TheIMF said in its April 2016 global financial stability report that stabilityrisks have increased over the past six months amid higher economic risks anduncertainty, falling commodity prices and concerns about China's economy.
Thefund said those developments tightened financial conditions, reduced riskappetite, raised credit risks and hindered balance sheet repair, therebyundermining financial stability.
"Themain message of this report is that additional measures are needed to deliver amore balanced and potent policy mix for improving growth and inflation outlookand securing financial stability," the IMF said. "In the absence ofsuch measures, market turmoil may recur."
Thefund called on policymakers to build on the current economic recovery anddeliver a stronger path for growth and financial stability by addressing legacychallenges in advanced economies, elevated vulnerabilities in emerging marketsand greater systemic market liquidity risks.
Banksin advanced economies have become safer in recent years, with stronger capitaland liquidity buffers and progress in repairing balance sheets, but concernsremain about the profitability of banks' business models in a weak economicenvironment, with approximately 15% of the banks facing significant challengesin attaining sustainable profitability without reform.
TheIMF noted that market pressures are highlighting long-standing legacy issues inthe eurozone, indicating that a more complete solution to European banks'problems cannot be further postponed. European bank equity prices declinedalong with global bank equities, pushing valuations to a record discount toU.S. banks, according to the institution. The banking systems of Greece, Italyand to a lesser extent Portugal, were the hardest-hit systems within theeurozone, along with some large German banks.
Thedecline reflects structural problems of excess bank capacity, high levels ofnonperforming loans and poorly adapted business models. The IMF called forurgent action to address the high NPL levels and a solution to tackle excesscapacity in the eurozone.
Meanwhile,U.S. banks face rising risks from the weakening baseline outlook. Americanbanks are more profitable and have low levels of nonperforming assets, and theyare likely to experience a limited impact from the slowdown in emerging marketeconomies.
TheIMF noted that mortgage markets continue to benefit from significant governmentsupport, adding that authorities should reinvigorate efforts to reduce thedominance of FannieMae and FreddieMac and continue reforming the two institutions.