The International Monetary Fund (IMF) has said that a stronger regulatory framework for the non-bank financial sector should be a priority after the pandemic.
The global economic organisation said that the coronavirus crisis has triggered “an extraordinary contraction of the global economy” and called on policymakers to remain vigilant to rising financial risks.
“Post-pandemic, a robust financial reform agenda should focus on two priorities: strengthening the regulatory framework for the non-bank financial sector and stepping up prudential supervision to contain excessive risk-taking in a “lower for longer” environment for interest rates,” said Tobias Adrian, financial counsellor at the IMF.
He said that pre-existing financial vulnerabilities are rising in some sectors, such as non-bank financial institutions, and that some emerging markets already face challenges.
Adrian warned that if issues are not addressed now, they will just worsen over time.
“Unprecedented policy measures have been necessary, but the burden of debts and deficits are likely to be a drag on the economy for years to come,” he said.
“If they are not addressed once a sustainable recovery takes hold, as the crisis continues, corporate liquidity pressures may morph into insolvencies, especially if the recovery is delayed.
“The global banking system is well capitalised. But some banking systems have a weak tail of banks and they could experience aggregate capital shortfalls in an adverse scenario.
“Some emerging market and frontier economies already face financing challenges, and some of them may confront debt distress.”
Adrian’s warnings come as the IMF released its Global Financial Stability Report, showing the effect of the pandemic on the contraction of the global economy.
The report found that losses on corporate debt holdings could lead to non-bank lenders taking a step back from providing credit to these segments of the corporate sector and this would worse strains on borrowers.