| Executive Summary | |||
| Preface |
April 2013
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.
The April 2013: The Global Financial Stability Report examines current risks facing the global financial system and policy actions that may mitigate these. The April 2013 report analyzes the key challenges facing financial and nonfinancial firms as they continue to repair their balance sheets and unwind public and private debt overhangs. Chapter 1 also examines short- and medium-term stability risks in the euro area and the vulnerability of emerging market economies to persistent capital inflows. Chapter 2 takes a closer look at whether sovereign credit default swaps markets are good indicators of sovereign credit risk. Chapter 3 reports on unconventional monetary policy in some depth, including the policies pursued by the Federal Reserve, the Bank of England, the Bank of Japan, the European Central Bank, and the U.S. Federal Reserve.
This chapter examines current risks facing the global financial system and policy actions that may mitigate these. Risks to financial stability have declined since the October 2012 report, reflecting deeper policy commitments, renewed monetary stimulus, and continued liquidity support. This April 2013 report analyzes the key challenges facing financial and nonfinancial firms as they continue to repair their balance sheets and unwind debt overhangs, and examines the work that lies ahead to address structural challenges in the euro area. The report also looks at the potential risk to financial stability of persistent or accelerating capital flows to emerging market economies.
| Boxes | |||
| 1.1 | What Has China’s Lending Boom Done to Corporate Leverage? | ||
| Tables | |||
| Data | 1.1 | Selected Euro Area Countries: Vulnerability Indicators in the Corporate Sector | |
| Data | 1.2 | Deleveraging Progress, 2011:Q3–2012:Q3 | |
| Data | 1.3 | U.S. Nonfinancial Corporate Bonds: Yields, Spreads, and Valuations | |
| Data | 1.4 | Scenarios for U.S. Treasury Bond Market Corrections | |
| Data | 1.5 | Distribution of Bank Lending and Nonperforming Loans | |
| 1.6 | Credit and Asset Market Indicators for Selected Emerging Markets and Other Countries | ||
| 1.7 | Comparing Proposals for Structural Reform | ||
| Data | 1.8 | Nonfinancial Corporate Debt and Leverage | |
| Data | 1.9 | Nonfinancial Corporate Database Coverage | |
| Data | 1.10 | Corporate Sectoral Breakdown within the Sample | |
| 1.11 | Progress on Deleveraging/Restructuring Plans of Selected Major European Banks, as of January 2013 | ||
| Figures | |||
| Data | 1.1 | Global Financial Stability Map | |
| Data | 1.2 | Global Financial Stability Map: Assessment of Risks and Conditions | |
| Data | 1.3 | Asset Price Performance since October 2012 GFSR | |
| Data | 1.4 | Global Equity Valuations | |
| Data | 1.5 | Global Equity Valuations, by Country | |
| Data | 1.6 | Property Price Valuations | |
| Data | 1.7 | Hard-Currency Debt Valuations in Emerging Market Economies | |
| Data | 1.8 | U.S. Sovereign Debt Valuations | |
| Data | 1.9 | Target Balances and Sovereign Bond Yields | |
| Data | 1.10 | Periphery Euro Area Banks’ Bond Issuance and CDS Spreads | |
| Data | 1.11 | Italy and Spain: Nonfinancial Firms’ Change in Bank Credit and Net Bond Issuance | |
| Data | 1.12 | Foreign Investor Share of General Government Debt | |
| Data | 1.13 | European Sovereign Bond Spreads, Current and Implied by Forward Curve | |
| Data | 1.14 | Asset Performance, March 15–April 2, 2013 | |
| Data | 1.15 | Proportion of System Balance Sheets Encumbered | |
| Data | 1.16 | Periphery Banks’ Covered Bond Issuance and Spreads | |
| Data | 1.17 | Selected EU Banks’ Foreign Claims on Banking Sectors, June 2011–September 2012 | |
| Data | 1.18 | Changes in Interest Rates on New Bank Loans, December 2010–January 2013 | |
| Data | 1.19 | Corporate Real Interest Rates and GDP Growth, February 2013 | |
| Data | 1.20 | Bank Lending to the Nonfinancial Private Sector | |
| Data | 1.21 | Euro Area Periphery Bank Credit | |
| 1.22 | Interaction between Credit Demand and Supply | ||
| 1.23 | Interest Rate on New Lending and Decomposition of New Bank Funding Rate | ||
| Data | 1.24 | Euro Area Bank Lending Conditions for Firms | |
| Data | 1.25 | Met and Unmet Demand for Bank Credit for Small and Medium-Sized Enterprises | |
| 1.26 | Spread of Interest Rates on New Loans to SMEs over ECB Policy Rate | ||
| Data | 1.27A | Corporate Debt | |
| Data | 1.27B | Corporate Debt in Percent of GDP | |
| Data | 1.28 | Share of Firms with High Leverage and Low Interest Coverage Ratio, 2011 | |
| Data | 1.29 | Share of Firms with High Leverage and Negative Net Free Cash Flow | |
| Data | 1.30 | Required Reduction in Leverage under Different Scenarios | |
| Data | 1.31 | Required Cuts in Capital Expenditures to Stabilize Debt of Euro Area Periphery Firms with High Leverage and Negative Net Free Cash Flow | |
| Data | 1.32 | Bank Core Tier 1 and Wholesale Funding Ratios, 2008:Q4 to 2012:Q3 | |
| Data | 1.33 | Bank Leverage and Wholesale Funding Ratios, 2008:Q4 to 2012:Q3 | |
| Data | 1.34 | Ranking of Banking Systems Based on Banks’ Balance Sheet Indicators, 2012:Q3 | |
| Data | 1.35 | Average Net Interest Margins | |
| Data | 1.36 | Impaired Loans in Selected EU Countries | |
| Data | 1.37 | EU Banks’ Asset Quality and Profitability | |
| Data | 1.38 | Buffers at Individual EU Banks | |
| Data | 1.39 | Bank Risk-Weights and Impairments, Average for 2008–11 | |
| Data | 1.40 | Deposit Funding Gaps of Foreign Subsidiaries of Large EU Banks | |
| Data | 1.41 | Average Return on Equity, and Cost of Equity | |
| Data | 1.42 | Ratio of Equity Price to Tangible Book Value, April 2013 | |
| Data | 1.43 | GFSR EU Bank Deleveraging Scenarios | |
| Data | 1.44 | Large EU Banks: Contributions to Change in Balance Sheets 2011:Q3–2012:Q3 | |
| Data | 1.45 | Banks’ Foreign Claims on All Regions | |
| Data | 1.46 | Net Foreign Assets Position | |
| Data | 1.47 | Global Mutual Fund and Exchange-Traded Fund Flows | |
| Data | 1.48 | Net Issues of Fixed-Income Securities | |
| Data | 1.49 | U.S. Fixed Investment Spending versus Internal Cash Flow | |
| Data | 1.50 | U.S. Nonfinancial Corporate Bond Issuance and Equity Buybacks | |
| Data | 1.51 | U.S. Nonfinancial Firms’ Credit Fundamentals | |
| Data | 1.52 | U.S. Primary Dealer Repo Financing | |
| Data | 1.53 | Global Issuance of Leveraged Loans and Collateralized Debt Obligations | |
| Data | 1.54 | Risk Tolerance for Weakest 10 Percent of U.S. Public Pension Funds | |
| Data | 1.55 | Net Interest Margins and Investment in Risky Assets by U.S. Insurance Companies | |
| Data | 1.56 | U.S. Treasury Sell-Off Episodes | |
| Data | 1.57 | U.S. High-Yield Corporate Spread and Liquidity and Volatility | |
| Data | 1.58 | Holdings of U.S. Corporate Bonds, by Investor Type | |
| Data | 1.59 | Net Capital Flows to Emerging Markets | |
| Data | 1.60 | Selected Emerging Market Bond, Equity, and Loan Issuance | |
| Data | 1.61 | Nonresident Holdings of Domestic Sovereign Debt | |
| Data | 1.62 | Emerging Market Nonfinancial Corporate Issuance | |
| Data | 1.63 | Emerging Market Nonfinancial Corporate Leverage, 2007 and 2012 | |
| Data | 1.64 | Foreign-Exchange-Denominated Debt of Nonfinancial Corporations in Emerging Markets | |
| Data | 1.65 | Emerging Market Corporate Issuance, by Type of Issuer | |
| Data | 1.66 | Corporate Leverage in Asia, excluding Japan | |
| Data | 1.67 | Interest Coverage Ratio for Emerging Market Firms | |
| Data | 1.68 | Hard Currency and Local Currency Sovereign Bond Issuance | |
| Data | 1.69 | EMBI Global Spread Tightening (December 2008–12): Decomposition | |
| Data | 1.70 | Local Yield Tightening in Emerging Market Economies (December 2008–12): Decomposition | |
| Data | 1.71 | Impact of Shocks on EMBI Global Spreads | |
| Data | 1.72 | Impact of Shocks on Local Emerging Market Yields | |
| Data | 1.73 | Domestic Credit Growth, 2006–12 | |
| Data | 1.74 | Consumer Price Index-Adjusted Residential Property Prices, 2006–12 | |
| Data | 1.75 | Gross Nonperforming Loan Ratios, 2010–12 | |
| Data | 1.76 | Banks’ Loss-Absorbing Buffers by Region | |
| Data | 1.77 | China: Growth Rate of Credit, by Type | |
| Data | 1.78 | European Investment-Grade Corporate Fundamentals | |
| Data | 1.79 | Developments in Publicly Listed European Companies | |
| 1.80 | Progress in Deleveraging Plans across Sample Banks, 2012 | ||
Examines whether sovereign credit default swaps (SCDS) are good market indicators of sovereign credit risk, and finds that many of the negative perceptions surrounding their impact on financial stability are unfounded: SCDS markets do not appear to be more prone to high volatility than other financial markets. The results of the analysis do not support the need for a ban on “naked” SCDS protection buying, which went into effect in the European Union in November 2012.
| Boxes | |||||
| 2.1 | Interconnectedness between Sovereigns and Financial Institutions | ||||
| 2.2 | The European Union’s Ban on Buying Naked Sovereign Credit Default Swap Protection | ||||
| 2.3 | What Could be the Impact of the Demise of SCDS? | ||||
| 2.4 | The Greece Debt Exchange and Its Implications for the SCDS Market | ||||
| Tables | |||||
| 2.1 | Rankings of CDS Amounts Outstanding | ||||
| 2.2 | Lead-Leg Relationship between Sovereign Credit Default Swaps and Bond Residuals | ||||
| 2.3 | List of Countries Included in Empirical Studies | ||||
| 2.4 | List of Variables Used in Regression Analysis | ||||
| 2.5 | Summary of Estimation of Monthly Drivers for Sovereign Credit Default Swap (SCDS) Spreads and Bond Spreads, October 2008–September 2012 | ||||
| 2.6 | Summary of Estimation Results on Drivers for Basis, October 2008–September 2012 | ||||
| Figures | |||||
| Data | 2.1 | Credit Default Swap (CDS) Contracts, Gross Notional Amounts Outstanding | |||
| Data | 2.2 | Nondealer Buyers and Sellers of Credit Default Swap Protection: Net Positions by Counterparty | |||
| 2.3 | Liquidity Indicators in the Sovereign Credit Default Swaps (SCDS) Market | ||||
| 2.4 | Volatility of Sovereign Credit Default Swap (SCDS) Spreads and Sovereign Bond Spreads | ||||
| 2.5 | Determinants of Sovereign Credit Default Swap (SCDS) Spreads and Bond Spreads, October 2008–September 2012 | ||||
| 2.6 | Sovereign Credit Default Swap (SCDS) Price Leadership and Liquidity, March 2009–September 2012 | ||||
| 2.7 | Time-Varying Price Leadership Measures of Sovereign Credit Default Swaps (SCDS) | ||||
| Data | 2.8 | Sovereign Credit Default Swaps (SCDS): Decomposition of Volatility Factors for Germany, Italy, and Spain, February 2009–October 2012 | |||
| 2.9 | Markov-Switching ARCH Model of VIX, European TED Spread, and Sovereign Credit Default Swap (SCDS) Indices | ||||
| 2.10 | Overshooting and Undershooting of Sovereign Credit Default Swaps (SCDS) and Sovereign Bond Markets | ||||
| Data | 2.11 | Sovereign Credit Default Swaps: Net Notional Amounts Outstanding, Selected EU Countries | |||
| 2.12 | Market Liquidity Measures before and after Ban on Short Sales of Sovereign Credit Default Swaps (SCDS) | ||||
| 2.13 | Constructing the Arbitrage Trade between Credit Default Swaps (CDS) and Bonds | ||||
| 2.14 | Difference between Sovereign Credit Default Swap Spreads and Sovereign Bond Spreads, Selected Countries | ||||
Investigates the monetary policies pursued by four central banks (the Federal Reserve, Bank of England, European Central Bank, and Bank of Japan), including prolonged periods of low real policy interest rates and unconventional measures, including asset purchases. The policies appear to have lessened banking sector vulnerabilities and contributed to financial stability in the short term. However, policymakers should be alert to the possibility that risks may rise the longer these policies are maintained. Though not failsafe, targeted micro- and macroprudential tools should be used to mitigate risks while allowing greater leeway for monetary policy to support the macroeconomy.
| Boxes | |||||
| 3.1 | Financial Stability Risks Associated with Exit from MP-Plus Policies | ||||
| 3.2 | The Macroeconomic Effectiveness of MP-Plus | ||||
| 3.3 | Balance Sheet Risks of Unconventional Policy in Major Central Banks | ||||
| Tables | |||||
| 3.1 | Asset Holdings of Major Central Banks Related to MP-Plus, 2008–12 | ||||
| 3.2 | Results from Event Study Regressions | ||||
| 3.3 | Marginal Effect of MP-Plus on Banks | ||||
| 3.4 | Calculated Losses on a 10-Year Bond as a Result of a Rise in Interest Rates | ||||
| 3.5 | Risks from MP-Plus and Mitigating Policies | ||||
| 3.6 | Specification of Taylor Rule | ||||
| 3.7 | Results of the Panel Regressions | ||||
| Figures | |||||
| Data | 3.1 | Changes in Central Bank Balance Sheets, 2006–12 | |||
| 3.2 | OIS Counterparty Spread Decompositions | ||||
| Data | 3.3 | Central Bank Intervention in Real Estate Securities Markets | |||
| Data | 3.4 | Central Bank Holdings of Domestic Government Securities and Market Liquidity, by Maturity | |||
| 3.5 | Correlations between Central Bank Holdings of Government Securities and Market Liquidity, by Maturity of Holdings | ||||
| 3.6 | Interest Rate Risk as Reported by U.S. Banks | ||||
| Data | 3.7 | Bank Holdings of Government Debt in Selected Economies | |||
| 3.8 | Various Measures of the Taylor Gap in the United States | ||||
| Figures | |||
| Data | 1. | Major Net Exporters and Importers of Capital in 2012 | |
| 2. | Sovereign Credit Default Swap Spreads | ||
| 3. | Selected Credit Default Swap Spreads | ||
| 4. | Selected Spreads | ||
| 5. | Implied Volatility Indices | ||
| Data | 6. | United States: Corporate Bond Market | |
| Data | 7. | Euro Area: Corporate Bond Market | |
| Data | 8. | United States: Commercial Paper Market | |
| Tables | |||
| Data | 1. | Selected Indicators on the Size of the Capital Markets, 2011 | |
| 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. |
