‍The International Monetary Fund (IMF) said that global financial stability has continued to improve but that new threats are emerging from elevated political and policy uncertainty around the globe, in its Global Financial Stability Report.

One of the key elements underpinning the judgement that financial stability has improved is the stronger overall economic outlook that the IMF published earlier.

Some risks in emerging markets have fallen as the prices of the commodities some of them produce, such as oil, have partly recovered from recent lows. Many banks in these countries have strengthened their financial foundations.

The IMF's recurrent concern has been about the possibility of more protectionist trade policies - measures that create new barriers to imports.

If countries were to go down that path - and it seems to be the US under the new administration in Washington that the IMF is most concerned about - the report warns that businesses in emerging economies that are closely integrated into global trade and capital markets could face lower foreign revenues and higher borrowing costs.

‍The IMF warned that the prolonged period of low interest rates and low growth that has characterized the global economy since the 2008 financial crisis may not end any time soon. That in turn could pose “significant challenges” to financial institutions and force them to make fundamental changes to their business models.

Although interest rates have recently started to rise in the US, “the experience of Japan suggests that an imminent and permanent exit from a low-interest-rate environment need not be guaranteed,” according to the Global Financial Stability Report.

Japan has had ultra-low interest rates for almost three decades, while other developed countries cut borrowing costs aggressively in response to the deep financial and economic crisis that began almost a decade ago.

The former US treasury secretary Larry Summers, say the global economy is gripped by "secular stagnation", in which excessive savings and weak investment lead to weaker growth and lower interest rates.

Many major economies are experiencing a combination of slow-moving structural shifts, the report notes, including an aging population and slower productivity growth. “In such an environment, yield curves would likely flatten, lowering bank earnings and presenting long-lasting challenges for life insurers and defined benefit pension funds,” the IMF said.

Smaller banks that were less diversified were likely to disappear if the global economy stagnated, with many bought by bigger rivals or forced into bankruptcy.

Larger banks in advanced economies would seek higher returns by taking bigger risks in international lending and investment activities.

Life insurance companies also face threats to their profits and solvency, according to the IMF. Investments favored by life insurers, such as bonds, typically have shorter terms than their liabilities. As a result, insurers may have to reinvest maturing assets at lower yields while continuing to make high payouts on their policies, which could require them to raise more capital.

However, not everyone would be hurt by an extended period of stagnation. With defined benefit plans giving way to defined contribution plans, asset managers would see their market share increase as more people invest their retirement savings in stocks, bonds, and mutual funds. Asset managers could also siphon business away from life insurers as clients seek alternatives to the low yields provided by whole-life policies and other insurance products.

The IMF offered a few suggestions for how policymakers and regulators can respond to changes in the financial landscape:

- Make it easier to consolidate or liquidate failing banks, allowing the remaining firms to improve their profitability.

- Efforts should be made not just to facilitate consolidation of smaller banks but also to “limit excessive risk-taking and avoid a worsening of the too-big-to-fail problem”.

- Introduce frameworks that recognize the financial condition of insurance companies and pension funds by consistently evaluating assets and liabilities based on economic value.

Nothing is certain, of course, the IMF underscored. “The question is whether the post-crisis landscape represents a temporary departure from the pace of growth we’ve come to expect since World War II,” the report said, “or whether it’s the start of a new normal.”

“Low growth and aging populations would likely lower credit demand by households and firms and increase household demand for liquid bank deposits and transaction services. Consequently, in this scenario, domestic banking in advanced economies may generally evolve toward provision of fee-based and utility services.” said the IMF.

Many banks around the world already charge current account fees, as well as upfront fees on credit cards, mortgages and money transfers.

While the IMF signaled there was scope to make more money in this area , it noted the rising popularity of companies such as TransferWise, which offer cheap ways to send money abroad at competitive rates.

The IMF said "if current trends in financial technology continue, the long-time pre-eminence of banks in payment services is not guaranteed".

While banks in Japan had not introduced additional account maintenance fees on deposits in the low-rate environment, many had been able to "increase non-interest income more effectively through fees and commissions on sales of investment trusts and life insurance products".