Global Financial Stability Report April 2018: A Bumpy Road Ahead
Global Financial Stability Report, April 2018
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- Published: April 10, 2018
Overview: Main findings and risks
- Short-term risks to financial stability have increased somewhat since the previous GFSR.
- Medium-term risks remain elevated as financial vulnerabilities built up during years of accommodative policies could mean a bumpy road ahead and put growth at risk.
- Higher inflation may lead central banks to respond more aggressively than currently expected, which could lead to a sharp tightening of financial conditions.
- Valuations of risky assets are still stretched; liquidity mismatches, leverage, and other factors could amplify asset price moves and their impact on the financial system.
- Emerging markets have generally improving fundamentals but could be vulnerable to sudden tightening of global financial conditions.
- Banks have strengthened their balance sheets since the crisis, but parts of the system face a structural US dollar liquidity mismatch that could be a vulnerability.
- Crypto assets have features that may improve market efficiency, but they could also pose risks if used with leverage or without appropriate safeguards.
- Policymakers and investors must remain attuned to the risks of rising interest rates and higher market volatility.
Policy recommendations and guidance
- Central banks should continue to normalize policy gradually and communicate clearly.
- Policymakers should address vulnerabilities by deploying and developing macroprudential tools.
- Supervisors and policymakers should keep close watch on the evolution of the riskiness of corporate credit allocation.
- Consideration of macroprudential tightening can reduce the likelihood that credit expansions are associated with riskier credit allocation.
- Greater banking supervisor independence, smaller government footprint in the nonfinancial corporate sector, and stronger minority shareholder protection are associated with less risky credit allocation during credit expansions.
Chapter 1 (A Bumpy Road Ahead): Key themes
- Examines the effect of higher inflation, central bank responses, and the potential for sharp tightening of financial conditions.
- Highlights stretched valuations of global equities and corporate bonds, liquidity mismatches, leverage, and interconnectedness as amplifiers of asset price moves.
- Documents vulnerabilities in emerging markets, low-income countries, and China.
- Discusses funding challenges of internationally active banks and a structural US dollar liquidity mismatch in parts of the system.
- Considers crypto assets under headings including "Crypto Assets: New Coin on the Block, Reach for Yield, or Asset Price Bubble?"
Chapter 2 (The Riskiness of Credit Allocation): Findings and implications
- Focus: the extent to which riskier firms receive credit relative to less risky firms, its relationship to the size of credit expansions, and relevance to financial stability.
- Constructs four measures of the riskiness of credit allocation across advanced and emerging market economies.
- The riskiness of credit allocation is cyclical at the global and country levels and rises when financial conditions and lending standards are looser.
- Taking riskiness into account helps better predict full-blown banking crises, financial sector stress, and downside risks to growth at horizons up to three years.
- A period of credit expansion is less likely to be associated with riskier credit allocation if:
- macroprudential policy has been tightened,
- the banking supervisor is more independent,
- the government has a smaller footprint in the nonfinancial corporate sector,
- minority shareholder protection is greater.
Chapter 3 (House Price Synchronization): Findings and implications
- Analyzes whether and how house prices move in tandem across countries and major cities (global house price synchronicity).
- Finds a striking increase in house price synchronization across countries and cities.
- Documents an increase in house price synchronization, on balance, for 40 advanced and emerging market economies and 44 major cities.
- Global financial conditions contribute to this synchronization; cities in advanced economies may be particularly exposed.
- Heightened synchronicity can signal a downside tail risk to real economic activity at short horizons.
- Macroprudential policies seem to have some ability to influence local house price developments and may reduce a country’s house price synchronization.
Selected charts, boxes, and annexes highlighted in the report
- Figures listed include: 1.1. Global Financial Conditions; 1.2. Growth-at-Risk; 1.3. Nonfinancial Private Sector Debt; 1.4. Market Interest Rates, Central Bank Balance Sheets, and US Financial Indicators; 1.7. Valuations of Global Equities; 1.8. Valuations of Corporate Bonds; 1.13. Crypto Assets: Size, Price Appreciation, Realized Volatility, and Sharpe Ratio; 1.23. US Dollar Credit Aggregates and Bank Intragroup Funding Structures; 1.24. Non-US Banks’ International Dollar Balance Sheets; 1.25. Non-US Banks’ International US Dollar Liquidity Ratios; among others.
- Boxes include: 1.1. The VIX Tantrum; 1.2. An Econometric Lens on What Drives Term Premiums; 1.4. Central Bank Digital Currencies; 1.5. Regulatory Reform—Stitching Up the Loose Ends.
- Online Annexes and Text subsections include: 1.1. Option-Implied Volatility: The Quantity and Price of Risk for Stocks and Bonds; 1.2. Bank International Dollar Funding Methodology.
Source: Global Financial Stability Report April 2018: A Bumpy Road Ahead
Content in this bundle
- Boxfigure12
- Figure 1.3.1 Nonbanks Have Increased Their Credit Exposure in the US Leveraged Loan Markets
- Figure 1.1. Global Financial Conditions
- Figure 1.10. Correlations and Interconnectedness
- Figure 1.13. Crypto Assets: Size, Price Appreciation, Realized Volatility and Sharpe Ratio
- Figure 1.14. Share of the Trading Volumes Across Exchanges, Cryptocurrencies and Fiat Currencies
- Figure 1.15. Improving Fundamentals, Increased Foreign Currency Issuance
- figure1-16
- figure1-19 — Chinese Banking System and Financial Market Developments and Liabilities
- figure1-2
- Figure 1.20. Risks and Adjustment Challenges in Chinese Investment Products
- Figure 1.21. Chinese Insurers
- Figure 1.22. Advanced Economy Bank Health
- Figure 1.23. US Dollar Credit Aggregates and Bank Intragroup Funding Structures
- figure1-24
- figure1-25
- Figure 1.26. Foreign Exchange Swap and Short-Term Bank Funding Markets
- figure1-3
- Figure 1.4. Market Interest Rates, Central Bank Balance Sheets, and US Financial Indicators
- Figure 1.6. Term Premium Correlations, Spillovers, and Exchange Rate Relationships
- Figure 1.7. Valuations of Global Equities
- Figure 1.8. Valuations of Corporate Bonds
- figure1-9
- IMF GFSR April 2018 Assumptions and Conventions
- IMF Global Financial Stablity Report GFSR April 2018 Executive Board Discussion Summary
- Preface
- IMF Global Finanacial Stability Report April 2018 Executive Summary
- Foreword
- Further Info
- Preface
- Full Report
- ANNEX 1.1. Option Implied Volatility--Edits from COM
- Online Annex 1.2. Bank International Dollar Funding Methodology
- Figure 1.1.1. US Asset Prices
- 108929.Figure.1.2.1
- Figure 1.3.1
- Figure 1.1
- figure1-10
- Figure 1.11. Measures of Leverage and Investment Funds with Derivatives-Embedded Leverage
- Figure 1.12
- Figure 1.13
- Figure 1.14
- Figure 1.15. Improving Fundamentals, Increased Foreign Currency Issuance
- Figure 1.16. Creditor Base and External Financing Vulnerabilities
- Figure1 17
- Figure 1.18
- Figure 1.19
- Figure 1.2
- Figure 1.20. Risks and Adjustment Challenges in Chinese Investment Products
- Figure 1.21. Chinese Insurers
- figure1-22
- Figure 1.23
- figure1-24
- Figure 1.25
- Figure 1.26
- figure1-3
- 108929.Figure.1.4
- Figure 1.5. US Inflation Expectations and Term Premium
- Figure 1.6
- Figure 1.7
- Figure 1.8
- figure1-9
- Dataset: boxfigure221 — China: Profitability of Credit Allocation, 1997–2016
- Figure 2.3.1. The Riskiness of Credit Allocation and Financial Conditions
- Figure 2.4.1. Impulse Response of Cumulative Real GDP Growth to a High-Yield Share Shock
- Figure 2.1. Financial conditions have been loose in recent years
- Figure 2.2. Low-Rated Nonfinancial Corporate Bond Issuance Has Been High in Some Advanced Economies
- Figure 2.5. Selected Economies: Riskiness of Credit Allocation, 1995–2016
- Figure28
- Figure29
- C2
- The Riskiness of Credit Allocation: A Source of Financial Vulnerability?
- Boxfigure2 1 1
- Boxfigure2 1 2
- Figure 2.2.1. China: Profitability of Credit Allocation, 1997–2016
- Figure 2.2.2. China: Profitability of Credit Allocation, by Ownership and Sector
- Figure 2.3.1. The Riskiness of Credit Allocation and Financial Conditions
- Boxfigure2 4 1
- Figure 2.1. Financial Conditions Have Been Loose in Recent Years
- figure2-10
- Figure 2.11. Higher Riskiness of Credit Allocation Signals Higher Downside Risks to GDP Growth
- Figure2 12
- Figure2 13
- Figure 2.2. Low-Rated Nonfinancial Corporate Bond Issuance Has Been High in Some Advanced Economies
- Figure2 3
- Figure 2.4. The Riskiness of Credit Allocation Is Cyclical at the Global Level
- Figure 2.5. Selected Economies: Riskiness of Credit Allocation, 1995–2016
- Figure 2.6. The Riskiness of Credit Allocation Rises When a Credit Expansion Is Stronger
- Figure2 7
- Figure2 8
- Figure2 9
- boxfigure3-1-1
- Figure 3.2.1. Housing Return Predictability
- Figure 3.2.2. Predictability of Returns on Housing and Capital Account Openness
- boxfigure3-4-1
- Figure 3.11. Average Country-Level Housing Market “Spillovers” Have Increased
- Figure3 12
- Figure3 13
- Figure3 14
- Figure3 15
- Figure3 16
- Figure 3.2. Widespread House Price Gains Have Accompanied Accommodative Financial Conditions
- Figure 3.5. Synchronization Has Steadily Increased Across Countries and Cities
- figure3-6
- figure3-7
- Figure 3.8. Relative Contribution of the Global Factor Varies Across Regions
- C3
- House Price Synchronization: What Role for Financial Factors?
- Boxfigure3 1 1
- Figure 3.2.1. Housing Return Predictability
- Figure 3.2.2. Predictability of Returns on Housing and Capital Account Openness
- Boxfigure3 3 1
- Figure 3.4.1. Macroprudential Tools Indirectly Reduce House Price Synchronicity
- figure3-1
- Figure 3.10. Interconnectedness among Cities’ House Prices Varies
- Figure 3.11. Average Country-Level Housing Market Spillovers Have Increased
- Figure3 12
- Figure3 13
- Figure3 14
- Figure3 15
- Figure3 16
- Figure 3.2. Widespread House Price Gains Have Accompanied Accommodative Financial Conditions
- Figure 3.3. Institutional Investor Participation Has Been on the Rise
- Figure3 4
- Figure 3-5
- Figure 3.6. The Relative Contribution of the Global Factor Has Grown
- Figure 3.7. Instantaneous Quasi Correlation of House Price Gaps Shows Financial Cycle Properties
- Figure 3.8. Relative Contribution of the Global Factor Varies across Regions
- Figure 3.9. Economies Differ in Their House Price Interconnectedness
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