IMF Warns about 3 Risks to the Global Financial System

In recent years, the global market (ACWI) (VTI) has seen increased volatility. Major events such as Brexit (EWU), China’s (FXI) (YINN) yuan devaluation, the global economic slowdown, and the fall in commodity (DBC) prices have affected the sentiment of investors. The global financial system has also been vastly affected by these events.

The International Monetary Fund (or IMF) warned that there are three major risks to the global financial system in its latest report on global financial stability in October 2016. According to the IMF report, the short-term risks to the global financial system have been declining since April 2016, while the medium-term risks to the global financial system are increasing gradually.

All the developed economies (EFA) (VEA) across the world such as the United States (SPY) (QQQ), Europe (VGK) (IEV), and Japan (EWJ) are facing various cyclical challenges. These challenges are creating a major obstacle for the financial system. The developed economies are still in the midst of a low growth and low interest rate environment. The low growth environment is creating a weaker profitability environment.

The IMF is focused on three major risks to the global financial system:

• The European banking system is facing a serious profitability crisis, which is a big warning sign for the world economy.
• Global debt is hitting a record high. Governments across the world (ACWI) (VEU) are issuing more debt to finance their fiscal deficit.
• In emerging economies (EEM) (VWO), nonfinancial corporate credit as a share of GDP is rising, which indicates an increase of corporate defaults in emerging markets.

Going forward in this series, we’ll discuss each risk individually and how it will impact the global financial system. In the next part of this series, we’ll analyze the problems that the European banking system is facing.