Global Financial Stability Report

Financial Stress and Deleveraging Macro-Financial Implications and Policy

October 2008

On this site, 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. Dependent territories of member countries are listed alphabetically followed by a description of the constitutional relationships with their member countries.

©2008 International Monetary Fund
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The Global Financial Stability Report provides semiannual assessments of global financial markets and addresses emerging market financing in a global context.*

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Contents

Preface(208KB pdf file)

Executive Summary(241KB pdf file)

Chapter I. Assessing Risks to Global Financial Stability

Full Text    |   Boxes   |    Figures   |   Tables

Global Financial Stability Map
The Default Cycle
Financial System Deleveraging
Systemic Implications
Emerging Market Resilience Is Being Tested
Financial Stability Policies
Annex 1.1. Global Financial Stability Map: Construction and Methodology
Annex 1.2. Financial Investment in Commodities Markets
Annex 1.3. Loss Estimates on U.S. Credit Instruments
Annex 1.4. Factors Infl uencing the Pace and Level of Bank Capital Rebuilding
References


Chapter II. Stress in Bank Funding Markets and Implications for Monetary Policy

Full Text   |   Boxes   |    Figures

The Microstructure of Bank Funding Markets
The Causes of Elevated Interbank Spreads
Implications for the Interest Rate Transmission Mechanism of Monetary Policy
Policy Recommendations
Annex 2.1. Empirical Framework: The Causes of High Interbank Spreads
Annex 2.2. Empirical Framework: Monetary Transmission
References

Chapter III. Fair Value Accounting and Procyclicality

Full Text   |   Figures

Fair Value Accounting Through the Business Cycle
Modeling Fair Value Accounting Through the Business Cycle Using Simulations
Conclusions and Policy Recommendations
Annex 3.1. Data and Modeling Assumptions
References

Chapter IV. Spillovers to Emerging Equity Markets

Full Text    |   Boxes   |    Figures

Performance of Emerging Market Equity Markets
Cross-Country Equity Price Correlations
Determinants of Emerging Market Equity Prices
Spillovers and their Impact
The Role of Local Institutional Investors
Key Results and Conclusions
Annex 4.1. Panel Estimation Specification and Results
Annex 4.2. Vector Autoregression Model Results
References

Glossary (270KB pdf file)

Annex: Summing Up by the Acting Chair

Statistical Appendix(1,331KB pdf file)

Key Financial Centers:      Figures    |   Tables
Emerging Markets:           Figures    |   Tables
Financial Soundness Indicators:           Tables

Boxes

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1.1 Recent Financial Market Developments
    1.2 Measuring Capital Adequacy
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1.3 Global Bank Writedowns and Capital Raising
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1.4 U.S. Government-Sponsored Enterprises and Housing Reform Developments
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1.5 Impact of Credit Market Turmoil on Hedge Funds
1.6 Forecasting Loan Charge-Off Rates
    2.1 Pricing and Hedging Role of Interbank Deposit-Related Derivatives
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2.2 Is the LIBOR Fix Broken?
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2.3 The Federal Reserve's Term Auction Facility
Chart Data 2.4 Breakdown of the Financial Sector for Monetary Transmission Analysis
3.1 Off-Balance Sheet Entities and Procyclicality
3.2 Disclosures Recommended by the Financial Stability Forum
    3.3 Dealing with Procyclicality in the Basel II Framework
    3.4 Options Surrounding the Application of Fair Value Accounting to Mitigate Procyclicality
    4.1 Is There a Stock Market Wealth Effect in Emerging Markets?
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4.2 The Role of Emerging Market Institutional Investors in Emerging Market Equities


Tables

Data 1.1 Estimates of Financial Sector Potential Writedowns
Data 1.2 Estimates of Potential Losses on Loans
Data 1.3 European and U.S. Public Securitization
Data 1.4 Sensitivity of Deleveraging to Public Sector Support
Data 1.5 Macro and Financial Indicators in Selected Emerging Market Countries
  1.6 Change in Risks and Conditions Since the April 2008 Global Financial Stability Report
Data 1.7 Asset Class Characteristics
Data 1.8 Test for Causality Between Commodities Prices and Financial Positions
Data 1.9 Comparison of Financial Sector Loss Estimates, October 2008
Data 1.10 Deleveraging Illustration: Key Assumptions
  2.1 List of Restrictions Used in the Structural Vector Autoregression for Each LIBOR and Euribor Spread
  2.2 Static Vector Error Correction Mechanism (2, 3) Estimation with Variable Controls: United States
  2.3 Static Vector Error Correction Mechanism (2, 3) Estimation with Variable Controls: Euro Area
  2.4 List of Variables Used in the Vector Autoregressions
  3.1 Balance Sheet of Representative U.S. and European Financial Institutions
  3.2 Parameter Values for Each Simulation
  3.3 Equity-to-Assets Ratio through the Business Cycle
  3.4 Application of Fair Value by U.S. and European Banks, 2007
  4.1 Emerging Equity Market Peaks and Troughs: Current and Previous Episodes
  4.2 Fixed-Effects Panel Least-Squares Estimation of the Determinants of Emerging Market Equity Prices—Monthly Observations (January 2001-May 2008), 30 Countries, First Specification
  4.3 Fixed-Effects Panel Least-Squares Estimation of the Determinants of Emerging Market Equity Prices—Monthly Observations (January 2001-May 2008), 30 Countries, Second Specification
  4.4 Unit Root Tests
  4.5 Pedroni Heterogeneous Panel Cointegration Tests


Figures

Chart Data 1.1 Global Financial Stability Map
Chart Data 1.2 Heat Map: Developments in Systemic Asset Classes
Chart Data 1.3 Systemic Bank Default Risk
Chart Data 1.4 Asset Price Volatility and Funding and Market Liquidity
Chart Data 1.5 Allocation to Global and Emerging Market Risk Assets
Chart Data 1.6 U.S. Loan Charge-Off Rates
Chart Data 1.7 U.S. Households' Balance Sheet: Net Worth
Chart Data 1.8 U.S. Mortgage Delinquencies by Vintage Year
Chart Data 1.9 Prices of U.S. Mortgage-Related Securities
Chart Data 1.10 U.S. Residential Real Estate: Loan Charge-Off Rates
Chart Data 1.11 U.S. Consumer Loans: Charge-Off Rates
Chart Data 1.12 Macroeconomic and Corporate Indicators and Default Rates
Chart Data 1.13 Comparison of Financial Crises
Chart Data 1.14 Financial Sector Losses
Chart Data 1.15 Ratio of Household Debt to Gross Disposable Income
Chart Data 1.16 U.K. Mortgage Foreclosures
Chart Data 1.17 Net Acquisition of Financial Assets by U.S. Financial Firms
Chart Data 1.18 Bank Ratios
Chart Data 1.19 U.S. Banks' Price-to-Book Ratios and Risk Exposures
Chart Data 1.20 European Banks' Price-to-Book Ratios and European Real Estate Prices
Chart Data 1.21 U.K. Banks' Price-to-Book Ratios
Chart Data 1.22 AA Rated Bank Bond Index Spreads Relative to Government Bonds
Chart Data 1.23 European Banks' Cross-Border Liabilities, end-2007
Chart Data 1.24 Net Cross-Border U.S. Dollar Claims of European Banks
Chart Data 1.25 Cross-Currency Swaps with U.S. Dollar
Chart Data 1.26 Private Sector Credit Growth
Chart Data 1.27 Euro Area Financial Institution Lending for Home Purchase
Chart Data 1.28 Market Capitalization and Equity Book Values of Select Financial Institutions
Chart Data 1.29 Probability of Default Based on Equity Option Prices
Chart Data 1.30 U.S. Equity Index Performance
Chart Data 1.31 Total Assets on Federal Reserve's Balance Sheet
Chart Data 1.32 Potential U.S. Commitments and Mortgage Markets
Chart Data 1.33 Sovereign Credit Default Swap Spreads
Chart Data 1.34 Net Foreign Equity Investment in Emerging Economies
Chart Data 1.35 Emerging Market External and U.S. High-Grade Corporate Spreads
Chart Data 1.36 Onshore Emerging Market Dollar Interest Rates
Chart Data 1.37 Credit Default Swap Spreads on Selected Emerging Market Banks, January 2007-Early October 2008
Chart Data 1.38 Real Policy Rates: Latest Levels and Changes from end-2008
Chart Data 1.39 Break-Even Inflation Rates
Chart Data 1.40 Baltic States: Real Bank Loan Growth to Non financial Private Sector
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1.41 Global Financial Stability Map: Monetary and Financial Conditions
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1.42 Global Financial Stability Map: Risk Appetite
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1.43 Global Financial Stability Map: Macroeconomic Risks
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1.44 Global Financial Stability Map: Emerging Market Risks
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1.45 Global Financial Stability Map: Credit Risks
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1.46 Global Financial Stability Map: Market and Liquidity Risks
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1.47 Commodity Futures Prices and Financial Positions
Chart Data 2.1 Unsecured European Bank Borrowing Volumes
Chart Data 2.2 Spread Between Three-Month Uncollateralized Interbank Rates and Overnight Index Swaps
Chart Data 2.3 Joint Probability of Distress: Selected Financial Institutions Participating in Interbank Panels
Chart Data 2.4 Three-Month Forex Swap Spreads
Chart Data 2.5 Structured VAR Model: Variance Decomposition of LIBOR/Euribor Minus Overnight Index Swap (OIS) Spread
Chart Data 2.6 Selected Countries: Size of Financial Assets
Chart Data 2.7 United States: Structural Changes in Financial Sector Liabilities
Chart Data 2.8 United States: Selected Interest Rate Spreads
Chart Data 2.9 Euro Area: Selected Interest Rates Spreads
Chart Data 2.10 Dynamic Vector Error Correction Mechanism (VECM) (2,3) Estimation of the U.S. Fed Funds Rate and Market Rates—United States
Chart Data 2.11 Dynamic Vector Error Correction Mechanism VECM (2,3) Estimation of the EONIA Rate and Market Rates—Euro Area
Chart Data 2.12 Summary Chart: Accuracy of Forecasts—U.S. Model, 1996-2008
Chart Data 2.13 Summary Chart: Accuracy of Forecasts—U.S. Model, 2006-08
Chart Data 2.14 Summary Chart: Accuracy of Forecasts—Euro Area Model, 2006-08
Chart Data 2.15 Decomposition of Spread between Three-Month U.S. Dollar LIBOR and Overnight Index Swaps
Chart Data 3.1 Selected U.S.-Based Financial Institutions: Change in Level 1, 2, and 3 Assets
Chart Data 3.2 Aggregate Fair Value Hierarchy, End-2007
Chart Data 3.3 Simulation of Full Fair Value
Chart Data 3.4 Simulation of Full Fair Value: Changes in Funding Conditions and Financial Market Distress
Chart Data 3.5 Simulation of Full Fair Value: International versus Retail-Oriented Banks
Chart Data 3.6 Simulation of Partial Fair Value
Chart Data 3.7 Simulation of Smoothing Techniques
Chart Data 3.8 Yield Curves and Business Cycles
Chart Data 3.9 Simulation of Full Fair Value with Upward Sloping Yield Curve
Chart Data 4.1 Selected Equity Market Indices
Chart Data 4.2 Emerging Market Economies: Composition of Capital Inflows
Chart Data 4.3 Current Account Balances and Capital Flows from a Global Perspective
Chart Data 4.4 Stock Market Capitalization
Chart Data 4.5 Total Equity Market Returns
Chart Data 4.6 Price/Earnings Ratios, July 31, 2008
Chart Data 4.7 Total Foreign Holdings of Equity
Chart Data 4.8 Emerging Markets Equity Indices and Foreign Investor Presence
Chart Data 4.9 Implied Correlations from Dynamic Conditional Correlation GARCH Specification
Chart Data 4.10 Emerging Market Countries: Implied Correlations from Dynamic Conditional Correlation GARCH Specification
Chart Data 4.11 Equity Price Response to Global Excess Liquidity Increase
Data 4.12 Equity Price Response to Credit Risk Premium Increase
Data 4.13 Equity Price Response to Market Risk Premium Increase



Statistical Appendix

Key Financial Centers

Figures

Chart Data 1. Major Net Exporters and Importers of Capital in 2007
Chart Data 2. Exchange Rates: Selected Major Industrial Countries
Chart Data 3. United States: Yields on Corporate and Treasury Bonds
Chart Data 4. Selected Spreads
Chart Data 5. Nonfinancial Corporate Credit Spreads
Chart Data 6. Equity Markets: Price Indices
Chart Data 7. Implied and Historical Volatility in Equity Markets
Chart Data 8. Historical Volatility of Government Bond Yields and Bond Returns for Selected Countries
Chart Data 9. Twelve-Month Forward Price/Earnings Ratios
Chart Data 10. Flows into U.S.-Based Equity Funds
Chart Data 11. United States: Corporate Bond Market
Chart Data 12. Europe: Corporate Bond Market
Chart Data 13. United States: Commercial Paper Market
Chart Data 14. United States: Asset-Backed Securities

Tables

Data 1. Global Capital Flows: Inflows and Outflows
Data 2. Global Capital Flows: Amounts Outstanding and Net Issues of International Debt Securities by Currency of Issue and Announced International Syndicated Credit Facilities by Nationality of Borrower
Data 3. Selected Indicators on the Size of the Capital Markets, 2007
Data 4. Global Over-the-Counter Derivatives Markets: Notional Amounts and Gross Market Values of Outstanding Contracts
Data 5. Global Over-the-Counter Derivatives Markets: Notional Amounts and Gross Market Values of Outstanding Contracts by Counterparty, Remaining Maturity, and Currency
Data 6. Exchange-Traded Derivative Financial Instruments: Notional Principal Amounts Outstanding and Annual Turnover
Data 7. United States: Sectoral Balance Sheets
Data 8. Japan: Sectoral Balance Sheets
Data 9. Europe: Sectoral Balance Sheets


Emerging Markets

Figures

Chart Data 15. Emerging Market Volatility Measures
Chart Data 16. Emerging Market Debt Cross-Correlation Measures


Tables

Data 10. Equity Market Indices
Data 11. Foreign Exchange Rates
Data 12. Emerging Market Bond Index: EMBI Global Total Returns Index
Data 13. Emerging Market Bond Index: EMBI Global Yield Spreads
Data 14. Emerging Market External Financing: Total Bonds, Equities, and Loans
Data 15. Emerging Market External Financing: Bond Issuance
Data 16. Emerging Market External Financing: Equity Issuance
Data 17. Emerging Market External Financing: Loan Syndication
Data 18. Equity Valuation Measures: Dividend-Yield Ratios
Data 19. Equity Valuation Measures: Price-to-Book Ratios
Data 20. Equity Valuation Measures: Price/Earnings Ratios
Data 21. United States: Mutual Fund Flows


Financial Soundness Indicators

Tables

Data 22. Bank Regulatory Capital to Risk-Weighted Assets
Data 23. Bank Capital to Assets
Data 24. Bank Nonperforming Loans to Total Loans
Data 25. Bank Provisions to Nonperforming Loans
Data 26. Bank Return on Assets
Data 27. Bank Return on Equity

On this site, 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. Dependent territories of member countries are listed alphabetically followed by a description of the constitutional relationships with their member countries.