An apparent disconnect between relatively buoyant financial markets and gloomy economic fundamentals could set the stage for a rapid market correction, says the Financial Stability Board (FSB).
In a report to the G20 finance ministers and central bank governors, the FSB said that, while policy actions to combat the economic effects of the Covid-19 outbreak have cushioned the blow, “the path of recovery is still uncertain.”
“Significant pricing disconnects between the market and economic forecasts could result in sudden and sharp repricing,” it said.
While market volatility has subsided, it may return. “Risky assets remain vulnerable to shifts in the economic outlook,” the FSB said.
In particular, it pointed to risks related to liquidity stress, corporate debt levels and effects of credit-rating downgrades as areas of concern.
Additionally, the report said lenders “face a challenging combination of deteriorating credit quality and rising credit demand.”
It also stressed the importance of ensuring the resilience of the shadow-banking sector.