Assessing Global Financial Stability

By M. Isi Eromosele

The global financial system has generally remained resilient during the past year, mainly because of continued global economic growth, steady financial markets and improved corporate balance sheets in many countries.

In many global emerging economies, economic fundamentals continue to improve, a result of efforts that has enhanced the credibility of their financial framework and the quality of their debt structure.

The return of overall improvement of good profitability in the corporate and financial sectors has been instrumental in bolstering their balance sheets. The ratio of liquid assets to debt in their balance sheets has returned to a comfortable level and held steady for the past year.

This preference for liquidity is a reflection of caution being exercised by corporate executives in making investments. It should be noted, though, that mergers and acquisitions deals has accelerated recently.

The result of this caution is slow growth in employment in many countries, notably in the United States. On a brighter note, it has mitigated the risk of the generation of investment excesses which resulted in sharp market corrections in the past.

Global financial institutions have improved their profitability, even as they strengthened their capital base and improved their risk management systems. The solvency ratio within the insurance sectors has recovered in many nations.

The result of these developments is that global financial institutions are much better prepared to weather future financial shocks and have significantly improved the health of the financial system.

At Oseme Finance, our optimistic appraisal of the global financial stability is bolstered by the encouraging prospects for the world economy. We forecast that the global economy is likely to experience steady but slow growth in the near future, with inflation held in check.

This forecasted global economic environment will enable financial institutions to further improve and bolster their financial systems. This assessment does not rule out the possibility that individual financial institutions and sovereign borrowers may experience difficulties.

While there is no reason to expect the current global financial situation to change in the near term, there are a number of risks that may test the resiliency of the financial system. It would be prudent for reformulate the plans that would mitigate these inherent risks.

Complacency is the most important risk factor for financial market at a time of steady growth. The current risk premiums for inflation and credit risks leave no margin for error in terms of financial asset valuations.

This combination of low risk premiums and untested components of risk management systems dealing with complicated financial instruments could be a threat to global financial markets.

Necessary currency adjustments have been made within the past year to address global imbalances. However, this may not be enough on its own to reduce global imbalances. Additionally, there needs to be reduction in growth differentials between the United States and several of its major trading partners.

The growing sophistication of financial market systems during the past year has greatly reduced the risk of shock contagion that characterized past global financial crises.

The interaction between liquidity risk and other potential triggers of market shocks as well as making changes in global capital flows will have to be at the forefront of future efforts to continually improve the global financial system.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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