Global Financial Stability Improved, Still Challenged

Jose Vinals, Financial Counsellor, IMF: "Well, let me start with the positives. The positives are that the normalization of U.S. monetary policy has taken place in the context of a growing economy in the U.S. and this is very good news for everybody in the world.

The second positive is that the Federal Reserve, after a bumpy start in communication, has finally succeeded in convincing markets that tapering is not tightening. This has very much contributed to reduce volatility in financial markets.

But certainly there are some challenges. Challenges coming from the very extensive process of monetary accommodation having led to pockets of financial vulnerabilities of certain segments of the U.S. financial system. For example, the very large issuance of low-quality corporate debt, the worsening underwriting standards, and the very rich pricing in a number of asset prices. All of these things mean that financial policies really have to be vigilant in order to keep financial stability risks under control.

Emerging markets have already been subject to two episodes of volatility. One at the end of May last year, and another one starting in January of this year. The good news is that in both of these episodes the capital outflows have been limited.