Global Financial Stability Report

Old Risks, New Challenges

April 2013

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 April 2013: The Global Financial Stability Report examines current risks facing the global financial system and policy actions that may mitigate these. The April 2013 report analyzes the key challenges facing financial and nonfinancial firms as they continue to repair their balance sheets and unwind public and private debt overhangs. Chapter 1 also examines short- and medium-term stability risks in the euro area and the vulnerability of emerging market economies to persistent capital inflows. Chapter 2 takes a closer look at whether sovereign credit default swaps markets are good indicators of sovereign credit risk. Chapter 3 reports on unconventional monetary policy in some depth, including the policies pursued by the Federal Reserve, the Bank of England, the Bank of Japan, the European Central Bank, and the U.S. Federal Reserve.

 

Contents

Front Matter

Executive Summary
Preface

Chapter 1. Acute Risks Reduced: Actions Needed to Entrench Financial Stability

This chapter examines current risks facing the global financial system and policy actions that may mitigate these. Risks to financial stability have declined since the October 2012 report, reflecting deeper policy commitments, renewed monetary stimulus, and continued liquidity support. This April 2013 report analyzes the key challenges facing financial and nonfinancial firms as they continue to repair their balance sheets and unwind debt overhangs, and examines the work that lies ahead to address structural challenges in the euro area. The report also looks at the potential risk to financial stability of persistent or accelerating capital flows to emerging market economies.

Boxes
1.1 What Has China’s Lending Boom Done to Corporate Leverage?
Tables
Data 1.1 Selected Euro Area Countries: Vulnerability Indicators in the Corporate Sector
Data 1.2 Deleveraging Progress, 2011:Q3–2012:Q3
Data 1.3 U.S. Nonfinancial Corporate Bonds: Yields, Spreads, and Valuations
Data 1.4 Scenarios for U.S. Treasury Bond Market Corrections
Data 1.5 Distribution of Bank Lending and Nonperforming Loans
1.6 Credit and Asset Market Indicators for Selected Emerging Markets and Other Countries
1.7 Comparing Proposals for Structural Reform
Data 1.8 Nonfinancial Corporate Debt and Leverage
Data 1.9 Nonfinancial Corporate Database Coverage
Data 1.10 Corporate Sectoral Breakdown within the Sample
1.11 Progress on Deleveraging/Restructuring Plans of Selected Major European Banks, as of January 2013
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 October 2012 GFSR
Data 1.4 Global Equity Valuations
Data 1.5 Global Equity Valuations, by Country
Data 1.6 Property Price Valuations
Data 1.7 Hard-Currency Debt Valuations in Emerging Market Economies
Data 1.8 U.S. Sovereign Debt Valuations
Data 1.9 Target Balances and Sovereign Bond Yields
Data 1.10 Periphery Euro Area Banks’ Bond Issuance and CDS Spreads
Data 1.11 Italy and Spain: Nonfinancial Firms’ Change in Bank Credit and Net Bond Issuance
Data 1.12 Foreign Investor Share of General Government Debt
Data 1.13 European Sovereign Bond Spreads, Current and Implied by Forward Curve
Data 1.14 Asset Performance, March 15–April 2, 2013
Data 1.15 Proportion of System Balance Sheets Encumbered
Data 1.16 Periphery Banks’ Covered Bond Issuance and Spreads
Data 1.17 Selected EU Banks’ Foreign Claims on Banking Sectors, June 2011–September 2012
Data 1.18 Changes in Interest Rates on New Bank Loans, December 2010–January 2013
Data 1.19 Corporate Real Interest Rates and GDP Growth, February 2013
Data 1.20 Bank Lending to the Nonfinancial Private Sector
Data 1.21 Euro Area Periphery Bank Credit
1.22 Interaction between Credit Demand and Supply
1.23 Interest Rate on New Lending and Decomposition of New Bank Funding Rate
Data 1.24 Euro Area Bank Lending Conditions for Firms
Data 1.25 Met and Unmet Demand for Bank Credit for Small and Medium-Sized Enterprises
1.26 Spread of Interest Rates on New Loans to SMEs over ECB Policy Rate
Data 1.27A Corporate Debt
Data 1.27B Corporate Debt in Percent of GDP
Data 1.28 Share of Firms with High Leverage and Low Interest Coverage Ratio, 2011
Data 1.29 Share of Firms with High Leverage and Negative Net Free Cash Flow
Data 1.30 Required Reduction in Leverage under Different Scenarios
Data 1.31 Required Cuts in Capital Expenditures to Stabilize Debt of Euro Area Periphery Firms with High Leverage and Negative Net Free Cash Flow
Data 1.32 Bank Core Tier 1 and Wholesale Funding Ratios, 2008:Q4 to 2012:Q3
Data 1.33 Bank Leverage and Wholesale Funding Ratios, 2008:Q4 to 2012:Q3
Data 1.34 Ranking of Banking Systems Based on Banks’ Balance Sheet Indicators, 2012:Q3
Data 1.35 Average Net Interest Margins
Data 1.36 Impaired Loans in Selected EU Countries
Data 1.37 EU Banks’ Asset Quality and Profitability
Data 1.38 Buffers at Individual EU Banks
Data 1.39 Bank Risk-Weights and Impairments, Average for 2008–11
Data 1.40 Deposit Funding Gaps of Foreign Subsidiaries of Large EU Banks
Data 1.41 Average Return on Equity, and Cost of Equity
Data 1.42 Ratio of Equity Price to Tangible Book Value, April 2013
Data 1.43 GFSR EU Bank Deleveraging Scenarios
Data 1.44 Large EU Banks: Contributions to Change in Balance Sheets 2011:Q3–2012:Q3
Data 1.45 Banks’ Foreign Claims on All Regions
Data 1.46 Net Foreign Assets Position
Data 1.47 Global Mutual Fund and Exchange-Traded Fund Flows
Data 1.48 Net Issues of Fixed-Income Securities
Data 1.49 U.S. Fixed Investment Spending versus Internal Cash Flow
Data 1.50 U.S. Nonfinancial Corporate Bond Issuance and Equity Buybacks
Data 1.51 U.S. Nonfinancial Firms’ Credit Fundamentals
Data 1.52 U.S. Primary Dealer Repo Financing
Data 1.53 Global Issuance of Leveraged Loans and Collateralized Debt Obligations
Data 1.54 Risk Tolerance for Weakest 10 Percent of U.S. Public Pension Funds
Data 1.55 Net Interest Margins and Investment in Risky Assets by U.S. Insurance Companies
Data 1.56 U.S. Treasury Sell-Off Episodes
Data 1.57 U.S. High-Yield Corporate Spread and Liquidity and Volatility
Data 1.58 Holdings of U.S. Corporate Bonds, by Investor Type
Data 1.59 Net Capital Flows to Emerging Markets
Data 1.60 Selected Emerging Market Bond, Equity, and Loan Issuance
Data 1.61 Nonresident Holdings of Domestic Sovereign Debt
Data 1.62 Emerging Market Nonfinancial Corporate Issuance
Data 1.63 Emerging Market Nonfinancial Corporate Leverage, 2007 and 2012
Data 1.64 Foreign-Exchange-Denominated Debt of Nonfinancial Corporations in Emerging Markets
Data 1.65 Emerging Market Corporate Issuance, by Type of Issuer
Data 1.66 Corporate Leverage in Asia, excluding Japan
Data 1.67 Interest Coverage Ratio for Emerging Market Firms
Data 1.68 Hard Currency and Local Currency Sovereign Bond Issuance
Data 1.69 EMBI Global Spread Tightening (December 2008–12): Decomposition
Data 1.70 Local Yield Tightening in Emerging Market Economies (December 2008–12): Decomposition
Data 1.71 Impact of Shocks on EMBI Global Spreads
Data 1.72 Impact of Shocks on Local Emerging Market Yields
Data 1.73 Domestic Credit Growth, 2006–12
Data 1.74 Consumer Price Index-Adjusted Residential Property Prices, 2006–12
Data 1.75 Gross Nonperforming Loan Ratios, 2010–12
Data 1.76 Banks’ Loss-Absorbing Buffers by Region
Data 1.77 China: Growth Rate of Credit, by Type
Data 1.78 European Investment-Grade Corporate Fundamentals
Data 1.79 Developments in Publicly Listed European Companies
1.80 Progress in Deleveraging Plans across Sample Banks, 2012

Chapter 2. A New Look at the Role of Sovereign Credit Default Swaps

Examines whether sovereign credit default swaps (SCDS) are good market indicators of sovereign credit risk, and finds that many of the negative perceptions surrounding their impact on financial stability are unfounded: SCDS markets do not appear to be more prone to high volatility than other financial markets. The results of the analysis do not support the need for a ban on “naked” SCDS protection buying, which went into effect in the European Union in November 2012.

Boxes
2.1 Interconnectedness between Sovereigns and Financial Institutions
2.2 The European Union’s Ban on Buying Naked Sovereign Credit Default Swap Protection
2.3 What Could be the Impact of the Demise of SCDS?
2.4 The Greece Debt Exchange and Its Implications for the SCDS Market
Tables
2.1 Rankings of CDS Amounts Outstanding
2.2 Lead-Leg Relationship between Sovereign Credit Default Swaps and Bond Residuals
2.3 List of Countries Included in Empirical Studies
2.4 List of Variables Used in Regression Analysis
2.5 Summary of Estimation of Monthly Drivers for Sovereign Credit Default Swap (SCDS) Spreads and Bond Spreads, October 2008–September 2012
2.6 Summary of Estimation Results on Drivers for Basis, October 2008–September 2012
Figures
Data 2.1 Credit Default Swap (CDS) Contracts, Gross Notional Amounts Outstanding
Data 2.2 Nondealer Buyers and Sellers of Credit Default Swap Protection: Net Positions by Counterparty
2.3 Liquidity Indicators in the Sovereign Credit Default Swaps (SCDS) Market
2.4 Volatility of Sovereign Credit Default Swap (SCDS) Spreads and Sovereign Bond Spreads
2.5 Determinants of Sovereign Credit Default Swap (SCDS) Spreads and Bond Spreads, October 2008–September 2012
2.6 Sovereign Credit Default Swap (SCDS) Price Leadership and Liquidity, March 2009–September 2012
2.7 Time-Varying Price Leadership Measures of Sovereign Credit Default Swaps (SCDS)
Data 2.8 Sovereign Credit Default Swaps (SCDS): Decomposition of Volatility Factors for Germany, Italy, and Spain, February 2009–October 2012
2.9 Markov-Switching ARCH Model of VIX, European TED Spread, and Sovereign Credit Default Swap (SCDS) Indices
2.10 Overshooting and Undershooting of Sovereign Credit Default Swaps (SCDS) and Sovereign Bond Markets
Data 2.11 Sovereign Credit Default Swaps: Net Notional Amounts Outstanding, Selected EU Countries
2.12 Market Liquidity Measures before and after Ban on Short Sales of Sovereign Credit Default Swaps (SCDS)
2.13 Constructing the Arbitrage Trade between Credit Default Swaps (CDS) and Bonds
2.14 Difference between Sovereign Credit Default Swap Spreads and Sovereign Bond Spreads, Selected Countries

Chapter 3. Do Central Bank Policies Since the Crisis Carry Risks to Financial Stability?

Investigates the monetary policies pursued by four central banks (the Federal Reserve, Bank of England, European Central Bank, and Bank of Japan), including prolonged periods of low real policy interest rates and unconventional measures, including asset purchases. The policies appear to have lessened banking sector vulnerabilities and contributed to financial stability in the short term. However, policymakers should be alert to the possibility that risks may rise the longer these policies are maintained. Though not failsafe, targeted micro- and macroprudential tools should be used to mitigate risks while allowing greater leeway for monetary policy to support the macroeconomy.

Boxes
3.1 Financial Stability Risks Associated with Exit from MP-Plus Policies
3.2 The Macroeconomic Effectiveness of MP-Plus
3.3 Balance Sheet Risks of Unconventional Policy in Major Central Banks
Tables
3.1 Asset Holdings of Major Central Banks Related to MP-Plus, 2008–12
3.2 Results from Event Study Regressions
3.3 Marginal Effect of MP-Plus on Banks
3.4 Calculated Losses on a 10-Year Bond as a Result of a Rise in Interest Rates
3.5 Risks from MP-Plus and Mitigating Policies
3.6 Specification of Taylor Rule
3.7 Results of the Panel Regressions
Figures
Data 3.1 Changes in Central Bank Balance Sheets, 2006–12
3.2 OIS Counterparty Spread Decompositions
Data 3.3 Central Bank Intervention in Real Estate Securities Markets
Data 3.4 Central Bank Holdings of Domestic Government Securities and Market Liquidity, by Maturity
3.5 Correlations between Central Bank Holdings of Government Securities and Market Liquidity, by Maturity of Holdings
3.6 Interest Rate Risk as Reported by U.S. Banks
Data 3.7 Bank Holdings of Government Debt in Selected Economies
3.8 Various Measures of the Taylor Gap in the United States

Statistical Appendix

  Figures
Data 1. Major Net Exporters and Importers of Capital in 2012
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.