability Report (GFSR), but remain relatively accommodative, notably in the United States.1 After sharp declines in the fourth quarter of 2018, financial markets rebounded in early 2019. This turnaround in market sentiment has been supported by the Federal Reserve’s more patient approach to monetary policy normalization. Given buoyant market sentiment, financial vulnerabilities—such as high leverage and liquidity, maturity, and currency mismatches—may continue to build, raising medium-term risks to global financial stability. Vulnerabilities in sovereign, corporate, and nonbank financial sectors are already elevated by historical standards in several systemically important countries that account for a significant share of the global economy. A sudden sharp tightening in financial conditions—triggered by investors’ reassessment of the outlook for monetary policy in major advanced economies, a sharper-than-expected growth slowdown, protracted trade tensions, or a no-deal Brexit—could expose these vulnerabilities and raise near-term financial stability risks.

Contributor Notes

Prepared by staff from the Monetary and Capital Markets Department (in consultation with other departments): Fabio Natalucci (Deputy Director), Anna Ilyina (Division Chief ), Peter Breuer (Deputy Division Chief ), Will Kerry (Deputy Division Chief ), Evan Papageorgiou (Deputy Division Chief ), Sergei Antoshin, John Caparusso, Sally Chen, Yingyuan Chen, Kevin Chow, Fabio Cortes, Dimitris Drakopoulos, Martin Edmonds, Rohit Goel, Tryggvi Gudmundsson, Frank Hespeler, Henry Hoyle, David Jones, Piyusha Khot, Robin Koepke, Sheheryar Malik, Rebecca McCaughrin, Thomas Piontek, Juan Solé, Ilan Solot, Jeffrey Williams, Akihiko Yokoyama, Xingmi Zheng, with inputs from Alexei Goumilevski and Shuyi Liu. Magally Bernal was responsible for word processing.
Vulnerabilities in a Maturing Credit Cycle