Global financial stability "remains fragile" and systemic risks "seem to be returning" to global financial markets, according to the International Monetary Fund's Global Financial Stability Report Update. There is a negative feedback loop between the real economy and global financial markets, and markets are continuing to face challenges despite policy efforts by global authorities, the report read.
Credit risk is "expanding…widening and deepening," the IMF's Jaime Caruana, Director of the Monetary and Capital Markets Department said in a statement.
The losses in the subprime mortgage markets have "largely been acknowledged," the IMF said, although the losses were said to be high.
Losses within banks are expected to grow, the report said, predicting that there will be "future losses" at large commercial banks in the United States. This prediction was "reinforced by the failure of IndyMac."
"Although banks have succeeded in raising additional capital, balance sheets are under renewed stress and bank equity prices have fallen sharply," the report read. "This has made raising additional capital more difficult and increased the likelihood of a negative interaction between banking system adjustment and the real economy."
Declining house prices outside of the United States have added to concerns about additional losses in mortgage, construction, and commercial property areas, the IMF said.
"Stemming the decline in the U.S. housing market is necessary for market stabilization as this would help both households and financial institutions to recover," the report read. "At the moment, a bottom for the housing market is not visible; however, some recent developments in affordability may provide support for house prices to stabilize."
The housing market in the United States is the center of negative feedback loop, Caruana said.
In addition, "inflationary pressures" are on the rise, Caruana added. One positive note is with emerging markets, which have remained "relatively resilient to the credit turmoil," the report said. However, the IMF cautioned that inflationary pressures have placed some of the emerging markets under "increased scrutiny."
Policy responses by central banks around the world have, up until now, "succeeded in containing systemic risks." However, the IMF urged that additional capital may need to be raised in order to assist struggling financial institutions.
In particular, the response to the weakness of embattled lenders Fannie Mae (FNM) and Freddie Mac (FRE) should include examinations of the GSEs flawed regulatory framework, the IMF said.
"Further examination of the GSEs' business model and oversight will be needed once conditions have stabilized," the IMF said, noting that the legislation in Congress includes establishing an independent regulator.
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