by Ma Wenbo and Li Qi

    ISTANBUL, Sept. 30 (Xinhua) -- Global financial stability has improved following unprecedented policy actions and signs of economic recovery, but overall risks remain elevated and the risk of reversal remains significant, the International Monetary Fund (IMF) said Wednesday in a report.

    The IMF lowered its estimate of losses from the global financial and economic crisis to 3.4 trillion U.S. dollars, around 600 billion dollars lower than its last report in April, largely due to rising securities values, according to the agency's Global Financial Stability Report (GFSR).

Jose Vinals, director for the International Monetary Fund's monetary and capital markets division, speaks during a news conference on the IMF's release of the Global Financial Stability Report (GFSR) in Istanbul, Turkey, Sept. 30, 2009. Global financial stability has improved following unprecedented policy actions and signs of economic recovery, but overall risks remain elevated, the IMF said in the GFSR. (Xinhua/Zhang Meng) Photo Gallery>>>

    The estimate covers the period from the beginning of the financial crisis in mid-2007 to 2010. The total cost represents what was needed and would be needed by financial institutions because of the deterioration in credit.

    Policy actions to inject liquidity into markets, stabilize bank balance sheets and restore credit market functioning have successfully reduced systemic risks in mature economies, said Jose Vinals, IMF financial counselor and director of monetary and capital markets department.

    With core markets stabilizing, emerging market risks have subsided, while the new facilities and augmented resources of the IMF have helped cut tail risks in vulnerable countries, Vinals told a press briefing in Istanbul where the GFSR is released.

    "We are on the road to recovery, but this does not mean that risks have disappeared," he said.

    The semi-annual report said financial institutions continue to face three main challenges, namely rebuilding capital, strengthening earnings, and weaning themselves off government funding support.

    Securities write-downs have begun to taper, but credit deterioration will continue to lead to higher loan losses over the next few years, it said. Bank write-downs on holdings of loans and securities realized between mid-2007 and mid-2009 have amounted to1.3 trillion dollars.

    "Banks' capital positions and earnings have substantially improved since the last GFSR, and significant capital has been raised," Vinals said.

    "However, if the question is whether banks have enough capital to supply sufficient credit to support the recovery, we believe that the answer is 'no'," he said.

    With stead-state earnings likely to be lower in the post-crisis environment, stronger action is needed to bolster bank capital and earnings capacity to support lending, the report noted.

    For emerging markets, the report said Asia and Latin America have benefited most from the stabilization of core markets and a recovery in portfolio inflows, and the tail risks in those emerging markets have declined as a result of strong policy measures.

    But Vinals pointed out that emerging market corporates face sizeable foreign-currency debt refinancing burden over the next two years.

    "Countries facing external and domestic imbalances and with heavy reliance on cross-border bank inflows will continue to remain vulnerable," he added.

    The analytical report advised that policymakers to ensure sufficient credit growth to support the nascent economic recovery, devise appropriate exit strategies and maintain a balance between regulation and market forces in reducing future systemic risks.

    Moving toward the medium-term, it said policymakers should seek to restore market discipline, address risks posed by systemic institutions, institute a macro-prudential policy approach, and strengthen the oversight of cross-border financial institutions.

    "We need to adopt reforms to financial regulation that minimize the likelihood of future crises, like the present one," Vinals said.

Special Report:  Global Financial Crisis