LATEST UPDATES
Card-image-cap

Market | Global Market

Global Policy Tightening to Test Financial Vulnerabilities

Jul 27, 2022   •   by   •   Source: Fitch Ratings   •   eye-icon 228 views

Fitch Ratings’ latest Macro-Prudential Indicator (MPI) scores suggest the number of countries that are vulnerable to banking sector stress remains low by historical standards. Nevertheless, global monetary tightening will be a test of any macro-prudential vulnerabilities that may have built up during the long period of ultra-low interest rates.
 
Fitch’s MPI scores aim to identify potential stresses in banking systems and the broader economy due to rapid real credit growth accompanied by bubbles in housing or equity markets, or an appreciated real effective exchange rate.
 
The shift to restrictive monetary conditions does not appear to follow a sustained build-up in financial vulnerabilities during the period of very loose policy. MPI scores suggest 23 markets exhibit moderate or high vulnerability to banking system stress. This is unchanged from a year ago, partly because last year’s economic recoveries reversed much of the jump in credit-to-GDP ratios caused by economic contractions during the Covid-19 pandemic.
 
The number of markets with moderate or high vulnerability is up from 15 pre-pandemic, but down from the peak of 59 in 2009, and at 20%, the proportion of elevated MPI scores (2, 2* and 3) is half the average (40%) seen since 2005. Our latest scores point to elevated MPIs for 16 developed markets and only seven emerging markets, although this partly reflects methodology differences.
 
 

Japan and Turkiye join Germany in registering an MPI 3 (high vulnerability) score. These are the only markets where real house price gaps triggered the MPI 3 threshold. Above-trend house prices have not necessarily been accompanied by increased leverage, which should limit damage from potential price corrections. But the economic impact of financial vulnerabilities combined with high inflation will depend on how high interest rates rise and how asset prices and debt-servicing burdens respond.

Related items.

Get the App

apple-store  play-store

Connect with us


Proshare is a professional practice focused on delivering research and information services to bridge the gap between investors and markets; by delivery on credible, reliable, and timely engagements through the following areas — Impact Research, Market Intelligence, Strategic Advisory, Stakeholder Relations & Digital Media.