IMF advises central banks to begin strict supervision and oversight

The International Monetary Fund (IMF) has said that in order to maintain financial stability, central banks can implement vital safeguards.

The Fund said these safeguards include robust surveillance and regulation and supervision of nonbank financial intermediaries (NBFIs).

The IMF added that discretionary marketwide operations should be temporary and designed to restore market functioning while containing moral hazard.

“Central banks could grant access to standing lending facilities to reduce the spillovers to the financial system,” it said.

The Fund indicated that nonbank financial intermediaries (NBFIs) play a key role in the global financial system, enhancing access to credit and supporting economic growth.

Also, NBFIs’ financial vulnerabilities might have increased in the past, amid low-interest rates.

NBFI stress tends to emerge with elevated leverage, liquidity mismatches, and high levels of interconnectedness that often spill over to emerging markets.

In the current environment of high inflation and tighter financial conditions, central banks can face complex and challenging trade-offs during market stress, between addressing financial stability risks and achieving price stability objectives.

Policymakers need appropriate tools to tackle the financial stability consequences of NBFI stress.

NBFI direct access to central bank liquidity could prove necessary in times of stress, but implementing appropriate guardrails is paramount.