Global Financial Stability Report

Fostering Stability in a Low-Growth, Low-Rate Era

October 2016

GFSR

The current report finds that short-term risks to global financial stability have abated since April 2016, but that medium-term risks continue to build. Financial institutions in advanced economies face a number of cyclical and structural challenges and need to adapt to low growth and low interest rates, as well as to an evolving market and regulatory environment. Weak profitability could erode banks’ buffers over time and undermine their ability to support growth. A cyclical recovery will not resolve the problem of low profitability. More deep-rooted reforms and systemic management are needed, especially for European banks. The solvency of many life insurance companies and pension funds is threatened by a prolonged period of low interest rates. Corporate leverage in emerging market economies remains elevated in some countries, but the current favorable external environment presents an opportunity for overly indebted firms to restructure their balance sheets. The political climate is unsettled in many countries. A lack of income growth and a rise in inequality have opened the door for populist, inward-looking policies. These factors make it even harder to tackle legacy problems and further expose economies and markets to shocks. A potent and more balanced policy mix is needed to deliver a stronger path for growth and financial stability, and avoid slipping into a state of financial and economic stagnation. The report also examines how the rise of nonbank financing has altered the impact of monetary policy and finds that fears of a decline in the effectiveness of monetary policy are unfounded. It appears that the transmission of monetary policy is, if anything, stronger in economies with larger nonbank financial sectors. Finally, the report examines the link between corporate governance, investor protection, and financial stability in emerging market economies. It finds that the improvements over the past two decades have helped bolster the resilience of their financial systems. These benefits strengthen the case for further reform.


Front Matter

Financial Stability Overview
Medium-Term Risks Rising
Emerging Market Economies: A Smooth Deleveraging?
Global Stability Challenges in the New Era
Boxes
Chart
Chart
Data
Data
1.1   Impact of Brexit
1.2   The Basel Committee Agenda: Achieving Certainty without Compromising Integrity
Figures
Chart
Data 1.1   Global Financial Stability Map: Risks and Conditions
Chart Data 1.2   Global Financial Stability Map: Assessment of Risks and Conditions
Chart Data 1.3   Brexit’s Impact on Financial Markets
Chart Data 1.4   Decomposition of Equity Market Performance
Chart Data 1.5   Policy Uncertainty
Chart Data 1.6   Global Growth Momentum and Interest Rates
Chart Data 1.7   Sovereign Bond Yields and Term Premiums in Advanced Economies
Chart Data 1.8   Drivers of Government Bond Yields
Chart Data 1.9   Effects on Credit Growth of Shocks to Equity Prices
Chart Data 1.10   Developed and Emerging Market Economy Banks: Capital and Liquidity Indicators
Chart Data 1.11   Price-to-Book and Return on Equity Decomposition, 2006–15
Chart Data 1.12   Advanced Economies: Trends in Bank Profitability
Chart Data 1.13   Bank Performance in a “Cyclical Recovery” Scenario, by Region
Chart Data 1.14   Stylized Net Capital Impact of Nonperforming Loan Disposal at Euro Area Banks
Chart Data 1.15   European and U.S. Banks—Operating Efficiency and Cost Rationalization
Chart Data 1.16   European Banks’ Elevated Cost of Funding
Chart Data 1.17   European Bank Profitability in a “Structural Reform” Scenario
Chart Data 1.18   Japanese Banks and Foreign Exchange Funding
Chart Data 1.19   Low Interest Rates and Insurance Companies
Chart Data 1.20   U.S. Pension Fund Discount Rate
Chart Data 1.21   Pension Funding Shortfalls in the United States and the United Kingdom
Chart Data 1.22   Portfolio Flows to Emerging Market Economies and Asset Prices
Chart Data 1.23   Corporate Borrowing: Stabilized, but at a High Level
Chart Data 1.24   Scenarios for Deleveraging in Emerging Market Firms and Default Rates
Chart Data 1.25   Sensitivity of Emerging Market Economy Assets to Global Policy Uncertainty
Chart Data 1.26   China: Credit Overhang and Shadow Credit
Chart Data 1.27   China: Bank Linkages to the Structured Investment Complex
Chart 1.28   Financial Stagnation and Protectionism Scenario: Simulated Peak Effects
Annex Figures
Chart 1.1.1   Financial Stagnation and Protectionism Scenario

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