Global Financial Stability Report

Restoring Confidence and Progressing on Reforms

October 2012

Disclaimer: As used in this volume the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.

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The October 2012 Global Financial Stability Report (GFSR) finds increased risks to the global financial system, with the euro area crisis the principal source of concern. The report urges policymakers to act now to restore confidence, reverse capital flight, and reintegrate the euro zone. In both Japan and the United States, steps are needed toward medium-term fiscal adjustment. Emerging market economies have successfully navigated global shocks thus far, but need to guard against future shocks while managing a slowdown in growth. This GFSR also examines whether regulatory reforms are moving the financial system in the right direction, and finds that progress has been limited, partly because many reforms are in the early stages of implementation and partly because crisis intervention methods are still in use in a number of economies, delaying the movement of the financial system onto a safer path. The final chapter assesses whether certain aspects of financial structure enhance economic outcomes. Indeed, some structural features are associated with better outcomes. In particular, financial buffers made up of high-quality capital and truly liquid assets tend to be associated with better economic performance.

 

Contents

Front Matter

Executive Summary
Preface

Chapter 1. Global Financial Stability Assessment

This chapter assesses changes in the global financial stability conditions and risks since the last report and discusses policy responses, highlighting that euro area crisis remains the principal risk, emerging markets are most susceptible to spillovers (with some of them also facing domestic vulnerabilities and reduced policy space), while the United States and Japan need clear plans for medium-term fiscal adjustment to sustain confidence.

Boxes
1.1 Falling Confidence, Rising Risks, and Complacency
1.2 Recent Policy Initiatives, Developments, and Challenges in the Euro Area
1.3 Resilience of the Euro, or Fragile Equilibrium?
1.4 Regulatory Reform: From Rulemaking to Implementation
Figures
Data 1.1 Global Financial Stability Map
Data 1.2 Global Financial Stability Map: Assessment of Risks and Conditions
Data 1.3 Asset Price Performance since April 2012 GFSR
Data 1.4 Cumulative Flows to Global Mutual Funds
Data 1.5 Portfolio and Other Investment Capital Flows in the Euro Area, Excluding Central Banks
1.6 Spain and Italy: Changes in Foreign Investor Shares and Yields
Data 1.7 Euro Area Exposures to Greece, Ireland, Italy, Portugal, and Spain
Data 1.8 Periphery Minus Core Credit Default Swap Spreads
Data 1.9 Total Deleveraging by Sample Banks
Data 1.10 Reduction in Euro Area Supply of Credit under Alternative Policy Scenarios
Data 1.11 Impact on Investment from EU Bank Deleveraging
Data 1.12 Impact on Employment from EU Bank Deleveraging
Data 1.13 Impact on GDP from EU Bank Deleveraging
Data 1.14 Reduction in Bank Assets: Sensitivity to Periphery Sovereign Spreads

Chapter 2. Restoring Confidence and Containing Global Spillovers

This chapter provides a detailed analysis of the key challenges facing the euro area, United States, Japan, and emerging markets, building upon earlier work on European bank deleveraging and exploring the sovereign-banking nexus in Japan as well the stability of U.S. financial markets in the face of short and medium term policy challenges.

Boxes
2.1 Systemic Risk in International Dollar Credit
2.2 Why Are Euro Area Periphery Sovereign Spreads So High?
2.3 European Bank Deleveraging: An Update
2.4 Corporate Sector Fundamentals, Funding Conditions, and Credit Risks
2.5 Key Challenges for the Dealer Operations of U.S. Banks
2.6 How Impaired Is Liquidity in the U.S. Corporate Bond Trading Market?
2.7 Avoiding the Pitfalls of Financial Liberalization in China—Credit Risk, Liquidity Mismatches, and Moral Hazard in Nonbank Intermediation
Tables
Data 2.1 Indebtedness and Leverage in Selected Advanced Economies
Data 2.2 Banking Financial Stability Indicators
Data 2.3 Sovereign Market and Vulnerability Indicators
2.4 Key Features of Sovereign Funding and Bank Deleveraging Scenarios
Data 2.5 Holdings of Treasury Securities, by Sector
Data 2.6 Impact on Domestic Bank Balance Sheets from a Hypothetical Reversal of Foreign Inflows into Local Bond Markets
2.7 Overview of Recent Macroprudential and Capital Flow Measures in Selected Emerging Market and Other Economies
Data 2.8 Indicators of Vulnerability and Policy Space for Emerging Market and Other Economies
2.9 Summary of Updates in the Deleveraging Exercise
2.10 Assumptions on Key Macro-Financial Variables
2.11 Average Funding Rollover Rates
2.12 Amount of Additional Funding Required from Domestic Investors
2.13 Progress on the Implementation of Business Plans by Selected EU Banks
Figures
Data 2.1 Government Bond Yields and Volatility
Data 2.2 Bank Holdings of Government Bonds in Spain and Italy
Data 2.3 Sovereign–Bank Nexus for Italy and Spain
Data 2.4 Portfolio Outflows from Italy and Spain
Data 2.5 Periphery Minus Core Bank Credit Default Swap Spreads
Data 2.6 Euro Area Bank Debt Issuance
Data 2.7 Bank Deposit Flows in the Euro Area
Data 2.8 Bank Customer Deposit Trends
2.9 Changes in the Sovereign Investor Base
Data 2.10 Bank Credit to Domestic Governments and the Private Sector, Selected Euro Area Countries
Data 2.11 Change in Euro Area Bank Cross-Border Exposures
Data 2.12 Change in Interest Rate on New Bank Loans
2.13 Pressure on Euro Area Banks
Data 2.14 Total Deleveraging by Sample Banks
Data 2.15 Total Deleveraging Due to Selected Stand-Alone Factors
Data 2.16 Reduction in Supply of Credit to Euro Area: Core versus Periphery
Data 2.17 Reduction in Credit Supply: Global Spillovers
Data 2.18 Impact of EU Bank Deleveraging on GDP, 2013 Projection
Data 2.19 Reduction in Credit Supply to Euro Area: Sensitivity to Periphery Sovereign Spreads under Alternative Policy Scenarios
Data 2.20 Bank Credit to Nonfinancial Firms in Italy and Spain
Data 2.21 Corporate Bond Issuance Needs through End-2013 under Alternative Deleveraging Scenarios
Data 2.22 Projected Average Interest Rates on Outstanding Sovereign Debt
Data 2.23 Projected Sovereign Interest Expense as a Proportion of Revenue
2.24 Sovereign and Corporate Credit Ratings in the Euro Area Periphery
Data 2.25 TARGET2 Projections
Data 2.26 Borrowing from Central Banks
Data 2.27 U.S. Five-Year Swap Rate and Implied Probability Distribution
Data 2.28 Contributions to Change in Fitted 10-Year Nominal Treasury Yield
Data 2.29 Private Sector Financial Balance Relative to Year before Outbreak of Financial Crisis, Selected Advanced Economies
Data 2.30 Change in 10-Year U.S. Treasury Yield in Recent Business Cycles
Data 2.31 Bank Credit in Past and Current Credit Cycles
2.32 Market Reaction: Heightened Uncertainty and Policy
Data 2.33 U.S. Government Debt and Interest Payments
Data 2.34 Foreign Investors’ Share of Outstanding Sovereign Debt, as of End-2011
Data 2.35 Rollover Risk: Weighted Average Maturity of Sovereign Bonds
2.36 Primary Dealers’ Positioning in U.S. Treasury Securities
Data 2.37 Bank Holdings of Government Debt in Selected Advanced Economies
Data 2.38 Sensitivity of Japanese Banks to a 100 Basis Point Interest Rate Shock
Data 2.39 Cumulative Purchases of Japanese Government Bonds since 2007
Data 2.40 Japanese Bank Holdings of Government Debt to 2017 under Current Trend
Data 2.41 Foreign Claims of Japanese Banks
Data 2.42 Foreign Holdings of Japanese Government Securities
Data 2.43 Emerging Market Bond Fund Assets under Management, by Geographic Location
Data 2.44 Resilience of Inflows into Emerging Market Local-Currency Bond Funds Despite Euro Area Stress
2.45 Performance of Emerging Market Equities and Bonds vs. Economic Surprise Index
Data 2.46 Sensitivity of Selected Sovereign CDS to CDS of Euro Area Periphery, 2011–12
Data 2.47 Net International Investment Position versus Gross External Debt, Selected Economies, 2011
Data 2.48 Share of Foreign-Currency-Denominated Bank Loans in Total Loans
Data 2.49 Ratio of Nonperforming Loans to Total Loans
Data 2.50 Change in Volatility of Local Bond Returns Relative to Foreign Participation and Domestic Investor Base
Data 2.51 Nonresident Holdings of Government Debt and Market Liquidity
Data 2.52 Bank Holdings of Local Currency Government Debt and Additional Purchases under Outflow Scenario
2.53 Credit Cycle Position of Selected Economies: 2006 and 2011
Data 2.54 Change in Private Sector Credit, 2006–11
Data 2.55 Change in Real House Prices, 2006–11
Data 2.56 Nonperforming Loans in Selected Economies, 2008, 2010, and 2011
2.57 Ratio of Price to Book Value of Banks in Selected Economies, 2010–12

Chapter 3. The Reform Agenda: An Interim Report on Progress Toward a Safer Financial System

This chapter does a stock-take on the global regulatory reforms and the implications for the structure of intermediation.

Boxes
3.1 Risks Associated with New Forms of Financial Intermediation
3.2 Global Deleveraging Landscape: Economy- and Bank-Level View
3.3 TruPs and the Impact of Basel III on U.S. Banks
3.4 Side Effects of Low Policy Interest Rates
3.5 Did Some Banking Systems Withstand International Contagion because They Are Less Globally Integrated?
Figures
Data 3.1 Size of the Global Financial System
3.2 Market-Based Intermediation
Data 3.3 Market-Based Intermediation: New Financial Products
3.4 Scope and Scale: Interconnectedness, Funding, Concentration
3.5 Globalization
3.6 Illustration of Difference-in-Differences Method
Tables
3.1 Financial Structure before the Crisis and Financial Stress during the Crisis
3.2 A Snapshot of the New Regulatory Initiatives
3.3 Possible Effects of Regulatory Reforms on Financial Structure
3.4 Government and Central Bank Crisis Measures, 2007–10
3.5 Effect of Progress in Basel Capital Rules on Intermediation Structures
3.6 Indices, Subindices, and Data Sources
3.7 Snapshot of the New Global Regulatory Initiatives: Resolution of G-SIFIs
3.8 Status of Initiatives, by Selected Economy
3.9 Effect of Progress in Basel Liquidity Rules on Intermediation Structures
3.10 Effect of Financial Policies on Intermediation Structures: Crisis Intervention Policies
3.11 Basel Capital and Liquidity Progress Index

Chapter 4. Changing Global Financial Structures: Can They Improve Economic Outcomes?

This chapter forms ideas about how the evolving financial structures relate to economic outcomes and draws implications for regulatory reform.

Boxes
4.1 Financial Depth and Economic Outcomes
4.2 How Robust Are the Econometric Results?
4.3 Australia
4.4 The United States
4.5

Germany
4.6 Japan
4.7 China
Figures
4.1 Time Varying Correlations: Financial Globalization Index
4.2 Time Varying Correlations: Financial Buffers
4.3 Financial Structure and Economic Growth, 1998–2010
Tables
4.1 Financial Structure Measures in This GFSR
4.2 Sector Size, Structure, and Economic Performance in Case Study Countries
4.3 Summary of Fixed-Effects Panel Estimation Results on Economic Outcomes, 1998–2010
4.4 List of Variables Used in Regression Analysis
4.5 Fixed-Effects Panel Estimation with Interaction Term, 1998–2010
4.6 Fixed-Effects Panel Estimation with Quadratic Term, 1998–2010
4.7 Systemic Banking Crises and Financial Structure Variables: Probit Model
4.8 Financial Depth and Macroeconomic Volatility

Statistical Appendix

  Figures
Data 1. Major Net Exporters and Importers of Capital in 2011
2. Sovereign Credit Default Swap Spreads
3. Selected Credit Default Swap Spreads
4. Selected Spreads
5. Implied Volatility Indices
Data 6. United States: Corporate Bond Market
Data 7. Euro Area: Corporate Bond Market
Data 8. United States: Commercial Paper Market
 
  Tables
Data 1. Selected Indicators on the Size of the Capital Markets, 2011
Data 2. MSCI Equity Market Indices
Data 3. Emerging Markets Bond Index: EMBI Global Sovereign Yield Spreads
Data 4. Emerging Market Private External Financing: Total Bonds, Equities, and Loans
Data 5. Emerging Market Private External Financing: Bonds
Data 6. Emerging Market Private External Financing: Equities
Data 7. Emerging Market Private External Financing: Loans
Data 8. Equity Valuation Measures: Dividend-Yield Ratios
Data 9. Equity Valuation Measures: Price/Earnings Ratios
Data 10. Emerging Markets: Mutual Funds
 
(*)Please note that effective with the April 2011 issue, the IMF’s Statistics Department has assumed responsibility for compiling the Financial Soundness Indicators tables and they are no longer part of this appendix. However, these tables will continue to be linked to the GFSR Statistical Appendix on the IMF’s public website.
 
The following symbols have been used throughout this appendix:

. . . to indicate that data are not available;
—— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

- between years and months (for example, 2008–09 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

/ between years (for example, 2008/09) to indicate a fiscal or financial year.

“Billion” means a thousand million; “trillion” means a thousand billion.

“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

“n.a.” means not applicable.

Minor discrepancies between constituent figures and totals are due to rounding.
Disclaimer: As used in this volume the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.