## chapter-2-and-3-summary

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### Low growth, low interest rates, and financial intermediation (Chapter 2)
- Context and drivers
  - Advanced economies have experienced a prolonged episode of low interest rates and low growth since the global financial crisis.
  - Real interest rates have been on a steady decline over the past three decades.
  - Despite recent signs of an increase in long-term yields, particularly in the United States, the experience of Japan suggests that an imminent and permanent exit from a low-interest-rate-environment need not be guaranteed.
  - Slow-moving structural factors, notably population aging and slower productivity growth common to many advanced economies, could conceivably generate a steady state of lower growth and lower nominal and real interest rates.

- Consequences for the financial sector (scenario of persistent low rates and low growth)
  - Yield curves would likely flatten, lowering bank earnings and presenting long-lasting challenges for life insurers and defined-benefit pension funds.
  - If bank deposit rates cannot drop (significantly) below zero, bank profits would be squeezed even further.
  - Smaller, deposit-funded, and less diversified banks would be hurt most, which could increase the pressure to consolidate.
  - As banks reach for yield at home and abroad, new financial stability challenges may arise in their home and host markets.
  - Low growth and aging populations would likely lower credit demand by households and firms and increase household demand for liquid bank deposits and transaction services.
  - Domestic banking in advanced economies may generally evolve toward provision of fee-based and utility services.

- Implications for pensions, insurers, and asset management
  - Defined-benefit pension plans provided by employers would tend to become less attractive relative to defined-contribution plans, which offer more portability.
  - Rising longevity would likely boost the demand for health and long-term care insurance.
  - Demand for guaranteed-return, long-term savings products offered by insurers could be expected to weaken.
  - Demand for passive index funds offered by asset management firms would likely grow.

- Policy recommendations
  - Prudential frameworks should provide incentives to ensure longer-term stability instead of yielding to demands for deregulation to ease short-term pain.
  - For banks, policies should help facilitate smooth consolidation and exit of nonviable institutions, while limiting excessive increases in risk taking and ensuring that the too-big-to-fail problem does not worsen.
  - Implementing economic solvency requirements that encourage life insurers to undertake necessary adjustments to their business models would be vital.
  - Surveillance and regulation of asset management activities would become more important as this industry’s share in the financial sector grows.

### Are countries losing control of domestic financial conditions? (Chapter 3)
- Scope and measurement
  - The chapter examines the evolving importance of common global components of domestic financial conditions.
  - It develops financial conditions indices (FCIs) to compare a large set of advanced and emerging market economies.

- Key findings
  - A common component (global financial conditions) accounts for about 20 to 40 percent of the variation in countries’ domestic FCIs, with notable heterogeneity across countries.
  - The importance of the common global component does not seem to have increased markedly over the past two decades.
  - Global financial conditions loom large, but evidence suggests that, on average, countries still appear to hold sway over their own financial conditions—specifically, through monetary policy.
  - The rapid speed at which foreign shocks affect domestic financial conditions may make it difficult to react in a timely and effective manner, if deemed necessary.

- Implications for emerging market economies and policy responses
  - Global financial conditions tend to account for a greater fraction of FCI variability in emerging market economies; these countries, in particular, should prepare for the implications of global financial tightening.
  - Governments can promote domestic financial deepening to enhance resilience to global financial shocks.
  - Specific measures include developing a local investor base, and fostering greater equity- and bond-market depth and liquidity to help dampen the impact of external financial shocks.

*Source: chapter-2-and-3-summary*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2017/april/chapter-2-and-3-summary.pdf_