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Abstract
Despite the ongoing economic recovery, the global financial system remains in a period of significant uncertainty. The baseline scenario is for balance sheets to strengthen gradually as the economy recovers, and as further progress is made in addressing legacy problems in key banking systems. However, substantial downside risks remain. Mature market governments face the difficult challenge of managing a smooth transition to self-sustaining growth, while stabilizing debt burdens under low and uncertain economic prospects. Without further bolstering of balance sheets, banking systems remain susceptible to funding shocks that could intensify deleveraging pressures and place a further drag on public finances and the recovery. Emerging market economies have proven resilient to recent turbulence, but are vulnerable to a slowdown in mature markets and face risks in managing sizable and potentially volatile capital inflows. Policy actions need to be intensified to contain risks in advanced and emerging economies, address sovereign debt burdens, tackle the legacy challenges of the crisis for the banking system, and put in place a new regulatory and institutional landscape to ensure financial stability.
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