IMF warning to banks over global financial stability

In its latest Global Financial Stability report, the IMF said that, while stock markets have steadied after recent turmoil, the risk of a further equity rout could knock global growth by as much as 4%.

The Washington-based fund said a repeat of the market woes which sent equities tumbling worldwide last August and again at the beginning of the year could “create a pernicious feedback loop of fragile confidence, weaker growth, tighter financial conditions, and rising debt burdens”.

It estimated this gloomy scenario could leave global growth 3.9% below the baseline over the next five years - equivalent to forgoing one year of global growth.

But it believes proactive moves by central banks to head off these risks could see world output as much as 1.7% above the baseline by 2018.

Jose Vinals, financial counsellor and head of the IMF’s monetary and capital markets department, said: “A key question that this report addresses is whether the turmoil over the past months is now safely behind us, or is it a warning signal that more needs to be done?

“I believe it is the latter: more needs to be done to secure global stability.”

It wants regulators to continue tackling issues within the banking sector left over from the financial crisis, while it said emerging market economies also needed to bolster their resilience to global headwinds.

It pointed to China as the emerging economy most in need of action to stabilise and balance growth.

China’s slowdown in growth was behind the recent stock market turbulence, sparking a lengthy commodities rout amid fears over a slump in demand from the world’s second biggest economy.

The IMF warned that bank loans to companies potentially at risk in China could cause bank losses of around 7% of gross domestic product.

It said the magnitude of these vulnerabilities calls for an “ambitious policy agenda”.