@Risk

Global financial systems are stabilizing, but significant challenges and risks remain, according to the IMF’s semiannual report, released yesterday.

The latest IMF Global Financial Stability Report (GFSR) estimates that global losses arising from the crisis for 2007-10 have improved to $3.4 trillion –that’s about $600 billion lower than the last GFSR.

However, further deterioration in banks’ loans is to come –because over half of their writedowns are still to be recognized. The report says actual and potential writedowns through end-2010 could amount to as much as $1.5 trillion. So, it’s clear that banks are facing three main challenges:

• rebuilding capital
• strengthening earnings
• weaning themselves off government funding support

The new GFSR also identifies the considerable near-term challenges facing policymakers, namely:

• ensuring sufficient credit growth to support economic recovery
• devising appropriate exit strategies
• managing the risks arising from heavy public borrowing
• maintaining a balance between regulation and market forces in reducing future systemic risks

Increased stability in core markets and a recovery in portfolio inflows have helped reduce risk in emerging market economies, particularly in Asia and Latin America. And, yet refinancing and default risks (in addition to corruption and compliance risks) in the corporate sector remain relatively high. The report suggests that policymakers should work to strengthen the oversight of cross-border financial institutions.

The IMF has also released several videos over the past few days. You can watch a press conference about the new GFSR here. In it, José Viñals, Director, Monetary and Capital Markets Department, IMF, and others talk about the recovering global economy and the risks that remain.