Recovery from the economic impacts of the COVID-19 crisis has been divergent across jurisdictions. In many emerging market and developing economies (EMDEs), limited ability to provide additional policy support, in particular in the form of fiscal stimulus, weighed on the recovery. . At the same time, disruptions to global supply chains alongside global demand recovery, and in some countries greater demand stimulus, created upward pressure on inflation. Global financial conditions began to tighten against a growth backdrop where EMDEs are lagging behind advanced economies (AEs). Overall, risks of scarring in EMDEs appear to be much more significant than in AEs.
Russia’s invasion of Ukraine has added substantially to these pre-existing challenges for achieving a strong, equitable and inclusive recovery, by causing a setback to global growth, triggering higher inflation, and adding to economic uncertainty. Tighter financing conditions and high market volatility have also exposed vulnerabilities in the financial system, demonstrated through episodes of large shifts in bond prices and the resulting unexpectedly large margin calls, as well as through strains in commodity markets. Interest rate rises have meant that banks may benefit from higher margins in the short term without adverse impacts on asset quality, but they may be impacted in the medium term as credit risk materialises from their borrowers. Scarring effects, in particular in EMDEs, could exacerbate debt overhang issues. With a further deteriorating outlook for fiscal positions, the feedback loop from sovereigns to banks may worsen and again, financial institutions in EMDEs may be most affected.
As a result of new fiscal support measures in many jurisdictions aimed at mitigating the cost of soaring energy costs for households and companies, questions have returned on the interplay between targeted fiscal measures and monetary policy, as well as on the trade-offs of future exit strategies for these new support measures.
This report considers exit strategies through the lens of financial stability and the capacity of the financial system to finance strong and equitable growth. Incorporating feedback from the FSB’s external outreach, the report discusses how the evolution of the pandemic, the Russian invasion of Ukraine and subsequent economic developments have affected the challenges financial authorities face, and how these relate to the COVID-19 related measures taken. The report then considers specific policy challenges related to:
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ensuring the effectiveness of domestic policies,
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containing cross-border spillovers and preventing scarring by addressing debt overhang issues, and
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the role of international standards.
A resilient global financial system is a necessary precondition for coping with these challenges. While policy decisions will reflect country-specific circumstances and needs, the FSB will continue to support a strong and equitable global recovery through intensive monitoring of vulnerabilities in, and assessments of the resilience of the global financial system; regular exchange of information and experiences with prudential policy measures; and finally, through the continuation of its work, in cooperation with IOSCO and other standard setters, to strengthen the resilience of non-bank financial intermediation (NBFI).