Financial Stability Overview
Financial stability has improved since the October 2016
Global Financial Stability Report
(GFSR). Growth is
gaining momentum and reducing macroeconomic risks,
rekindling hopes for reflation. Rising equity prices and
steeper yield curves have mitigated some of the negative
side effects of low interest rates for banks and insurance
companies. Emerging market risks remain elevated but
unchanged, as recovering commodity prices and modest
deleveraging in some corporate sectors are offset by higher
external financing risks and rising financial vulner-
abilities in China. Despite these improvements, there
are new downside risks and uncertainties around the
policy outlook. A key risk is that U.S. policy imbal-
ances could lead to tighter-than-expected financial
conditions and a rise in volatility and risk aversion. A
global shift toward protectionism could adversely affect
trade and global growth. Thus, anchoring stability will
depend heavily on policy choices at the national and
global levels—it is crucial to get the policy mix right.
Financial Stability Is Advancing
Better-than-expected incoming data and gathering
growth momentum, as outlined in the April 2017
World Economic Outlook
(WEO), have reduced near-
term
macroeconomic risks
(Figures 1.1 and 1.2). Hopes
for refation have risen, as
monetary and fnancial
conditions
remain highly accommodative, and antic-
ipated U.S. fscal measures and other reforms are
expected to bolster growth. Reduced concerns about
Prepared by staf from the Monetary and Capital Markets Depart-
ment (in consultation with other departments): Peter Dattels
(Deputy
Director),
Matthew Jones
(Division Chief)
, Paul Hiebert
(Advisor)
,
Ali Al-Eyd
(Deputy Division Chief)
, Will Kerry
(Deputy Division
Chief)
, Sergei Antoshin, Magally Bernal, John Caparusso, Sally
Chen, Yingyuan Chen, Fabio Cortes, Dimitris Drakopoulos, Martin
Edmonds, Jesse Eiseman, Jennifer Elliott, Rohit Goel, Tomas
Harjes, Sanjay Hazarika, Geofrey Heenan, Dyna Heng, Henry
Hoyle, Nigel Jenkinson, David Jones, Robin Koepke, Tak Yan Daniel
Law, Yang Li, Lilit Makaryan, Rebecca McCaughrin, Aditya Narain,
Vladimir Pillonca, Tomas Piontek, Luca Sanflippo, Juan Solé, Ilan
Solot, Narayan Suryakumar, Francis Vitek, and Jefrey Williams.
economic and fnancial stagnation have led to a shift
in consensus and market-implied expectations toward
higher growth, infation, and long-term interest rates.
Refation expectations have taken hold across advanced
economies (Figure1.3).
Against this stronger economic backdrop,
risk
appetite
has increased, as refected in more buoyant
investor confdence (Figure1.2, panel5).
Market
and liquidity risks
have eased from elevated levels
as risk premiums have fallen and volatility remains
subdued. Tese trends in market indicators have been
a global phenomenon, starting last September and
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