Opinion | Regulators’ fears suggest global financial system not as stable as hoped

The annual meetings of the World Bank and the International Monetary Fund (IMF) took place this month in Marrakech, Morocco. These meetings came at a time when key reports on the global economic and financial health were published.

The outlook for global growth has slowed amid weakness in the Chinese and European economies. And in addition to Russia’s invasion of Ukraine, war has broken out in the Gaza Strip, driving oil prices above US$90 per barrel.

How strong is the global financial system? Earlier this year, the problems experienced by Silicon Valley Bank (SVB) and Credit Suisse highlighted that all was not well. However, swift action by the US Federal Reserve and the Swiss authorities stemmed losses in confidence.

Today, despite prospects of interest rates being “higher for longer”, stock prices in Europe and the United States are about 10 to 12 per cent higher than the beginning of the year, while overall financial conditions have not been as stringent since monetary policy has eased somewhat.

The IMF’s Global Financial Stability Report, released earlier this month, warned that there are still vulnerabilities out there. This is not difficult to see since global real estate values are several times that of GDP, so a decline in property prices would affect asset wealth several times over. History has shown that banks are vulnerable to fluctuations in real estate since it forms the bulk of collateral for bank credit.

According to the IMF, “in the advanced economies, real house prices fell 8.4 per cent in the first quarter of 2023, whereas emerging markets saw a smaller decline of about 2.4 per cent”. With interest rates significantly higher than in early 2022, we will see the impact of “higher for longer” rates on real estate, especially commercial real estate, over the coming months.