COVID-19 Worsens Pre-existing Financial Vulnerabilities

By Tobias Adrian and Fabio Natalucci عربي, 中文, Español, Français, 日本語, Português, Русский Much the same way COVID-19 hits people with pre-existing health conditions more strongly, so is the pandemic-triggered economic crisis exposing and worsening financial vulnerabilities that have built up during a decade of extremely low rates and volatility. Our recently released chapters 2-4 of the  Global Financial Stability Report focus on three potential weak spots: risky segments in global credit markets, emerging markets, and banks. Should the ongoing economic contraction last longer or be deeper than currently expected, the resulting tightening of financial conditions may be amplified by these vulnerabilities, causing more instability or even a financial crisis. Vulnerabilities in credit markets, emerging countries and banks could even cause a new financial crisis. Risky corporate credit markets Risky segments of credit markets have expanded rapidly since the global financial crisis. Potential fragilities include borrowers’ weaker credit quality, looser underwriting standards, liquidity risks at investment funds, and increased interconnectedness. On the positive side, risky corporate credit markets our analysis finds that investors’ use of borrowed funds to finance their investments in these markets is less prevalent and that banks’ are not as heavily exposed to leveraged loans and high-yield bonds as in the past. Both factors … Continue reading COVID-19 Worsens Pre-existing Financial Vulnerabilities