InvestmentsOct 17 2014

IMF cuts global forecast, warns on shadow banks

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ByAlexander Jackman

Geopolitical tension, stagnating growth and concerns over growing shadow banking are presenting downside risks to economies, the International Monetary Fund has warned.

In its 192-page Global Financial Stability Report: Risk Taking, Liquidity, and Shadow Banking; Curbing Excess while Promoting Growth, the IMF warned that the global economy was facing several tail winds that could pose threats to investors.

As a result, the IMF has cut its forecast for global growth in both 2014 and 2015, from 3.4 per cent in July to 3.3 per cent, while the 2015 forecast has been cut from 4 per cent in July to 3.8 per cent.

According to the IMF, increased geopolitical tensions and stagnating growth are “key downside risks”, while in advanced economies, such as the US, UK and Canada, which are growing at, or just above, their normal rate of expansion, raising growth will require continued support from monetary policy and fiscal adjustment.

Key facts

* The US growth forecast for 2014 has been upgraded from 1.7% in July to 2.2%

* UK will grow at 3.2% in 2014 and 2.7% in 2015

Source: IMF

The report also suggested that shadow banking, which it “freshly defines as financing of banks and nonbank financial institutions through noncore liabilities” – has shifted to “less-well-monitored activities” since 2008.

These include bond funds, investment funds and country-specific entities. The report noted that the growth of new entities, coupled with a lack of data on shadow banking, was an impediment to risk management.

The growth in shadow banking was driven in part by a desire to circumvent tighter regulation of the banking sector, and could result in greater oversight and regulatory intervention.

It said: “Shadow banking entails potential externalities and market failures that are unlikely to be solved privately... the lack of a safety net means that, for a given contribution to systemic risk, more conservative regulatory measures are needed for shadow banks than for banks.

“Monitoring of shadow banking should be part of the macroprudential policy framework that aims to address systemic stability risks more broadly. A one-size-fits-all approach to shadow banking regulation is not likely to work.”

The report also suggested several policies to regulate shadow banking, including “extending the regulatory boundary” and capital requirements. However, it shied away from recommending access to a lender of last resort, since “access to central bank funding entails substantial moral hazard risks... public backstops should be considered only if appropriate regulatory oversight mechanisms are in place.”