Global Financial Stability Report
Navigating Monetary Policy Challenges and Managing Risks
April 2015
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.
Global financial stability risks have risen since October. Chapter 1 finds that these risks have also been pivoting away from banks to shadow banks, from solvency to market liquidity risks, and from advanced economies to emerging markets. In advanced economies, the key challenge is to enhance the traction of accommodative monetary policies, ensure a smooth normalization of monetary policy in the United States, and manage the undesirable side effects of low interest rates. Emerging markets must address their own domestic financial vulnerabilities from weaker growth, lower commodity prices, and a stronger dollar, while strengthening their resilience to the changing global environment.
Chapters 2 and 3 examine developments in international banking and the potential risks stemming from the financial management industry. Analyzing developments since the global financial crisis, Chapter 2 highlights a shift from direct cross-border lending to local lending by foreign banks’ affiliates. The decline in cross-border lending can be explained by a combination of regulatory changes, weaknesses in bank balance sheets, and macroeconomic factors. This change can positively affect the financial stability of host countries. Cross-border lending tends to compound adverse domestic and global shocks; in contrast, foreign-owned subsidiaries behave less procyclically than domestic banks during domestic crises. Chapter 3 shifts the focus to the asset management industry, particularly “plain-vanilla” products, such as mutual funds. Even these vehicles may pose financial stability risks due to incentive problems between portfolio managers and end investors (which may lead to herding) and due to run risk stemming from liquidity mismatches. The empirical analysis finds evidence for many of these risk-creating mechanisms, although their importance varies across markets. Oversight of the industry should be strengthened.
Contents
Front Matter
Chapter 1: Enhancing Policy Traction And Reducing Risks
Chapter 1 concludes that global financial stability risks have risen since October. They have also been rotating: away from banks to shadow banks, from solvency to market liquidity risks, and from advanced economies to emerging markets. In advanced economies, the key challenge is to enhance the traction of accommodative monetary policies, ensure a smooth normalization of monetary policy in the United States, and manage the undesirable side effects of low interest rates. Emerging markets must address their own domestic financial vulnerabilities from weaker growth, lower commodity prices, and a stronger dollar, while strengthening their resilience to the changing global environment.
| Boxes | |||||
| Chart | 1.1 The Oil Price Fallout—Spillovers and Implications for the Financial Sector | ||||
| Chart Chart Chart |
1.2 Russia’s Financial Risks and Potential Spillovers | ||||
| Tables | |||||
| Data | 1.1 Household Debt in the Euro Area, Japan, the United Kingdom, and the United States | ||||
| Data | 1.2 Corporate Debt in the Euro Area, Japan, the United Kingdom, and the United States | ||||
| 1.3 Reallocating Assets: Stylized Investment Choices | |||||
| Data | 1.4 Energy’s Impact on Two Barclays Corporate Credit Indices | ||||
| Data | 1.5 Summary of Sovereign, Corporate, and Banking Indicators | ||||
| Figures | |||||
| Chart | Data | 1.1 Global Financial Stability Map: Risks and Conditions | |||
| Chart | Data | 1.2 Global Financial Stability Map: Components of Risks and Conditions | |||
| Chart | Data | 1.3 Global Disinflationary Forces | |||
| Chart | Data | 1.4 Asset Valuation and Volatility Heat Maps | |||
| Chart | 1.5 Quantitative Easing Impact Channels | ||||
| Chart | Data | 1.6 Private Nonfinancial Sector Gross Debt | |||
| Chart | Data | 1.7 Episodes of Private Sector Deleveraging in Selected Advanced Economies | |||
| Chart | Data | 1.8 Insolvency Frameworks and Macroeconomic Deleveraging | |||
| Chart | 1.9 Quantitative Easing and Financial Markets | ||||
| Chart | Data | 1.10 Illustrative “Baseline” QE Portfolio Rebalancing Scenarios in Japan and the Euro Area | |||
| Chart | Data | 1.11 Bank Lending and Constraints | |||
| Chart Chart |
Data | 1.12 Bank Nonperforming Loans and Lending Conditions | |||
| Chart | Data | 1.13 Life Insurance Industry Characteristics | |||
| Chart | Data | 1.14 United States: Nonfinancial Corporations | |||
| Chart | Data | 1.15 U.S. Credit Spreads, Firm Leverage, and Interest Coverage | |||
| Chart | Data | 1.16 U.S. High-Yield Energy Markets | |||
| Chart | Data | 1.17 U.S. Interest Rates and Term Premiums | |||
| Chart | 1.18 Global Interest-Rate Developments | ||||
| Chart | 1.19 The October 15 Flash Rally in U.S. Treasuries | ||||
| Chart | Data | 1.20 Asset CoMovements and Correlation Spillovers | |||
| Chart | Data | 1.21 Wide Range in the Inflation Outlook of Emerging Market Economies | |||
| Chart | Data | 1.22 China: Real Estate and Interest Rate Developments | |||
| Chart | Data | 1.23 Emerging Market Nonfinancial Corporate Investment Continues to Shrink | |||
| Chart | Data | 1.24 Dependence of Emerging Market Sovereigns on Commodities, and Market Reaction | |||
| Chart | Data | 1.25 Energy Corporate Sector Metrics | |||
| Chart | Data | 1.26 Large Increase in Emerging Market Debt | |||
| Chart | Data | 1.27 Firms in Countries with Large Currency Selloffs Also Had High Equity Volatility | |||
| Chart | Data | 1.28 Financial Stability of Emerging Market Banks | |||
| Annex Tables | |||||
| Data | 1.2.1 Potential Portfolio Outflows by Euro Area Investors, 2015 | ||||
| Data | 1.2.2 Japan: A Potential Portfolio Rebalancing Scenario under QQE2, 2015–17 | ||||
| Data | 1.2.3 Potential Portfolio Outflows by Japanese Institutional Investors, 2015–17 | ||||
| Annex Figure | |||||
| Chart | Data | 1.2.1 Euro Area Negative-Yielding European Government Bonds and Baseline Portfolio Rebalancing | |||
Chapter 2: International Banking After the Crisis: Increasingly Local and Safer?
Chapter 2 analyzes developments in international banking since the global financial crisis. It highlights a shift from direct cross-border lending to local lending by foreign banks’ affiliates. The decline in cross-border lending can be explained by a combination of regulatory changes, weaknesses in bank balance sheets, and macroeconomic factors. This change can positively affect the financial stability of host countries. Cross-border lending tends to compound adverse domestic and global shocks; in contrast, foreign-owned subsidiaries behave less procyclically than domestic banks during domestic crises. More international cooperation is needed to maximize the benefits of international banking while mitigating the risks.
| Boxes | |||||
| Chart Chart Chart |
Data | 2.1 The International Expansion of Chinese and Japanese Banks | |||
| Chart Chart |
Data | 2.2 The Expansion of Pan-African Banks: Opportunities and Challenges | |||
| Chart | Data | 2.3 Banking Union in Europe | |||
| 2.4 Global Banks: Regulatory and Supervisory Areas in Need of Attention | |||||
| Tables | |||||
| 2.1 Effects of International Banking Linkages on the Incidence of Crises | |||||
| 2.2 Main Findings of the Analysis of the Effects of International Banking Linkages on Domestic Credit Growth | |||||
| Figures | |||||
| Chart | Data | 2.1 Developments in Foreign Banking Claims | |||
| Chart | 2.2 Types of Claims in Bank for International Settlements Consolidated Statistics | ||||
| Chart | Data | 2.3 Number of Branches and Subsidiaries of Foreign Banks in 2008 and 2013, by Region | |||
| Chart | Data | 2.4 Banking Regionalization from Asia | |||
| Chart | Data | 2.5 Trends in Latin America and Europe | |||
| Chart | 2.6 PreCrisis and PostCrisis Geographic Correlation Networks from Banks’ Stock Returns | ||||
| Chart | Data | 2.7 Changes in Corporate Borrowing | |||
| Chart | Data | 2.8 Share of Countries that Changed Regulations on International Banking Operations between 2006 and 2014 | |||
| Chart | Data | 2.9 Share of Countries that Tightened Regulations on International Banking Operations between 2006 and 2014, by Region | |||
| Chart | 2.10 Effects of Regulations and Other Factors on International Banking Linkages | ||||
| Chart | Data | 2.11 Changes in Capital Flows | |||
| Chart | 2.12 Effect of International Banking Linkages on Domestic Credit Growth | ||||
| Chart | 2.13 Lending Growth by Domestic and Foreign-Owned Banks during Crises | ||||
| Chart | 2.14 Effect of Parent and Subsidiary Characteristics on Subsidiary Lending Growth | ||||
Chapter 3: The Asset Management Industry and Financial Stability
Chapter 3 examines potential risks stemming from the asset management industry, focusing on “plain-vanilla” products, such as mutual funds. Even these vehicles may pose financial stability risks due to incentive problems between portfolio managers and end investors (which may lead to herding) and due to run risk stemming from liquidity mismatches. The empirical analysis finds evidence for many of these risk-creating mechanisms, although their importance varies across markets. Oversight of the industry should be strengthened, with a better microprudential supervision of risks and by adopting a more-encompassing (macroprudential) approach.
| Boxes | |||||
| 3.1 Possible Incentive Problems Created by Delegated Management | |||||
| Chart Chart |
Data | 3.2 Fund Share Pricing Rules and First-Mover Advantage | |||
| Tables | |||||
| 3.1 Summary Characteristics and Risk Profiles of Major Investment Vehicles | |||||
| 3.2 Mutual Fund Flows and Asset Returns | |||||
| 3.3 Selected Regulations for Publicly Offered Funds | |||||
| 3.4 Summary of Analysis and Policy Implications for Mutual Funds and ETFs | |||||
| Figures | |||||
| Chart | Data | 3.1 Financial Intermediation by the Asset Management Industry Worldwide | |||
| Chart | Data | 3.2 Products Offered by Asset Managers and Their Recent Growth | |||
| Chart | Data | 3.3 Key Domiciles of Mutual Funds | |||
| Chart | 3.4 Unleveraged Open-End Funds and Systemic Risk | ||||
| Chart | 3.5 Liquidity Mismatches | ||||
| Chart | Data | 3.6 Growth in Bond Funds by Investment Focus | |||
| Chart | Data | 3.7 Bond Ownership Concentration and Its Effects on Credit Spreads | |||
| Chart | Data | 3.8 Drivers of Fund Flows from End Investors | |||
| Chart | 3.9 Convexity of Fund Flow-Performance Relationship | ||||
| Chart | Data | 3.10 Liquidity Risk and Fund Structures | |||
| Chart | 3.11 Brand Name Effects | ||||
| Chart | 3.12 Funds’ Liquidity Risk Management | ||||
| Chart | 3.13 Herding among U.S. Mutual Funds | ||||
| Chart | Data | 3.14 Ownership Structure of the 25 Largest Global Asset Management Companies | |||
| Chart | Data | 3.15 Bank Financing by Mutual Funds and Money Market Funds | |||
| Chart | 3.16 Contribution to Systemic Risk by Mutual Funds | ||||
| Annex Figures | |||||
| Chart Chart |
Data | 3.1.1 Investment Vehicles by Size, Domicile, and Investment Focus | |||
| Chart | 3.1.2 Operation of a Fund | ||||
| Chart | 3.2.1 Drivers of Changes in Credit Spreads during Distress Episodes | ||||
Statistical Appendix
| Figures | |||
| Data | 1. Major Net Exporters and Importers of Capital, 2013 | ||
| 2. Sovereign Credit Default Swap Spreads | |||
| 3. Selected Credit Default Swap Spreads | |||
| 4. Selected Spreads | |||
| 5. Implied Volatility Indices | |||
| Data | 6. U.S. Corporate Bond Market | ||
| Data | 7. Euro Area Corporate Bond Market | ||
| Data | 8. U.S. Commercial Paper Market | ||
| Tables | |||
| Data | 1. Capital Market Size: Selected Indicators, 2013 | ||
| 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.