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A Bridge To Economic Recovery: Be Aware Of Financial Stability Risks

A Bridge To Economic Recovery: Be Aware Of Financial Stability Risks

By Tobias Adrian, Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department

Despite a global economic crisis comparable only to the Great Depression, near-term financial stability risks have been contained with the help of unprecedented monetary policy easing and massive fiscal support across the globe. But many economies had pre-existing vulnerabilities – which are now intensifying, representing potential headwinds to the recovery.

Extraordinary policy measures have stabilized markets, boosted investors’ sentiment, and maintained the flow of credit to the global economy. Critically, these measures helped prevent a slowing economy and sliding financial markets from feeding on each other in a destructive vicious cycle.

The rebound in asset prices and the easing in global financial conditions have benefited not only advanced economies, but also emerging markets. In addition, unlike in previous crises, emerging markets this time were also able to respond by cutting policy rates, injecting liquidity and, for the first time, employing asset purchase programs.

Beware of the real-financial disconnect

The significant improvement in financial conditions has helped maintain the flow of credit to the economy, but the economic outlook remains highly uncertain. A disconnect persists, for example, between financial markets – where there have been rising stock market valuations (despite the recent repricing) – and the weak economic activity and uncertain outlook. This gap can gradually narrow if the economy recovers swiftly. But if the recovery is delayed, for example because it may take longer to get the virus under control, the investor optimism may wane.

As long as investors believe that markets will continue to benefit from policy support, asset valuations may stay elevated for some time. Nonetheless, and especially if the economic recovery is delayed, there is a risk of a sharp adjustment in asset prices or periodic bouts of volatility.

Corporate sector vulnerabilities

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How to Create Financial Stability in Shaky Times

How to Create Financial Stability in Shaky Times

In a year that has thrown a pandemic, natural disasters and economic calamity at us while we lurch closer to a presidential election, stability can feel elusive. No matter how well-laid your plans, some new crisis might be lurking around the corner, waiting to upend your life.

While it’s never been more clear how much is out of our control, you can still take steps to improve your financial stability. And it’s not just about cash flow.

Find your idea of stability

Financial stability is both a state of money and a state of mind, says Ed Coambs, a certified financial planner and certified financial therapist near Charlotte, North Carolina.

On the money side, stability is straightforward. “You have a budget, you know where your money is going, and you know how much you should be saving to meet your bigger goals,” Coambs says.

“What’s a little harder is more the state of mind,” Coambs says. This financial peace of mind is subjective and looks different from one person to the next.

Do some self-reflection to pin down what stability means for you. Maybe you don’t want to feel anxious when you check your bank balance, or you hope to save enough for retirement so you won’t have to worry about the future. Whatever your focus, feeling stable means you won’t have to constantly worry about money.

If you find yourself overwhelmed because the pandemic has destabilized your finances, follow the advice of Tara Tussing Unverzagt, a Torrance, California, certified financial planner and financial therapist. She advises people to think through the worst that could happen rather than avoiding the topic out of fear.

“This often helps people open up a way to reframe the situation from, ‘There’s no way out of this,’ to ‘I have some choices — this

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Regulators Eyeing Tech To Boost Financial Stability

Regulators Eyeing Tech To Boost Financial Stability

Regulators around the globe are eyeing tech to boost financial stability

Enhanced supervisory technology (SupTech) with strong governance and skilled human oversight could well have important benefits for financial regulators around the in efforts to increase economic stability in their nations and around the globe, said a report prepared for the G20.

“SupTech could improve oversight, surveillance and analytical capabilities, and generate real time indicators of risk to support forward looking, judgement based, supervision and policymaking,” regulators told the Financial Stability Board.

Importantly as well, real-time and non-traditional data may allow authorities to be more pro-active in their supervision, FSB said.

As an example of the efficiencies SupTech can provide financial regulation, the authors of the report pointed out the U.S. Securities and Exchange Commission has found

algorithms are five times better than random testing at identifying language in investment adviser regulatory filings that could merit further investigation for potential wrongdoing’

The possible improvement in quality arising from automation of previously manual processes has significant appeal to the overseers, the FSB reported in a study released today.

The use of SupTech innovations and strategies in regulatory reporting for microprudential regulation has grown significantly in the last four years, the authors found.

Artificial intelligence was the most commonly deployed application of SupTech.

National financial regulators surveyed by the FSB lauded SupTech’s potential for gains in the effectiveness and efficiency of oversight and improvements in risk management and compliance.

But the risk of handing too many of their functions to technology vendors and the potential for poor data quality were on the minds of the regulatory leaders responding to a poll and other resources consulted by the FSB’s Financial Innovation Network.

“(They were particularly concerned) over-reliance on methods built on historic data could lead to incorrect inferences about the future,” the study

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