Global Financial Stability Report
Transition Challenges to Stability
October 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.
The October 2013 Global Financial Stability Report examines current risks facing the global financial system as it undergoes a series of transitions along the path toward greater financial stability. The United States may soon move to less accommodative monetary policies and higher long-term interest rates as its recovery gains ground. Emerging markets face a transition to more volatile external conditions and higher risk premiums. Japan is moving toward the new “Abenomics” policy regime, and the euro area is moving toward a more robust and safer financial sector. Finally, the global banking system is phasing in stronger regulatory standards.
Contents
Front Matter
Chapter 1. Making the Transition to Stability
Examines the challenges and risks of each of these transitions.
| Boxes | |||
| Chart Chart Chart Chart |
Data | 1.1 | Mortgage Real Estate Investment Trusts: Business Model Risks |
| Chart Chart Chart Chart |
Data | 1.2 | First-Time Issuers: New Opportunities and Emerging Risks |
| 1.3 | Financial Regulatory Reform Update | ||
| 1.4 | Recent Financial Sector Assessment Program Mission Findings | ||
| 1.4 | The GFSR Analysis of Corporate Credit Quality versus Bank Stress Tests References | ||
| Tables | |||
| Data | 1.1 | Market-Implied Interest Rate Pricing versus Historical Cycles | |
| Data | 1.2 | Bond Portfolio Interest Rate Sensitivities | |
| Data | 1.3 | Structure of the Japanese Government Bond Market | |
| Data | 1.4 | Foreign Assets Held by Japanese Investor Groups, end-2012 | |
| Data | 1.5 | Japan Scenarios: Complete, Incomplete, and Disorderly | |
| Data | 1.6 | European Union Bank Deleveraging | |
| 1.7 | Policy Recommendations | ||
| 1.8 | Determinants of Bank Interest Rates on New Small Loans | ||
| 1.9 | Amadeus Database, 2011 | ||
| Data | 1.10 | Mapping of Corporate Vulnerability Indicators to Probabilities of Default | |
| Data | 1.11 | Comparison of GFSR Analysis with Oliver Wyman’s Stress Tests for Spain | |
| Figures | |||
| Chart | Data | 1.1 | Global Financial Stability Map |
| Chart | Data | 1.2 | Global Financial Stability Map: Assessment of Risks and Conditions |
| Chart | Data | 1.3 | Market Volatility Shock |
| Chart | Data | 1.4 | Global Financial Conditions |
| Chart | Data | 1.5 | Market Dashboard |
| Chart | Data | 1.6 | U.S. Nonfinancial Firms’ Credit Fundamentals |
| Chart | Data | 1.7 | Decomposition of Term Premium: Change since Late 2008 |
| Chart | Data | 1.8 | Simulated Shock to 10-Year U.S. Treasury Term Premium |
| Chart | Data | 1.9 | U.S. Mutual Fund Cumulative Flows |
| Chart | Data | 1.10 | Global Bond Portfolio Duration |
| Chart | Data | 1.11 | Nongovernment Bond Inventories, Total Trading Volumes, and Outstanding Stock |
| Chart | 1.12 | Fire Sale “Risk Spiral” | |
| Chart | Data | 1.13 | Estimated Average Change in Mortgage Real Estate Investment Trust Portfolio Value for Parallel Interest Rate Shifts |
| Chart | Data | 1.14 | Leveraged Mortgage Real Estate Investment Trusts Are More Vulnerable to Interest Rate Increases |
| Chart | Data | 1.15 | Above-Trend Bond Flows from Advanced to Emerging Market Economies |
| Chart | Data | 1.16 | Net Portfolio Flows into Fixed-Income Equity by Country, 2009-12 |
| Chart | Data | 1.17 | Impact of Flows on Local Currency Bond Yields |
| Chart | Data | 1.18 | Allocation of Major Bond Funds to Emerging Markets |
| Chart | Data | 1.19 | Duration of Emerging Market Fixed-Income Indices |
| Chart | Data | 1.20 | Share of Nonresident Holdings of Local Currency Government Debt and Market Liquidity |
| Chart | Data | 1.21 | Composition of the Holders of Local Currency Government Debt |
| Chart | Data | 1.22 | Net New Issuance of Emerging Market Bonds |
| Chart | 1.23 | Credit Ratings of Emerging Market Corporate Bond Issues | |
| Chart | Data | 1.24 | Corporate Rating Changes in Emerging Markets |
| Chart | Data | 1.25 | Nonfinancial Corporate Balance Sheet Metrics |
| Chart | Data | 1.26 | Sharp Increase in Corporate Debt Defaults |
| Chart | Data | 1.27 | China: Corporate Sector Fundamentals |
| Chart | Data | 1.28 | External and Domestic Vulnerabilities |
| Chart | Data | 1.29 | China: Credit Developments |
| Chart | Data | 1.30 | Recent Stress in Emerging Markets |
| Chart | Data | 1.31 | May 2013 Sell-Off of Emerging Market Bonds versus the Lehman Brothers Episode |
| Chart | Data | 1.32 | Estimated Impact on Bond Yields from a Reversal of Capital Flows and Other Factors |
| Chart | Data | 1.33 | Japanese Flows into Currency Overlay Funds |
| Chart | Data | 1.34 | Japanese Banks’ Sensitivity to an Interest Rate Shock |
| Chart | Data | 1.35 | Value-at-Risk in the Disorderly Scenario |
| Chart | Data | 1.36 | Projected Flows to Selected Emerging Markets in Disorderly Scenario |
| Chart | 1.37 | Bank-Corporate-Sovereign Nexus | |
| Chart | Data | 1.38 | Stressed Euro Area Economy Bank Credit |
| Chart | Data | 1.39 | Bank Buffers and Interest Rates on Corporate Loans |
| Chart | Data | 1.40 | Individual Bank Buffers and Lending in Stressed Economies, 2013:Q1 |
| Chart | 1.41 | Euro Area Sovereign Spreads, April–August 2013 | |
| Chart | Data | 1.42 | Leverage Ratios |
| Chart | Data | 1.43 | Leverage Ratios by Firm Size |
| Chart | Data | 1.44 | Share of Debt at Firms with Various Debt-to-Assets Ratios, 2011 |
| Chart | Data | 1.45 | Share of Debt at Firms with Various Interest Coverage Ratios, 2011 |
| Chart | Data | 1.46 | Nonperforming Corporate Loans |
| Chart | Data | 1.47 | Distribution of Estimated Corporate Expected Default Frequencies and Bank Loan Interest Rates |
| Chart | Data | 1.48 | Listed Firms: Changes in Debt, Capital Expenditures, and Dividends |
| Chart | 1.49 | Factors Affecting Bank Interest Rates on Corporate Loans | |
| Chart | Data | 1.50 | Model-Based Interest Rates on Bank Loans and Factor Decomposition |
| Chart | Data | 1.51 | Corporate Debt Overhang |
| Chart | 1.52 | Distribution of Estimated Corporate Sector Probabilities of Default | |
| Chart | Data | 1.53 | Potential Losses on Corporate Loans and Banking System Buffers |
| Chart | Data | 1.54 | Large Bank Tier 1 Ratios |
| Chart | Data | 1.55 | Large Bank Tangible Leverage Ratios, 2012:Q4 |
| Chart | Data | 1.56 | Large Bank Tier 1 Capital and Tangible Leverage Ratios |
| Chart | Data | 1.57 | Bank Profitability Comparison |
| Chart | Data | 1.58 | Bank Profitability and Market Valuation of Assets |
| Chart | 1.59 | Large Bank Capitalization | |
| Chart | Data | 1.60 | Normalization of Monetary Policy: Smooth or Turbulent? |
| Chart | Data | 1.61 | France: Deviations from Cointegrating Equilibrium |
| Chart | Data | 1.62 | Spain and Italy: Deviations from the Cointegrating Equilibrium |
| Chart | Data | 1.63 | Leverage, Profitability, and Debt at Risk |
| Chart | Data | 1.64 | Bank Lending Rates to Small and Medium Enterprises |
| Chart | Data | 1.65 | Projected Corporate Debt Overhang in Italy, Portugal, and Spain |
| Chart | Data | 1.66 | Probabilities of Default in the Corporate Sector |
Chapter 2. Assessing Policies to Revive Credit Markets
Chapter 2 looks at efforts by policymakers to revive weak credit growth, which has been seen by many as a primary reason behind the slow economic recovery. The chapter argues that policies are most effective if they target the constraints that underlie the weakness in credit. But it cautions policymakers to be aware of the fiscal costs and implications for financial stability of credit-supporting policies.
| Boxes | |||||
| 2.1 | Policies to Diversify Credit Options for Small and Medium Enterprises in Europe | ||||
| 2.2 | Challenges in the Structural Estimation of Credit Supply and Demand | ||||
| Chart | Data | 2.3 | The Effect of the Liquidity Crisis on Mortgage Lending | ||
| Chart Chart Chart Chart Chart Chart |
Data | 2.4 | Policy Measures to Finance Small and Medium Enterprises during Crises: The Case of Korea | ||
| Chart Chart |
Data | 2.5 | Lessons from the Nordic Banking Crises | ||
| Tables | |||||
| 2.1 | Identifying Countries with Weak Credit Growth, BIS Data | ||||
| 2.2 | Identifying Countries with Weak Credit, Other Data Sources | ||||
| 2.3 | Credit Policies Implemented since 2007 | ||||
| 2.4 | Determinants of Credit Growth | ||||
| 2.5 | Structural Determinants of the Supply and Demand of Bank Lending to Firms in Selected Countries | ||||
| 2.6 | Firm-Level Regressions of Changes in Debt-to-Asset Ratio for Manufacturing Firms | ||||
| 2.7 | Previous Findings in the Literature | ||||
| 2.8 | Euro Area: Determinants of Bank Lending Standards | ||||
| 2.9 | United States: Determinants of Bank Lending Standards | ||||
| Figures | |||||
| Chart | Data | 2.1 | Real Credit Growth | ||
| Chart | 2.2 | Perceived Obstacles in Access to Finance | |||
| Chart | Data | 2.3 | Interest Rate Spread between Loans to SMEs and to Larger Firms | ||
| Chart | Data | 2.4 | Corporate and Household Debt Outstanding | ||
| Chart | Data | 2.5 | Stock Price Index | ||
| Chart | Data | 2.6 | Real House Price Index | ||
| Chart | 2.7 | Relative Number of Credit Supply and Demand Policies Currently in Place | |||
| Chart | 2.8 | Decomposing Credit Growth: Corporate Loans | |||
| Chart | 2.9 | Decomposing Credit Growth: Mortgage Loans | |||
| Chart | 2.10 | Decomposition of Change in Debt-to-Asset Ratios for Firms | |||
| Chart | Data | 2.11 | Real Total Credit Growth, by Borrowing Sector | ||
| Chart | 2.12 | Decomposing Lending Standards: Corporate Loans | |||
| Chart | 2.13 | Decomposing Lending Standards: Mortgage Loans | |||
| Chart | 2.14 | Effects of a Tightening of Lending Supply and a Drop in Lending Demand | |||
| Chart | 2.15 | Fitted Supply and Demand Curves for Bank Loans to Firms | |||
Chapter 3. Changes in Bank Funding Patterns and Financial Stability Issues
Chapter 3 examines how banking funding structures matter for financial stability and the potential impact of various regulatory reforms. This chapter examines how bank funding structures have changed over time—especially in the run-up to the crisis—and how these structures affect financial stability. The analysis considers banks in a number of advanced and emerging market economies and includes systemically important banks. It examines the potential effect of several regulatory reforms on banking funding structures, noting the potential for tensions among them. It concludes that careful implementation of reform efforts are important to ensure that financial stability benefits are realized.
| Boxes | |||||
| Chart | 3.1 | Typology of Bank Funding | |||
| 3.2 | What the Crisis Taught Us about Bank Funding | ||||
| Chart Chart |
Data | 3.3 | Changes in Cross-Border Bank Funding Sources | ||
| 3.4 | Bank Funding in Emerging Market Economies and the Impact of Regulatory Reforms | ||||
| 3.5 | Investor Base for Bail-in Debt and Bank Bond Ratings | ||||
| Tables | |||||
| 3.1 | Characteristics of Four G-SIBs in Simulation Exercise | ||||
| 3.2 | Country and Bank Coverage Statistics | ||||
| 3.3 | List of Variables Used in the Panel Data Analysis | ||||
| 3.4 | Illustration of Creditor Hierarchy and Loss Sharing under Alternative Resolution Tools | ||||
| 3.5 | Cross-Country Comparison of Covered Deposits, End-2010 | ||||
| Figures | |||||
| Chart | 3.1 | Banks’ Funding Structures across Major Economies and Regions | |||
| Chart | 3.2 | Banks’ Long-Term Wholesale Funding across Major Economies and Regions: Outstanding as of End-July 2013 | |||
| Chart | 3.3 | Evolution of Bank Funding Structures, Global and Systemically Important Banks | |||
| Chart | 3.4 | Evolution of Bank Funding Structures, Advanced and Emerging Market Economies | |||
| Chart | 3.5 | Determinants of Bank Funding | |||
| Chart | 3.6 | Wholesale Bank Funding | |||
| Chart | 3.7 | Regulatory Capital Ratios across Major Economies and Regions | |||
| Chart | 3.8 | Asset Encumbrance: December 2007 and June 2013 | |||
| Chart | 3.9 | Share of Retained Bank-Covered Bonds in Europe | |||
| Chart | 3.10 | Contribution of Funding Characteristics to Bank Distress | |||
| Chart | 3.11 | Evolution of Bank Funding Characteristics | |||
| Chart | 3.12 | Priority of Claims of Bank Liabilities | |||
| Chart | 3.13 | Bank Bond Yield to Maturity at Issuance: Selected Advanced Economies | |||
| Chart | 3.14 | Debt Pricing under Depositor Preference and Asset Encumbrance | |||
| Chart | 3.15 | Debt Pricing under Bail-in Power | |||
| Chart | 3.16 | Simulation Results for Specific Banks | |||
| Chart | 3.17 | Equity Value for Original Shareholders under Bail-in Regime Converting Debt to Equity | |||
| Chart | 3.18 | Contribution of Specific Variables to Bank Distress in Probit Models | |||
| Chart | 3.19 | Basel III Minimum Capital Requirements and Buffers | |||
| Chart | 3.20 | Pricing of Senior and Subordinated Debt and Equity | |||
| Chart | 3.21 | Pricing of Liabilities with Depositor Preference and Asset Encumbrance | |||
| Chart | 3.22 | Pricing of Liabilities under Bail-in Power | |||
Statistical Appendix
| Figures | |||
| Chart | Data | 1. | Major Net Exporters and Importers of Capital in 2012 |
| Chart | 2. | Sovereign Credit Default Swap Spreads | |
| Chart | 3. | Selected Credit Default Swap Spreads | |
| Chart | Data | 4. | Selected Spreads |
| Chart | Data | 5. | Implied Volatility Indices |
| Chart | Data | 6. | United States: Corporate Bond Market |
| Chart | Data | 7. | Euro Area: Corporate Bond Market |
| Chart | Data | 8. | United States: Commercial Paper Market |
| Tables | |||
| Data | 1. | Capital Market Size: Selected Indicators, 2012 | |
| 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. |