Chapter 1 Key Risks and Challenges for Sustaining Financial Stability Key Risks and Challenges for Sustaining Financial Stability Summary

Risks to global financial stability have declined since the October 2010 Global Financial Stability Report, helped in part by improving macroeconomic conditions. However, sovereign balance sheets remain under strain in many advanced economies, structural weaknesses and vulnerabilities in the euro area pose significant risks to bank balance sheets, credit risks remain high, and capital inflows to emerging markets could strain their absorptive capacity. Many advanced economies are struggling with the legacy of high debt and excessive leverage. High debt levels are evident in many parts of the global economy, including households with negative equity, banks with thin capital buffers and uncertain asset quality, and sovereigns facing debt sustainability challenges. Sovereign balance sheets are under strain in many advanced economies. As long as sovereign funding concerns persist, investors are likely to have a diminished appetite for riskier credits, in turn driving up funding costs and posing rollover risks. Economies with higher marginal funding costs and larger nearterm financing needs are most vulnerable. Incomplete policy action and reform has left segments of the global banking system vulnerable to further shocks. Despite improvements to balance sheets and significant policy initiatives, some bank