IMF Global Financial Stability Report (GFSR) -- October 2013 -- Table of Contents

World Economic and Financial Surveys

Global Financial Stability Report

Transition Challenges to Stability

October 2013

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.

Front Matter

Executive Summary
Preface

Chapter 1. Making the Transition to Stability

Examines the challenges and risks of each of these transitions.

Full Text

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.

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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.

Full Text | Survey Article

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

Full Text

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.

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.