Odd Lots Fabio Natalucci on How to Think About Financial Risk Right Now
Feb 9, 2023
Fabio Natalucci, the Deputy Director of the IMF's Monetary and Capital Markets Department, shares his insights on current financial risks. He discusses the Federal Reserve's rapid interest rate hikes and examines why the financial system remained surprisingly stable despite these shifts. Topics include liquidity risks highlighted by the UK real estate fund issues and the resilience of non-bank financial institutions. Natalucci emphasizes the need for vigilance against unnoticed risks and the impact of recent changes since the 2008 crisis.
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Market Excesses and Systemic Risk
- Market excesses and stretched valuations become systemic risks when combined with vulnerabilities like leverage.
- Archegos exemplifies how leverage can amplify repricing risks, with impacts on banks through prime brokerage.
Growth and Financial Stability
- Economic growth is crucial for financial stability, as seen in the post-COVID recovery.
- Central bank intervention and fiscal policy fueled growth but also contributed to inflation.
Managing Inflation
- Address inflation proactively to avoid entrenched inflation expectations.
- Failure to do so may require more aggressive tightening later, increasing financial instability risks.