1. The Quest for Lasting Financial Stability Centre International d'Etudes Monétaires et Bancaires José Viñals Financial Counsellor International Monetary Fund May 8, 2012

2. EM Risks Deleveraging Scenarios Policies Global Situation

3. Global Financial Risk Indicators Have Improved Risk Indicators Risk Appetite 1

4. But Markets Are Volatile And Stability Is Fragile 2 (September 2011 = 0)

5. Not Out Of The Crisis Yet Sovereign and Bank Spreads Sovereign and Bank Spreads (in basis points) 3 Buildup of StressCrisis Begins Policy ResponseRelief Political Resistance and/or Complacency

6. Global Situation Deleveraging Scenarios EM Risks Policies

7. Further Efforts Needed To Achieve Lasting Stability In The Euro Area And Avoid Downside Risks Weak Policies Current Policies Escalating funding pressures Credit crunch Falling growth Global contagion Funding markets normalize Smooth deleveraging Higher growth Complete Policies Market funding strains Credit squeeze Home bias Low growth Negative spillovers 4

8. Structural Shed Legacy Assets Better Capitalization Reduce Reliance on Wholesale Funding Cyclical Earnings Pressures Funding Pressures Drivers of Bank Deleveraging 5

9. European Banks Need To Reduce Leverage And Shrink Balance Sheets Bank Leverage (Adjusted tangible assets to Tier 1 common capital) Bank Loan-to-Deposit Ratios (Loans as a percentage of deposits) 6

10. What Are The Effects Of Deleveraging On The Region… 7 2012-2013 (in percent of end-2011 stock, deviation from baseline growth) -1.4% -4.4% -$3.8 tn -1.7% -$2.6 tn 0.0% -$2.2 tn -0.6% +0.6% Current Policies Complete Policies Weak Policies

11. ..And On Credit In The Rest Of The World? 8 Impact of EU Bank Deleveraging On Global Bank Lending Supply (in percent of total bank credit)

12. U.S./Japan Public Debt: Latent Risk To Stability Required Fiscal Adjustment and Interest Rate 9 U.S. Japan Historical Volatility in One-Month U.S. Treasury Bills During Debt Ceiling Negotiations (in percent)

13. Global Situation EM Risks Deleveraging Scenarios Policies

14. Emerging Market Portfolio Flows (in billions of U.S. dollars, 3-month moving average) Emerging Market Asset Performance (January 1, 2010=100) 10 Capital Flows Have Become More Volatile And Less Predictable Capital Flows Have Become More Volatile And Less Predictable

15. What Happens If Bank And Portfolio Flows Reverse? 11 Credit to GDP Ratio GDP Growth Rate

16. Fiscal Policy Room Monetary Policy Room Credit Policy Room 12 Hungary Poland Russia Turkey South Africa China India Indonesia Korea Brazil Mexico Peru EMs Have Policy Room To Buffer Shocks But Homegrown Vulnerabilities Remain EMs Have Policy Room To Buffer Shocks But Homegrown Vulnerabilities Remain 10.7368405 36.57098271 39.78204563 23.29249406 23.5610262 30.28578836 63.97290738 21.60017491 3.1 6.11615086 5.5 3.5 8.549267935 3.2 5.003352744 3.345152851 2.499537501 -0.794832851 7.027696688 9.433981925 11.03613394 4.465779187 7.12925671

17. EM Risks Global Situation Deleveraging Scenarios Policies

18. Policy: The Quest For Lasting Stability Euro Area Breathing Space Limited And Shrinking; Use It Wisely National: Banking: “More & Better Europe”: 13 Implementation key Recap/restructure/resolve; use public money if needed Roadmap to further integration: - Financial: Pan-European supervision and resolution - Fiscal: Ex-ante risk sharing (central financing mechanism)

19. Policy: The Quest For Lasting Stability U.S., Japan Start Addressing Medium-Term Challenges Now Keep sovereign bonds safe: Fiscal consolidation strategies Emerging Markets Do Not Take Stability For Granted Preserve policy space and buffers Macro + prudential + liquidity instruments GlobalThe World Needs More Collaboration IMF resources Regulatory reform 14

20. Together: Together: Strong, Sustainable, Balanced Global Growth Advanced Economies Advanced Economies : Achieve Lasting Stability for Stronger Growth Emerging Markets Emerging Markets : Maintain Stability for Continued Growth No Time to Pause or Relax: This Time Must Be Different Financial Stability 15