The release overnight of the International Monetary Fund's (IMF's) Global Financial Stability Report (GFSR) highlights the extremely difficult situation financial markets are currently experiencing and urges a decisive international policy response to restore confidence in the global financial system.
The report underscores the importance of engaging with international policy-makers at a time of widespread financial upheaval and comes on the eve of critical World Bank and IMF meetings I will be attending in Washington this weekend.
The report notes that the failure to restore badly shaken confidence in global financial institutions and markets could lead to a period that is 'increasingly disorderly and costly for the real economy'. The IMF has significantly raised its estimate of aggregate losses on US loans and securitized assets to about US$1.4 trillion due to rising default rates and recent heightened market distress.
The GFSR's identification and assessment of risks to global financial stability, and policy measures that could be helpful in responding to the current turmoil, are welcome and should be addressed urgently.
To restore confidence, the IMF recommends that authorities in affected countries commit to address the issue in a consistent and coherent manner. There is also more for the IMF to do, in cooperation with the Financial Stability Forum, to develop early warning systems of institutional vulnerabilities and provide advice on remedial policies. Regular scenario analysis should also be undertaken and included in future GFSRs to inform international work on risks facing the global financial system.
I will raise these issues, and other reforms necessary to strengthen the global financial system against future systemic crises, with senior IMF officials and international counterparts during my visit to the US for the IMF and World Bank Annual Meetings.
At the meetings I will be continuing the Rudd Government's concerted efforts in the international arena to drive reform of the global financial architecture.
Australia has a strong regulatory framework for the financial sector which has ensured Australian deposit-taking institutions continue to maintain sound balance sheets. However, Australia is not immune from developments in international financial markets.
The Government, in concert with Australian regulators, has been taking steps to strengthen the resilience of Australia's financial sector in the face of current challenges. These steps include enhanced liquidity arrangements and increased prudential oversight, support for Australian credit markets by issuing additional Commonwealth Government Securities, banning detrimental short‑selling practices and improved crisis management arrangements including a Financial Claims Scheme.
Australia has also been active in international forums and has made significant progress in fully implementing the recommendations of the Financial Stability Forum.
The Australian economy is not immune from global financial market turmoil, but we are better placed than many other countries around the world to withstand the problem. Nevertheless, continuing instability in global financial markets remains a clear risk to Australia's economic outlook.