by Klaas Knot
What was on our minds when we last met in December 2022? At that time, we had just seen the sharpest tightening of financial conditions since the 2008 global financial crisis. We had concerns about elevated debt levels and interconnectedness between banks and non-bank financial intermediaries amid high inflation and a deteriorating growth outlook. In this context, I emphasized that financial stability could not be taken for granted. So where are we today? Well, these concerns have not vanished; they continue to shape large parts of the FSB’s work. While inflation has somewhat eased, there is still some uncertainty about the persistence of inflation. What’s more, market valuations remain elevated. The tight spreads and low volatility in corporate bond markets are hard to square with rising defaults and upcoming higher refinancing costs. Similarly, equity valuations appear stretched.
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