The global financial system still faces threats to its stability, the Institute of International Finance\u2019s Market Monitoring Group warned Tuesday.
The MMG, which is co-chaired by David Dodge, former governor of the Bank of Canada and Jacques de Larosi\u00e8re, former managing director of the International Monetary Fund and former governor of the Banque de France, agreed that, \u201cprolonged economic weakness could pose notable risks for financial stability.\u201d
The MMG cited limited further support from monetary policy and a number of significant potential headwinds to growth, including ongoing deleveraging, lingering financial sector vulnerabilities, and pressure to move ahead with fiscal consolidation, as threats to future growth.
Nevertheless, the group also stressed that the need for fiscal consolidation, most notably in some of the Euro area\u2019s smaller economies, \u201cremains urgent\u201d. While a number of highly indebted governments, including Greece, have shown serious commitment to fiscal consolidation, they noted that the increased likelihood of an extended period of slow growth in major economies in 2011 and beyond, \u201cwill make the task of deficit and debt reduction more challenging.\u201d
\u201cA sustained period of weak growth would also exacerbate existing financial sector vulnerabilities, particularly for many smaller, regional U.S. and EU banks,\u201d the MMG warned. \u201cThese weaknesses include significant exposure to real estate and sovereign debt, high upcoming refunding needs, heavy reliance on central bank funding in some cases, and more stringent capital requirements.\u201d
The MMG also called on policymakers to look for ways to revive the securitization market. And it cautioned that the full impact of regulatory changes on economic growth, such as new global capital requirements for banks, and U.S. market reforms, have not been factored in.
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