Odd Lots Fabio Natalucci on How to Think About Financial Risk Right Now
Feb 9, 2023
Fabio Natalucci, the Deputy Director of the IMF's Monetary and Capital Markets Department, shares his insights on current financial risks. He discusses the Federal Reserve's rapid interest rate hikes and examines why the financial system remained surprisingly stable despite these shifts. Topics include liquidity risks highlighted by the UK real estate fund issues and the resilience of non-bank financial institutions. Natalucci emphasizes the need for vigilance against unnoticed risks and the impact of recent changes since the 2008 crisis.
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Defining Liquidity
- Market liquidity is the ability to sell a position quickly at market prices.
- This should be achievable without significantly impacting overall prices.
2022 Financial Stability
- Despite rapid interest rate hikes in 2022, the financial system remained largely stable.
- The UK pension LDI crisis exemplifies how liquidity issues and leverage amplify risks.
IMF's Approach to Financial Stability
- The IMF assesses financial stability by identifying vulnerabilities that amplify shocks.
- They analyze different sectors and vulnerabilities like liquidity, leverage, and interconnectedness.