The global financial system continues to face elevated risks, including rising interest rates and the persistence of vulnerabilities that prevailed during the financial crisis, cautions a report from the Organisation for Economic Co-operation and Development (OECD).
The report, 2018 Business and Finance Outlook, highlights major risks that, have the potential to disrupt global economic growth. In particular, the ongoing normalization of monetary policy, at a time when debt levels are growing, “will be a major test of whether the Basel III regulatory reforms have achieved their goal of ensuring safety and soundness in the financial system,” the OECD said in a news release.
Although the capital rules for global banks have been toughened in response to the crisis, the business models of the world’s major, systemically-important banks, “have changed little since before the crisis,” the OECD said.
The report points out that the notional value of over-the-counter derivatives, which represents a gauge of interdependence, is now “only slightly below its pre-crisis peak of US$586 trillion in late 2007.”
In addition, the global financial outlook will be shaped by “China’s ability to manage risks relating to high indebtedness and leverage in its banking, shadow banking and wealth management industries,” the report says.
It says that information about banks’ exposure to non-performing loans in China, “is obscured by the lack of information about which assets are sitting in off-balance sheet vehicles.” The report warns that these exposures could “disrupt growth beyond China if further changes to the structure of financial markets and institutions are not considered in major advanced and emerging economies …”