Normalization of monetary policy will test Basel III reforms
The gradual return to normal monetary policy amid an environment of growing debt is set to challenge the stability of the global financial system.
The OECD says that it will test whether the Basel III regulatory reforms have genuinely strengthened the resilience of the system, noting that while capital rules are tougher, the systematically important banks’ business models are broadly the same as pre-crisis.
In its 2018 Business and Finance Outlook, the organization says that
the financial outlook will also 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 extent of non-performing loans in China is obscured by the lack of information about which assets are sitting in off-balance sheet vehicles.
These 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, according to the report.
The OECD says that global standards are essential in managing cross-border infrastructure investment.
China’s Belt & Road Initiative must engage with other investing economies and institutions given its largely debt-funded nature and coverage of many countries with challenging business environments.
The report says that significant contributions from OECD countries will be critical in the BRI’s success.
