The financial system outlook

Three major risks are set to shape the financial outlook:1. Monetary policy normalisation: with the unwinding of ultra-low interest rates and the large-scale holdings of sovereign and private sector securities on central bank balance sheets, the transition may be volatile.2. Financial sector vulnerabilities and the extent to which the recent finalisation of G20 reforms, including Basel III, has achieved the goal of a safe and sound financial system in the face of future stresses.3. High indebtedness and leverage, especially related to China’s bank, shadow bank and wealth management businesses, and how well the Chinese authorities will be able to manage related risk.All these risks have the potential to disrupt sustainable growth in the global economy. This chapter examines these three topics, concluding that financial system risk will be elevated in the period ahead.