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PREFACE
The Global Financial Stability Report (GFSR) assesses global financial market developments with a view to identifying potential systemic weaknesses. By calling attention to potential fault lines in the global financial system, the report seeks to play a role in preventing crises, thereby contributing to global financial stability and to sustained economic growth of the IMF’s member countries. The report was prepared by the International Capital Markets (ICM) Department, under the direction of the Counsellor and Director, Gerd Häusler. It is managed by an Editorial Committee comprising Hung Q. Tran (Chairman), Elie Canetti, Todd Groome, and Ceyla Pazarbasioglu, and it benefits from comments and suggestions by Axel Bertuch-Samuels and Charles R. Blitzer. Other ICM staff contributing to this issue include Geoffrey Bannister, Nicolas Blancher, Marcelo Carvalho, Peter Dattels, Michael Gapen, François Haas, Anna Ilyina, Andreas Jobst, Herman Kamil, John Kiff, William Lee, Pipat Luengnaruemitchai, Carlos Medeiros, Christopher Morris, Shinobu Nakagawa, Hiroko Oura, Michael Papaioannou, Lars Pedersen, Jorge Roldos, Paul Ross, G. Edwin Smith III, Laura Valderrama, Christopher Walker, Mark Walsh, and Luisa Zanforlin. Jonathan Fiechter, Kalin Tintchev, and Kal Wajid from the Monetary and Financial Systems Department (MFD) contributed banking sector developments in emerging market countries. Martin Edmonds, Ivan Guerra, Silvia Iorgova, Oksana Khadarina, Yoon Sook Kim, Ned Rumpeltin, and Peter Tran provided analytical support. Caroline Bagworth, Rosemarie Edwards, Vera Jasenovec, and Elsa Portaro-Cracel provided expert word processing assistance. Archana Kumar of the External Relations Department edited the manuscript and coordinated production of the publication. This particular issue draws, in part, on a series of informal discussions with commercial and investment banks, securities firms, asset management companies, hedge funds, insurance companies, pension funds, stock and futures exchanges, and credit rating agencies, as well as regulatory authorities and academic researchers in many major financial centers and countries. The report reflects information available up to July 22, 2005. The report has benefited from comments and suggestions from staff in other IMF departments, as well as from Executive Directors following their discussions of the Global Financial Stability Report on August 29, 2005. However, the analysis and policy considerations are those of the contributing staff and should not be attributed to the Executive Directors, their national authorities, or the IMF.
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CHAPTER I
OVERVIEW
he global financial system has yet again gathered strength and resilience. As before, this trend has been fueled by continued balance sheet improvements in the financial and corporate sectors in most countries. The continuing global economic expansion, together with determined efforts to restructure and cut costs, has enabled many financial institutions and corporations to generate substantial, or even record, profits over the past three years. As a result, their balance sheets have strengthened to the extent that the financial and corporate sectors can absorb a significant degree of financial shock before coming under systemic stress. With global growth most likely to continue, inflation under control, and financial markets generally benign, we expect the resilience of the global financial system to improve even further. This improvement provides an important cushion in the event that any of the more medium-term risks discussed below were to materialize. This cushion against risks and vulnerabilities in the medium term may have expanded, but risks have not disappeared altogether.
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Balance of Risks, Current Assessment Hence, in the short term, the current configuration of solid growth, low inflation,