Transcript

Transcript of October 2021 Global Financial Stability Press Briefing

October 12, 2021

Speakers:

Tobias Adrian, Financial Counsellor and Director, Monetary and Capital Markets Department

Fabio Natalucci, Deputy Director, Monetary and Capital Markets Department

Nassira Abbas, Deputy Division Chief, Monetary and Capital Markets Department

Meera Louis, Communications Officer

Ms. LOUIS: Good morning. And welcome today for the Global Financial Stability Report press conference. Thank you so much for joining us today. I am Meera Louis, with the Communications Department.

Today we have with us Tobias Adrian. He is the Financial Counsellor and the Director of the Monetary and Capital Markets Department; also with us is Nassira Abbas, who is the Deputy Division Chief, and Fabio Natarajan, who is the Deputy Director of the Monetary and Capital Markets Department.

So welcome. Thank you again for joining us. You know, you can always send us your questions via WebEx or via the Press Center.

Before we begin, I would just like to turn to Tobias for a few words. Tobias, this has been a rather complex environment in which you and your team have put together this report. Could you just spell out a little bit about how you went about putting this report together, what topics were of interest, and what challenges you and your team faced?

Mr. ADRIAN: Absolutely. Thank you, Meera.

The Global Financial Stability Report for this Annual Meetings has three themes: COVID, crypto, and climate. Let me go through the three themes one by one.

COVID has been with us for more than a year and a half now. It has been raging around the world. And with the ebbs and flows of the pandemic, economic challenges have been raised around the world. The recovery from the economic headwinds and the global financial stability headwinds due to COVID are first‑order for all countries around the world.

At the moment, we are seeing three major vulnerabilities. First of all, debt has increased. As countries were fighting the pandemic, they eased monetary policy; they expanded fiscal expenditures; and, as a result, debt in the corporate sector, debt among governments, and in some countries, in household sectors, has increased tremendously. So high leverage is one vulnerability.

A second vulnerability is stretched asset valuations. Easy monetary policy means that financial conditions eased, interest rates are low, and risk asset prices are rising. However, we do detect stretched asset valuations in some segments, and those could revert.

The third vulnerability is capital flows to emerging markets. Emerging markets and developing economies have benefited tremendously from the ease of financial conditions. They have been able to access capital markets throughout the crisis, but there is a risk of a sharp reversal of capital flows to those countries.

Finally, we are facing inflation that is higher and longer than expected, and that is a policy challenge going forward.

Let me turn to the second theme of the GFSR, and that is crypto. Crypto valuations have risen more than tenfold in just over two years. And crypto valuations are highly volatile. Just this year, we have seen run‑ups, declines and run‑ups associated with leverage in this important space. So we are taking a very deep look at the crypto ecosystem, and we are developing policy formulations for countries around the world.

Finally, climate. Climate is an existential threat to the global economy. Many countries already are subject to climate catastrophes, and it is urgent for policymakers to develop policies around climate finance that can support the transition of economies to a greener and more sustainable path.

Let me stop here with my opening remarks.

Ms. LOUIS: Thank you, Tobias.

We will now take your questions, either via the Press Center or WebEx. Feel free to join us. We already have some questions coming in, and I see one from the Press Center. This is coming in from the South China Morning Post. QUESTION: What impact do you see rising inflation having on stock and bond markets?

Mr. ADRIAN: Absolutely. We have seen that inflation has been above target in a number of countries ‑‑ not in all countries. In some countries, inflation remains below target. But in many countries, including some of the major economies, inflation has been above target. We see three main reasons for that.

One is base effects as we are coming out of this pandemic. Last year, in the pandemic, prices dropped very sharply; for example, commodity prices dropped very sharply. And now, prices are getting back to more normal levels. So those are technical effects that should dissipate over time.

However, some of the increases in prices ‑‑ in particular, in commodities ‑‑ have been higher and more persistent than what we had initially anticipated. So, while we continue to forecast that inflation is a temporary phenomenon, with a reversion back to target in the vast majority of countries, there is certainly quite a bit of upside risk going forward, to both the level and the persistence of inflation.

Finally, we are seeing a lot of imbalances in supply chains. There are shortages of shipping, and those are driving up inflation in many countries. And we are also seeing that commodity prices are rising quite rapidly. So those increases could conflate into core inflation, and central banks might need to act. In fact, some central banks have already moved to tighten monetary policy. This is particularly so in many countries in Latin America. In advanced economies, only two countries have tightened so far, and we will see what is happening to inflation going forward, to see what the monetary policy response is going to be.

Ms. LOUIS: Thank you Tobias. QUESTION:: Fitch Ratings recently warned that political brinkmanship and reduced financial flexibility could increase the risk of a U.S. sovereign default. If the U.S. does default or the U.S. credit rating is downgraded again, what are the implications for the financial stability risks?

Mr. ADRIAN: Yes, thank you. This is a very important and very timely question. Many of you will have followed markets and followed political developments in the U.S., where there is a debt ceiling. So that means that the U.S. Treasury can only borrow up to a certain ceiling, and that generates uncertainty as to what is going to happen to the cash balances and to the financial position of the U.S. Treasury going forward.

At the moment, when we are looking at market pricing in the bill market, there is some increase in bill rates in early December, when the debt limit is currently expected to be hit; but there is a potential for further uncertainty about the evolution, the political evolution. And that is certainly increasing uncertainty for capital markets, in general, and the U.S. Treasury market, in particular.

Let me turn to my colleague Fabio.

Mr. NATALUCCI : Maybe just a couple of words.

As Tobias said, our attention now has shifted with the new deadline that has come out of the U.S. Congress in early December. So, we have seen some adjustment of pricing in the Treasury bill market. There [are not many] signs at this point, no significant imprint left in the financial markets, either in the bill market or in terms of, like, Treasury securities.

Now, of course, U.S. Treasury securities are the deepest, most liquid instruments, and after [the base fiscal] pricing of financial risks. So a potential default would be catastrophic in that sense, because it would have threefold implications for other financial markets as well, especially at a time when we are recovering from COVID and, of course, the market has to be careful and pay attention to developments on this front.

Ms. LOUIS : Thank you, Fabio. I am going to now turn to WebEx for a question.

QUESTION: I wanted to ask you about the inflation situation in India, how it is. How it has impacted ‑‑ how it has been impacted by COVID‑19 and the reforms that the government has taken now.

And secondly, on the crypto, how the technology issue [has talked] about, fluctuation market, how the technology can, itself, be used for public good or governance globally? Thank you.

Mr. ADRIAN: Thank you so much. Of course, India was hit very hard by the pandemic last year, and that did have adverse economic consequences. But the pandemic situation is improving in India; and with it, economics are improving. We have seen a tremendous rally in equity markets in India. Inflation remains within the target range of the Reserve Bank of India. In fact, we have seen that India has scaled down some of its asset purchases recently.

Turning to cryptoassets. In India, as in many other countries, crypto markets are booming. Many individuals are participating in crypto investments. Of course, there is a tremendous amount of uncertainty about the valuation of crypto markets.

Now, cryptoassets can be used to transfer money across borders. Authorities in countries around the world are taking policy steps and are in the process of developing policy steps to regulate cryptoassets in a way that ensures investor protection, that ensures financial integrity, that ensures financial stability and monetary stability. It is a whole set of policy steps, and different countries are taking different approaches. We are working very closely with our membership, almost 190 countries around the world, in order to tackle these important policy challenges around the crypto ecosystem.

Ms. LOUIS: Thank you, Tobias. And just coming back to the questions, I would just like to remind reporters, if you are on WebEx, please, it would be nice if you would turn on your camera so we can identify you easily.

Let’s turn to the next WebEx participant.

QUESTION: Given all the risks you see, should the Fed activate the countercyclical capital buffer at this time? Thank you.

Mr. ADRIAN: Thanks so much for this question. Let me step back for a moment and explain what a countercyclical capital buffer is.

Banks have minimum capital requirements; and on top of those minimum capital requirements, there are top‑ups. So, there is a systemic buffer, and there is a countercyclical buffer. The countercyclical buffer philosophy is that it should be activated by policymakers, in particular, in the U.S. by the Federal Reserve, in order to protect the banking system and the broader economy against the cyclical buildup of vulnerabilities.

Now, what are these kinds of vulnerabilities that we are seeing in the U.S. at the moment? I think there are a number to list here. No. 1, asset valuations are stretched in some segments of markets, so there is a risk of a sharp reversal of asset valuations, at least in some segments. Secondly, we do see that housing prices increased tremendously in the U.S. ‑‑ in particular, in some pockets around the U.S., in certain market segments. And thirdly, of course, there is the global environment. We are still facing quite a bit of uncertainty, in particular, with respect to the evolution of the pandemic and the evolution of inflation, as we discussed earlier.

Now the question is: What is the right time to activate the countercyclical capital buffer? There is a surcharge in between zero and 2.5 percent of risk‑weighted assets. At the moment, it is set at zero, but it could be gradually ramped up. In general, that is done as the economy is expanding, as the financial cycle is booming. And there are certainly good arguments to turn on the countercyclical buffer at this time, but we have not taken an official position on that at the IMF. So I cannot give you an official assessment at this point.

Ms. LOUIS: Thank you, Tobias.

I am going to take another question that has come in from. QUESTION: Are there misalignments in commercial real estate prices in China that could increase downside risks to future growth and, thereby, introduce potential for sharp price corrections?

Mr. ADRIAN: Yeah. Let me start and pass it to Fabio in a moment.

In China, there is the largest property developer, Evergrande, that has been facing challenges in terms of repaying its debt. It has debt of about $300 billion dollars outstanding. The property market has been slowing down, and there has been a regulatory crackdown on leverage in that very important market for the Chinese economy.

In our assessment, the Chinese authorities have the fiscal power ‑‑ so the fiscal space, as well as the legal and institutional means in order to address this problem. Having said that, there are a number of financial stability worries that Fabio will go into in more detail.

Mr. NATALUCCI: With respect to the situation in ‑‑ with Evergrande and the property developer sector more broadly, I mean, so far, contagion has been relatively limited; but we have seen some [broader] within the sector. For example, in the offshore dollar funding market, as well as a tightening of credit conditions [for firms], as well as those allocated in the provinces with weak public provinces ‑‑ weak public finance.

As Tobias said, the authorities have the tools to address, in terms of risk management, as well as, of course, in the economy, if needed.

What we do in the Global Financial Stability Report is look at risks around essentially this general assessment, this basic assessment. We identify a number of channels, to which financial stress could be amplified. One of them is through domestic financial sectors. So whether this is the exposure of domestic banks to Evergrande, more broader property development sector, not just at the aggregate level, but also at the level of individual institutions, the exposure of what we call non‑bank financial institutions, whether those are wealth management products or [trust (inaudible)], and also the extent of interconnectedness within the financial system, as well as what we call the contingent liabilities, so guarantees that some of these companies [might have] provided. So, this is a domestic financial channel.

There is also a domestic macro channel. If you see, for example, a slowdown in sales, which we have seen lately quite sharp, if we see a decline in asset ‑‑ in equity ‑‑ in home prices, that could have implications for collateral posting and the position of banks, for example. If you see ‑‑ as well as, obviously, the local government. Right? If there is a slowdown of sales, a slowdown in revenues, it might provide support to local SOEs and so on. If that happens, there could be a feedback effect loop back into financial conditions. The tightening of financial conditions could become an amplifier.

Then there is a third channel, which is through global markets, so a spillover to the rest of the world. That could be through a broad deterioration of risk taking. We have seen some of this in the month of September, for example, in world equity markets. Or it could be through the inclusion of (inaudible) indexes, so the exposure of international investors, for example, in the dollar funding markets, the freezing of the dollar funding markets offshore. So those are a potential channel as well. Of course, the tightening of financial conditions that might have implications for emerging markets. Now, again, as Tobias said, the authorities have the tools to address both in terms of risk management, as well as providing cushion to the economy, should they need to.

One important is that, of course, we have highlighted the need to delayer the financial system in China. It has been in various Global Financial Stability Reports, one point, policy recommendations we are making in other IMF documents. That should be accompanied by a restructuring, as well as reform efforts, as well as a gradual phasing out of guarantees, as well as addressing weak SOEs.

So, again, overall, we think the authorities have the tools. Risks remain. And if there is a need to support the domestic economy, it best be done by addressing the conditional household, as well as supporting consumption.

Ms. LOUIS: Thank you. I think I will go back to WebEx now.

QUESTION: COVID‑19 already exhausted emerging countries and caused a rise in inflation globally and locally in Egypt, too. Will Egypt be able to survive for a third year of such a situation, in 2022, or will the turn to have a third loan from the IMF?

About the Egyptian central bank, it is under pressure to raise interest rates, too. Do you think it will be able to keep the rates the same level, or will there be a push to raise it? Thank you.

Mr. ADRIAN: Thank you so much for this question.

Inflation in Egypt is within the target range of the Bank of Egypt. In the most recent policy meeting, they did not make a change to policy rates. You know, in terms of the IMF, there was a second and final review completed in June. And the repayment of the first disbursement will begin in September 2023.

Turning to your second question, that was about interest rates in advanced economies and more globally. What we are seeing is that inflation has been above target in some countries, and it has been more persistent and higher than previously anticipated. That is particularly the case in the United States.

In Europe, there has also been inflation that has come up. And there are three key questions for central bankers, for monetary policymakers when they are looking at inflation and the path to inflation going forward.

The first question is: What is happening to inflation expectations? In most countries, there are surveys, and there are market‑implied inflation expectations. Both the surveys and market indicators are watched very, very closely. For example, in the U.S., in the short term, there is an expectation that inflation is somewhat above target; but in the medium term, the expectation is that inflation will come back to target. In the euro area, for example, inflation is expected to get to target but from below the target in the future. And in other countries, like Japan, inflation is far below the target.

You know, the [same] question is the nature of the inflation shocks. So are these inflation shocks that are going to go away? Or are they going to last longer? So there, it really matters, looking at the mechanics of what is generating inflation at the moment. For example, there are shipping constraints in many parts of the world. There are constraints on commodities. And, you know, that really depends on how this situation is going to evolve.

The third part is looking at the labor market. While in the U.S., in the euro area, employment remains below pre‑crisis levels, you do see imbalances. So you see high vacancy levels in some sectors; but, overall, employment is still below target. So the wage dynamics and to what extent the wage dynamics feed into prices is a third key question.

So I do not know, Nassira, whether you want to add something on the eurozone; in particular, on the inflation picture there?

Ms. ABBAS: Yes. In the eurozone, The ECB’s new target, it shifted to the symmetric target in last July.

Now when you look at the market‑based instrument measure, so we see that the inflation is still below the 2 percent. For instance, the five‑year/five‑year [top] inflation that the ECB closely monitors is about 1.8 percent, so we are far below the ECB target.

Ms. LOUIS: Thank you.

Just sticking to the ECB question ‑‑ I have another question that has come in. Do we, the IMF, believe still that the ECB should maintain its accommodative monetary stance?

Mr. ADRIAN: The ECB has interest rates that are negative and that are expected to remain negative for some time. And the ECB is also conducting asset purchases. And for the moment, those asset purchases continue. So, this is expansionary monetary policy.

Interest rates are low, and financial conditions are eased through the asset purchases. That is [escalating] economic activity. The rationale is that employment continues to be below pre‑crisis levels. Unemployment rates are high in many countries. And while inflation is somewhat above target in some areas of the eurozone, there is an expectation that inflation will be back below target sometime in the future, and inflation expectations in the medium term are well anchored. So, the bottom line is that our current assessment for the ECB is that the stance of policy is appropriate.

Ms. ABBAS: Absolutely. Especially if we look at the driver of the current inflation. So, we see that the increase you have very recently is more driven by actually the reopening of the economic and some supply [disruptions], as Tobias has highlighted at the very beginning of this meeting.

So, yes. The inflation expectations remain well‑anchored. And I guess what we highlighted in this report is the importance of communication. Our main message is for central banks is that they have to communicate very clearly their policy ‑‑ to give more clarity about the policy monetary path, actually, to prevent any tightening of financial conditions. So, it is very important, and it will also prevent a tightening of financial conditions, as I said, but also to avoid unnecessary market volatility, which is very important. Thank you.

Mr. NATALUCCI: One point where perhaps in the discussion on inflation was [advantageous], one part of the question at the beginning.

We have seen, obviously, headline inflation rise also in emerging markets, not only but also on the surprise, it has been on the upside. There has been a number of drivers. Tobias has touched upon the commodity prices. Other reasons being, for example, food prices have been rising very strongly, very rapidly. And this is (inaudible) into core inflation.

Now, that said, there are important differences across regions. So you see inflation seems to be rising more rapidly, for example, in Latin America or in the (inaudible) region, when you see less inflationary pressure in Asia, for example. And that is true even if you look, at the same time, at core inflation, as well as at food inflation. There are very, very few countries in Asia where you see pressure on (inaudible).

Now, what do markets expect? If markets expect inflation is about, for the medium EMs, is now about 1.5 percentage points above target, but they expect inflation to come back gradually over the next few quarters. Not only that, but also the medium‑term inflation expectations, based on [surveys], seems to be within the target range of the central bank. I think, if anything, the risk is that, if inflation continues to come back, it turns out to be temporary, but market pricing in more [tightly] monetary policy is that real rates will turn from negative into positive, and so you would see a major tightening of financial conditions, which is going to be very important to follow price dynamics and to which this [pressure] may be temporary [or] is more persistent.

Ms. LOUIS: Thank you, Fabio.

I am going to stay with inflation, at the risk of sounding repetitive, as this is an important subject. We have another question on inflation.

QUESTION: We are seeing that the inflation pressures are easing, but energy prices are now rising. And just in the last two weeks, we have seen that. So does that increase our doubts in our forecasts?

Mr. ADRIAN: Thanks so much, Greg, for this question. Let me clarify.

Our expectation is that, in the medium term, inflation is going to revert back to targets, both in advanced economies and in emerging markets. However, there are many risks to the upside to inflation, both in terms of level and in terms of persistence. We might very well see that in some countries, inflation continues to increase for some time, but there are two important points. One is, in emerging markets, we have already seen a quite significant tightening of monetary policies. So real interest rates have increased, on average, in emerging markets. While inflation continues to rise, the expectation is that inflation will come down, and that is predicated on the fact that interest rates have risen and are expected to rise even further. So. it is taking the monetary policy response into account that is generating this drop in inflation expectations in the medium term.

In advanced economies, the picture is a little bit different. So only two central banks, the Bank of Norway and the Reserve Bank of New Zealand, have tightened monetary policy so far in terms of raising interest rates.

In the other countries, output gaps remain large, and inflation is, for the moment, assessed to be of a temporary nature; it is assessed that inflation is going to come down. Of course, monetary policy is always state‑dependent. It depends on what is happening in terms of economic conditions, economic news. And what is added in the expectations of a decline in inflation is that whatever monetary policy response is necessary is going to be taken. So, for example, over the past month, we have already seen that the expected path of policy in some countries, such as the U.K. or the U.S., has been moved forward gradually. And as new economic data is coming out, these expectations about the path of interest rates going forward might well shift, and that is embedded in the inflation expectation. Right? It is a fact that monetary policy is going to do what it takes to keep inflation expectations anchored and return back to target inflation in the medium term.

Ms. LOUIS: Thank you. Now I am going to switch to emerging markets. QUESTIONS: We have two questions that have come in. I am just going to combine the questions. It is about the share of the foreign Mexican government securities have fallen to 18 percent in August. Now, that’s the lowest since October 2010. Do you see some risks if it fell ‑‑ if it continues to extend this fall, the rest of the year? And what do you see as behind this? Also, in general, what do you see are the financial risks that could be triggered if Mexico returns to electricity [duration methods] (inaudible)?

Mr. ADRIAN: Thanks so much for these questions. The questions that are specific to countries will be addressed next week in the Regional Economic Outlook. The Western Hemisphere Department is going to have a press briefing, and you can ask specific country questions at that point. So let me defer this question to next week.

Ms. LOUIS: Thank you. All the regional press briefings will be next week, so please feel free tune in. And we will have the information on our website.

We have a question on crypto: QUESTION: Cryptoassets have a nominal market value over 2 trillion. If this bubble explodes soon, do you see major consequences to other companies, like Coinbase and banks that provide liquidity to those crypto platforms?

Mr. ADRIAN: Yes, thank you.

The crypto market is, indeed, at a valuation above 2 trillion. The valuation of cryptoassets is quite volatile, and there is the question of where this value is going to go.

Cryptoassets are different from the stocks and bonds, where investors are paying for future cash flows. Right? When you buy a stock, for example, you get a dividend payment, and the ownership of the stock gives you a dividend payment every year in the future. If you own a bond, you get a coupon; and at the end of the maturity of the bond, you get back the principal.

That’s not the case with cryptoassets, such as Bitcoin. There is really no claim to a future cash flow. It is based on the belief that, in the future, there are other buyers that are going to buy the cryptoasset at a higher level. It’s much more difficult to determine what the fundamental value of a cryptoasset should be.

Now, having said that, there are cryptoassets that have reserves, and those are actually called stablecoins. So when you buy such a cryptoasset, your proceeds are [placed] into a reserve fund, such as cash or deposits with a bank, and you have a claim on that reserve if you own this particular cryptoasset. So that’s a very, very different construct from cryptoassets, such as Bitcoin or Ethereum.

I would just note that volatility has been high. Traditionally, up until last year, correlations of cryptoassets with equity markets and [other] risk assets was very low; but this year, that has shifted. So correlations with equity market is increasing, and our interpretation is that more institutional investors are moving into that space. So this is generating this correlation in between equities and cryptoassets. So that is making cryptoassets potentially more systemic.

Even though there are 2 trillion, this is still small, relative to global asset markets, which are over 100 trillion in the aggregate. But for some countries, for some emerging markets, in particular, the magnitude of trading in cryptoassets and the share of ownership and the capital flows across borders associated with cryptoassets, all of these things already amount to large numbers that can be macro‑critical for some countries.

Ms. LOUIS: Thank you, Tobias.

Just staying with crypto. You just said that it was systemic, so this question sort of follows nicely after that. It’s coming from NIKKEI. QUESTION: It seems that the U.S. government is considering regulations on companies that issue stablecoins as strong as those on banks. How do you evaluate that? Do you see this regulation warranted?

Also, here is another question, still staying on the subject, but it’s more regional. And he asks: El Salvador made Bitcoin a legal tender in September. Do you see any issues with this? Does the IMF support this move?

Mr. ADRIAN: Thank you.

In Chapter 2 of the Global Financial Stability Report, we analyzed the crypto ecosystem in detail, and we list many policy recommendations. In our assessment, it is warranted for country authorities to tighten regulations around the crypto ecosystem. And one of the ways this can be done is by regulating wallet providers.

Typically, an individual or as a firm, to access crypto markets, you are using a wallet provider. And at that level, you should give your identity so that your identity can be used in order to make sure that transactions are legitimate. At that point, you can also regulate the degree of leverage and risk taking that individuals are taking in this important market.

Finally, you can take investor protection steps. At the moment, there’s really no investor or consumer protection in this space. So regulators around the world are moving toward having more regulation of the crypto ecosystem.

Now, let me turn to countries adopting Bitcoin as a national currency. In our view, that is a step too far. We would not recommend that countries adopt Bitcoin as a national currency for a number of reasons, the main reason being that it is highly volatile. When you “bitcoinize,” so to say, your country, you are importing the volatility of this cryptoasset, and that could have macroeconomic consequences. There are a host of other issues related to financial stability, financial integrity as well, and we put out a blog post in July that is explaining all of these challenges.

Ms. LOUIS: So just one other question. QUESTION: The People’s Bank of China has banned all transactions related to cryptoassets. Do you agree with this approach?

Mr. ADRIAN: Well, different countries are taking different steps to the crypto universe.

Forbidding transactions in a particular cryptoasset entirely is, of course, one way to address risks. However, there are thousands of cryptoassets out there. By some counts, there are more than 7,000 cryptoassets out there. So if you forbid one cryptoasset, of course, your population could start to trade in other cryptoassets. And then the question is, do you want to outlaw all cryptoassets or only some cryptoassets?

There are some benefits to these technologies. Right? Cryptoassets are popular because they use very powerful technologies, blockchain, and distributed ledger technologies. And those can be used for many very good purposes, such as financial inclusion, lower costs of doing financial transactions, allowing firms to access capital markets more cheaply. Our general policy approach is to advise our membership to take a policy approach that is minimizing the risks of [new activities] in cryptoassets, but it’s also taking advantage of the benefits of the new technologies. So, it’s balancing the risks and benefits in an appropriate manner.

Now, for different countries, that means different things, because every country has a different institutional setup, a different lead setup, and different financial institutions. There is no one‑size‑fits‑all recommendation at this point.

Ms. LOUIS: Tobias, I see we are almost coming to the end. We will take one last question. This comes from [Heather Scott]. QUESTION:: Can you be more specific about the areas where you see financial risks building and how policymakers should deal with them?

I guess this is sort of a global approach.

Mr. ADRIAN: Thank you so much for this question. That really goes to the core messages of the Global Financial Stability Report.

We are seeing vulnerabilities that are rising in three areas. There are stretched asset valuations in certain segments of risky asset markets. There are also deteriorating underwriting standards in some of those asset markets. So that is one pocket of vulnerabilities. Secondly, leverage is rising around the world among sovereigns and in the corporate sector. And higher leverage exposes countries and corporations to potential reversals in interest rates or widening credit spreads. Finally, there is the risk of capital flow reversals to emerging markets. So those are three vulnerabilities that are extremely important.

How central banks are moving forward with policies, in terms of interest rates and asset purchase programs, is going to determine how financial conditions will evolve. So the interactions between policy steps going forward and communication about those policy steps going forward, this interaction between the policies, on the one hand, and the vulnerabilities, on the other hand, is going to determine how global financial stability is evolving.

There are difficult trade‑offs for policymakers -- trade‑offs between inflation and real activity and trade‑offs between financial stability today and financial stability in the medium term, both intertemporal and intra-temporal trade‑offs for policymakers. So, these are difficult balancing acts, and we are aiming to help our membership to take the right policy steps to make sure that global financial stability is ensured.

Ms. LOUIS: Thank you very much, Tobias.

And thank you very much for joining us today. Before we wrap up, I do want to say we will have the Fiscal Affairs Department conference this week and all our regional briefings next week. So please do tune in. Thank you again for joining us today and stay safe.