World Economic and Financial Surveys
Global Financial Stability Report
Restoring Confidence and Progressing on Reforms
October 2012
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
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. |