Global Financial Stability Report

Durable Financial Stability: Getting There from Here

April 2011

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.

©2011 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

Executive Summary  

Preface

Glossary 

Summing Up of the Acting Chair

Chapter I. Key Risks and Challenges for Sustaining Financial Stability

Full Text   |   Video    |   Boxes   |    Figures   |   Tables   |   Press Points

A. What Are the Key Stability Risks and Challenges?
B. Living Dangerously—The Legacy of High Debt Burdens in Advanced Economies
C. Banking System—Not Enough Has Been Done
D. Sovereign Funding Challenges
E. Alleviating Pressures on Households and Firms
F. Macro and Stability Implications of Capital Inflows into Emerging Markets
G. Durable Financial Stability: Getting There from Here
Annex 1.1. What Factors Are Driving U.S. Bond Yields Higher?
Annex 1.2. Compilation of Investor Base Data for General Government Debt
Annex 1.3. Dubai: From Debt Overhang to Restructuring, but Risks Remain
Annex 1.4. Projecting Government Funding Costs through 2015
Annex 1.5. Strategic Defaults and Housing Prices in the United States
Annex 1.6. Recent Measures to Manage Capital Flows in Selected Economies
Annex 1.7. Exchange-Traded Funds: Mechanics and Risks
References

Chapter II. How to Address the Systemic Part of Liquidity Risk

Full Text   |   Video    |   Boxes   |    Figures   |   Press Points


Summary
What Is Systemic Liquidity Risk?
Will Liquidity Rules Under Basel III Lower Systemic Risk?
Measures of Systemic Liquidity Risk and Potential Macroprudential Tools to Mitigate It
Summary and Policy Considerations
Annex 2.1. Methods Used to Compute a Systemic Liquidity Risk Index
Annex 2.2. Technical Description of the Systemic Risk-Adjusted Liquidity Model
Annex 2.3. Highlights of the Stress-Testing Framework References
References

Chapter III. Housing Finance and Financial Stability—Back to Basics?

Full Text   |   Video    |   Boxes   |   Figures   |   Press Points

Summary
Housing Booms and Busts—Theory and Stylized Facts
Global Housing Finance Landscape
Housing Finance and Financial Stability
Conclusions and Policy Implications—Back to Basics
Annex 3.1. The Impact of Housing Finance Modes on House Prices and Loan-Loss Growth during the Recent Crisis
Annex 3.2. Evidence on House Prices, Credit, and Housing Finance Characteristics in Advanced Economies
References

Statistical Appendix (1900 KB pdf file)

Figures    |   Tables

Boxes

    1.1 The Middle East: Geopolitical Risk to the Financial Stability Outlook
    1.2 Implications of Japan’s Earthquake for Financial Stability
    1.3 Examining the Ability of U.S. Banks to Absorb Mortgage Principal Reductions
    1.4 Are Debt Vulnerabilities Building in the Emerging Market Corporate Sector?
    1.5 Emerging Market Banks: Fueling Growth or Frenzy?
    1.6 Euro Area Crisis Management and Prevention
    1.7 Regulatory Reforms: Are We There Yet?
  Data 2.1 How Well Does the Net Stable Funding Ratio Predict Banks' Liquidity Problems?
    2.2 How Well Does the Systemic Liquidity Risk Index Explain Banks' Liquidity Problems?
    3.1 The Danish “Balance Principle” Mortgage Model
    3.2 Legal Prerequisites for Housing Finance Systems
    3.3 Experience with Limits on Loan-to-Value Ratios for Residential Mortgages
  Data 3.4 Housing Finance and the U.S. Housing Crisis
    3.5 Emerging Market Mortgage Securitization
    3.6 Empirical Analyses of the Relationships among House Prices, Credit, and Housing Finance Characteristics
    3.7 Mortgage Finance Unbundling and Incentive Misalignments

Tables

Data 1.1 Sovereign Market and Vulnerability Indicators
1.2 Low-Growth Shock: Impact Analysis and Ranking
Data 1.3 Low-Growth Shock: Impact Analysis and Ranking
Data 1.4 Low-Growth Shock: Impact Analysis and Ranking
1.5 Low-Growth Shock: Impact Analysis and Ranking
1.6 Low-Growth Shock: Impact Analysis and Ranking
2.1 Factors Used in Calculations
2.2 Main Features of the Proposed Methodologies
2.3 Indicators for (Systemic) Liquidity Risk Monitoring
2.4 Joint Expected Losses from Systemic Liquidity Risk
2.5 Capital Charge for Individual Liquidity Risk and Individual Contribution to Systemic Liquidity Risk
2.6 Summary Statistics of Individual Contributions to Systemic Liquidity Risk and Associated Fair Value Insurance Premium
2.7 Selected Liquidity Stress Testing Frameworks
2.8 Withdrawal Rate Assumptions
2.9 Probability of Banks Ending the Simulation with a Liquidity Shortage
2.10 Capital Surcharges
2.11 Selected Regulatory Proposals for Managing Systemic Liquidity Risk
  3.1 Crisis Measures
3.2 Housing Finance Features in Advanced Economies, 2008
3.3 Housing Finance Systems in Emerging and Newly Industrialized Economies, 2008
3.4 Mortgage Market Characteristics in Emerging and Newly Industrialized Economies, 2008
3.5 Index of Government Participation in Housing Finance Markets, 2008
3.6 Which Housing Finance Features Help Explain Growth in House Prices, Mortgage Credit, and Nonperforming Loans?
3.7 Joint Determinants of Growth in Real House Prices, Mortgage Credit, and Loan Losses
3.8 Joint Determinants of Growth in Real House Prices and Mortgage Credit, Pre-Crisis Episode, 2004–07
3.9 House Prices and Household Bank Credit
3.10 House Prices, Household Bank Credit, and Macroeconomic Controls
3.11 House Prices and Housing Finance Characteristics
3.12 House Prices and Government Participation

Figures

 Data 1.1 Global Financial Stability Map
  Data 1.2 Global Financial Stability Map: Assessment of Risks and Conditions
  1.3 Changes in Financial Conditions
  Data 1.4 Risk Appetite
  1.5 Banking Sector Challenges
  Data 1.6 Banking System Capital and Reliance on Wholesale Funding
  1.7 Global Bank Debt Maturity Profile
  Data 1.8 Bank Rollover Requirement, 2011–12
  1.9 Bank Debt Yields
  Data 1.10 Increase in Bank Deposit Rates
  Data 1.11 Change in Bank Net Interest Margin, June 2010
  1.12 Policy Solutions to Banking Sector Challenges
  1.13 European Union Bank Core Tier 1 Ratios, 2010
  1.14 Sovereign Credit Default Swap Spreads
  Data 1.15 Euro Area Treasury Bond Spreads over German Bunds, and Volatility
  Data 1.16 Risk-Adjusted Yields for Euro-Denominated Bonds
  Data 1.17 Change in General Government Debt Holdings
  Data 1.18 Average versus Marginal Government Funding Costs
  Data 1.19 Sovereign Funding Needs
  Data 1.20 Government Funding Costs in 2015
  1.21 Funding Cost Thresholds, Debt, and Revenue
  Data 1.22 Leverage Ratios: Household Debt as a Percent of GDP
  Data 1.23 Various Measures of U.S. Household Leverage
  Data 1.24 Shadow Inventory of Houses Potentially for Sale
  Data 1.25 Household Balance Sheets
  Data 1.26 Federal Reserve Assets and Flows into U.S. Risky Assets
  Data 1.27 Nonfinancial Corporate Credit Default Swap Spreads
  Data 1.28 Nonfinancial Corporates’ Debt-to-Equity Ratios
  Data 1.29 Lending Conditions for Small and Medium-Sized Enterprises
  Data 1.30 Debt Maturity Profile for the Commercial Real Estate Sector
  Data 1.31 Net Capital Inflows to Emerging Markets
  Data 1.32 U.S. Investment Flows in Foreign Securities
  1.33 Portfolio Debt Inflows and Risk-Adjusted Local Government Yields
  Data 1.34 Average Monthly Retail Flows to Emerging Market Debt and Equity Mutual Funds
  Data 1.35 Capital Inflows, Real Credit, and Real Equity Prices
  1.36 Emerging Market Equities: Foreign Inflows, Issuance, and Returns in 2010
  Data 1.37 Emerging Market External Corporate Issuance by Rating
  1.38 Median Volatility of Inflation, Currencies, and Capital Flows
  Data 1.39 Real Policy Rates in February 2011
  1.40 Ten-Year Government Bond Yields
  1.41 Macroeconomic Surprise Indices
  1.42 Ten-Year Break-Even Rates
  Data 1.43 Term Premium on U.S. Treasuries
  Data 1.44 Components of 10-Year Nominal Treasury Yield
  Data 1.45 Dubai: Foreign Borrowing Surge and Rollover Risk
  Data 1.46 Urban Real Estate Prices, CPI-Deflated
  Data 1.47 Maturity Profile of Debt of Dubai Government-Related Enterprises
  Data 1.48 Dubai: Composition of Debt
  1.49 Credit Default Swap Spreads
  Data 1.50 United Arab Emirates: Recent Developments in Local Banks
  Data 1.51 Nonperforming Loans and Real Estate
  Data 1.52 Government Funding Costs and Debt Affordability
  1.53 Annualized Transition Probability of a Performing Prime Mortgage to 60-Plus Day Delinquency Conditional on Local Unemployment Rate
  Data 1.54 U.S. Mortgage Delinquency Probability and Home Equity Distribution
  Data 1.55 Home Equity, Delinquency Rate, and House Price Declines
  Data 1.56 Indonesia: Foreign Holdings of Government Bonds and Bank Indonesia Certificates
  1.57 Thailand: Weekly Foreign Portfolio Inflows and Reserves
  Data 1.58 Asian Residential Property Prices
  Data 1.59 Korea: Short-Term External Borrowing
  Data 1.60 Exchange-Traded Fund Assets ($1.2 Trillion), by Type of Exposure
  Data 1.61 Exchange-Traded Fund Trading: Synthetic Replication Based on Total Return Swaps
  Data 1.62 Counterparty Risks in Exchange-Traded Funds
  1.63 Flash Crash: Intraday Prices, May 6, 2010
  1.64 Gold Exchange-Traded Funds
  Data 2.1 Net Stable Funding Ratio by Region
  Data 2.2 Net Stable Funding Ratio by Business Model
  Data 2.3 Net Stable Funding Ratio by Bank, 2009
  Data 2.4 Systemic Liquidity Risk Index
  Data 2.5 Average Sensitivity of Volatility of Banks' Return on Equity to Systemic Liquidity Risk Index
  Data 2.6 Sensitivity of Volatility of Banks’ Return on Equity Based on Market Capitalization to Systemic Liquidity Risk Index
  Data 2.7 Sensitivity of Volatility of Banks' Return on Equity Based on Net Stable Funding Ratio to Systemic Liquidity Risk Index
  Data 2.8 Illustration of Individual Expected Losses Arising from Liquidity Risk
  Data 2.9 Illustration of Joint and Total Expected Shortfalls Arising from Systemic Liquidity Risk
  Data 2.10 Total Loan Reductions
  Data 2.11 Principal Component Analysis: Total Variation Explained by Each Factor
  2.12 Methodology to Compute Systemic Liquidity under the Systemic Risk-Adjusted Liquidity Model
  2.13 Conceptual Relation between the Net Stable Funding Ratio at Market Prices and Expected Losses from Liquidity Risk
  2.14 Conceptual Scheme for the Probability Distribution of Joint Expected Shortfall from Liquidity Risk: Two-Firm (Bivariate) Case
  2.15 Systemic Liquidity Risk ST Framework
  Data 3.1 House Price Indices
  Data 3.2 Government Participation in Housing Finance
  Data 3.3 Government Participation in Housing Finance: Emerging and Newly Industrialized Economies
  Data 3.4 Homeownership Rate and Government Participation in Housing Finance
  Data 3.5 Homeownership Rate
  Data 3.6 Residential Mortgage-Debt-to-GDP Ratio: Advanced Economies
  Data 3.7 Residential Mortgage-Debt-to-GDP Ratio: Emerging Europe
  Data 3.8 Nonperforming Residential Mortgage Loans
  Data 3.9 Home Foreclosures in the United Kingdom and the United States


Statistical Appendix

Figures

Data 1. Major Net Exporters and Importers of Capital in 2010
2. Sovereign Credit Default Swap Spreads
3. Selected Credit Default Swap Spreads
Data 4. Selected Spreads
Data 5. Implied Volatility Indices
Data 6. Twelve-Month Forward Price/Earnings Ratios
Data 7. United States: Corporate Bond Market
Data 8. Euro Area: Corporate Bond Market
Data 9. United States: Commercial Paper Market

Tables

Data 1. Selected Indicators on the Size of the Capital Markets, 2009
Data 2. MSCI Equity Market Indices
Data 3. Emerging Market Bond Index: EMBI Global Yield Spreads
Data 4. Emerging Market External Financing: Total Bonds, Equities, and Loans
Data 5. Emerging Market External Financing: Bonds
Data 6. Emerging Market External Financing: Equities
Data 7. Emerging Market External Financing: Loans
Data 8. Equity Valuation Measures: Dividend-Yield Ratios
Data 9. Equity Valuation Measures: Price/Earnings Ratios
Data 10. Emerging Markets: Mutual Fund Flows
(*)Please note that effective this 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.