Over the last several months, financial markets have made significant adjustments and policymakers have carried out exceptional interventions. Nonetheless, global financial markets continue to be fragile and indicators of systemic risk remain elevated. Credit quality across many loan classes has begun to deteriorate with declining house prices and slowing economic growth. Although banks have succeeded in raising additional capital, balance sheets are under renewed stress and bank equity prices have fallen sharply. This has made raising additional capital more difficult and increased the likelihood of a negative interaction between banking system adjustment and the real economy. At the same time, policy trade-offs between inflation, growth, and financial stability are becoming increasingly difficult. The resilience of emerging markets to the global turmoil is being tested as external financing conditions tighten and policymakers face rising inflation.
Overview of Developments
Credit risks remain elevated and systemic strains in funding markets continue despite official action, while the low level of risk appetite remains unchanged. Financial markets have not returned to the elevated levels of systemic risk seen in the spring, but there is increasing concern over the interaction of the macroeconomic outlook with markets.
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