## Global Financial Stability Report: The Last Mile: Financial Vulnerabilities and Risks ## Source details **Canonical URL:** [Global Financial Stability Report: The Last Mile: Financial Vulnerabilities and Risks](https://www.imf.org/-/media/files/publications/gfsr/2024/april/english/text.pdf) ## Other formats - [Markdown version](/-/media/files/publications/gfsr/2024/april/english/text.pdf.md) - [Structured JSON version](/-/media/files/publications/gfsr/2024/april/english/text.pdf.json) --- ### Financial market backdrop and near-term assessment - Financial markets turned "quite optimistic" since October 2023 amid expectations that global disinflation is entering its "last mile" and monetary policy will be easing. - Interest rates: interest rates are down worldwide; stock markets are up about 20 percent globally. - Spreads and flows: - Corporate and sovereign borrowing spreads have narrowed notably, producing an easing in global financial conditions. - Emerging markets have seen rekindled capital inflows; across all emerging markets, the estimated likelihood of capital outflows over the next year declined from 32 percent to 27 percent. - The GFSR reflects information available as of March 29, 2024; in Chapter 1, some figures reflect information through April 5, 2024. ### Salient near-term financial fragilities and triggers - Stretched valuations and compressed risk premiums: - Corporate bond spreads continue to grind lower despite rising default rates. - Sovereign spreads have narrowed even for vulnerable issuers. - Elevated asset price correlations and lower market volatility raise the risk of sudden, broad repricing; average correlation across equities, bonds, credit, and commodity indices in both advanced economies and emerging markets exceeds the 90th historical percentile. - Potential catalysts for a rapid tightening of financial conditions: - Sudden shifts in policy expectations. - A flare-up of geopolitical tensions. - Commodity and supply chain disruptions. - Real estate refinancing pressures: - An estimated $600 billion of US commercial real estate debt is due this year, creating potential for difficult and costly refinancings and attendant defaults. - US CRE debt is estimated at almost $6 trillion. - US CRE maturing debt in 2024: $277 billion; office-backed portion: $82 billion. - Refinancing gap for maturing US CRE debt (2024–25): exceeds $300 billion. - Banking-sector and nonbank signals: - Bank failures in Switzerland and the United States in March 2023 have not spread; soundness indicators for most financial institutions indicate continued resilience. - Defaults in riskier credit markets have been rising in many countries. - Banks with aggregate assets of $33 trillion, or 19 percent of global banking assets, have breached at least three of five key risk indicators. ### Medium-term vulnerabilities - Debt accumulation and rollover risks: - Both public and private debt continue to accumulate in advanced economies and emerging markets, amplifying downside risks to growth. - Some advanced economies will likely require heavy government bond issuance; quantitative tightening paces cited: Bank of England £100 billion annually; European Central Bank €212 billion annually; US Federal Reserve $780 billion annually. - Private credit and nonbank finance: - Rapid surge in private credit creates opacity and potential fragilities; private credit assets and undeployed capital commitments in 2023: approximately $2.1 trillion (including private credit funds $1.7 trillion). - Private credit AUM in the United States reached $1.6 trillion as of June 2023, growing at an average annual rate of 20 percent over the last five years. - Private credit accounts for 7 percent of the credit to nonfinancial corporations in North America; in Europe, private credit accounts for 1.6 percent of corporate credit; Asian private credit accounts for about 0.2 percent. - Cyber risk and digital dependence: - The number of cyberattacks has almost doubled since before the COVID-19 pandemic. - Since 2020, aggregated reported direct losses from cyber incidents have amounted to almost $28 billion (in real terms). - Almost one-fifth of reported cyber incidents over the past two decades have affected the financial sector. ### Regional and sectoral considerations - Emerging markets and frontier economies: - Major emerging markets demonstrated resilience to interest rate hikes due to improved policy frameworks; on average, emerging market central banks have raised policy rates by 780 basis points from trough to peak after the pandemic versus 400 basis points for advanced economy central banks. - Across emerging markets, the 5th percentile of one-year-ahead capital outflows fell to 2.3 percent of GDP. - Frontier issuers have a combined $30 billion in foreign currency bonds coming due in 2024 and 2025. - China: - China’s housing market downturn: existing home prices and activity measures (starts, sales, real estate investments) have sharply declined; CSI equity market has declined 45 percent since the peak in 2021. - Asset management industry assets as of 2023: ¥110 trillion (nearly 90 percent of GDP). - Structured-product outstanding exposure: "snowball" and equity-linked products estimated at US$45 billion (domestic) and an estimated $20 billion of equity-linked investments in Korean markets are related offshore exposures. - Real estate: - Global CRE price change (real, year-over-year): −12 percent. - US office sector price change: −23 percent. - Europe CRE price change: −17 percent. - Severe adverse three-year-ahead real cumulative CRE price declines (5 percent probability): EMEA −20 percent; North America −23 percent; Office sector > −25 percent. - CMBS issuance down 45 percent year-over-year; CMBS office delinquency rate: 6.1 percent (up 1.5 percentage points year-over-year). - US CRE nonperforming loan rate: 0.81 percent at end-2023 (0.40 percent at end-2022). - CRE coverage ratio (banking sector): 154 percent at latest versus 200 percent previously. - REITs specializing in the office sector: 15 percent potentially in debt distress (10 percentage point increase from prior year). - Corporate sector: - Cash liquidity buffers eroded: as of Q3 2023, share of small firms with cash-to-interest-expense ratio below 1 was around one-third in advanced economies and more than half in emerging markets. - Share of debts issued by firms with cash-to-interest expense ratio below 1: around 33 percent (advanced economies) and 55 percent (emerging markets) as of Q3 2023; under a market-yield interest expense scenario: 38 percent and 59 percent respectively. - A considerable amount of corporate debt will mature in the coming year at interest rates significantly higher than existing coupons. ### Key statistics and measures (selected) - Stock markets: global stocks are up about 20 percent since October 2023. - Crypto markets: market capitalization of crypto assets surpassed $2.79 trillion in March 2024; Bitcoin prices surpassed $70,000 and Bitcoin reached $73,805 on March 14, 2024; net inflows in the top 12 bitcoin funds reached more than $12 billion in the first quarter after US spot Bitcoin ETP approval. - Growth-at-Risk (GaR) near-term metric: - With 5 percent probability, global growth over 2024 could fall below +0.7 percent (an improvement from October 2023 when it stood just below 0 percent). - Term premium spillovers: - On average over a longer time period, spillovers from US term premium to advanced economies have stood around 45 percent compared to 11 percent for emerging markets. - Banking sector concentrations: - One-third of US banks, mainly small and medium banks with $3.7 trillion in total assets, reported CRE exposures exceeding 300 percent of their Tier 1 capital plus the allowance for credit losses. - Unrealized losses at US banks: $477 billion in Q4 2023. - Weak-tail subset: estimated $5.5 trillion in total assets, almost 23 percent of total banking system assets. ### Policy recommendations and priorities - Monetary policy and communication: - Central banks should avoid premature easing and push back against overly optimistic market expectations about the pace of disinflation and policy easing. - Where disinflation progress suggests inflation is moving sustainably toward target, central banks should gradually move to a more neutral policy stance. - Market pricing examples: up to two Fed cuts priced for the second half of the year; around three ECB cuts by October; one Bank of England cut by August; Japan priced for gradual increase after BoJ exit. - Financial regulation and supervision: - Use stress tests, early corrective actions, and supervisory tools to ensure banks and other institutions can withstand defaults and other risks, including CRE stress scenarios with large price declines. - Enhance reporting requirements to close data gaps, notably in private credit markets; consider requiring private credit funds to report leverage, liquidity, and exposures. - Prioritize full and consistent implementation of internationally agreed prudential standards, notably finalizing the phase-in of Basel III. - Advance recovery and resolution frameworks for banks and nonbank financial institutions; expand resolution planning beyond largest banks where appropriate. - Fiscal and sovereign debt management: - Strengthen efforts to contain debt vulnerabilities, including through appropriate fiscal consolidation (April 2024 Fiscal Monitor recommendation). - For emerging markets and frontier economies, fiscal consolidation can lessen incidence and severity of capital outflows and external funding squeezes. - Promote depth of local currency markets and a diversified investor base; monitor changing composition of buyers for government bonds. - Nonbank and private credit oversight: - Consider a more proactive supervisory and regulatory approach to private credit and semiliquid fund structures; close data gaps, enhance reporting, and strengthen cross-sectoral and cross-border cooperation. - Require liquidity management tools, gates, and redemption-frequency constraints for funds investing in illiquid assets; consider closed-end structures where appropriate. - Monitor and, if needed, limit multiple layers of leverage across private credit value chains; consider stress tests encompassing collateral calls and rollover risk. - Cybersecurity and operational resilience: - Develop national cybersecurity strategies, regulatory and supervisory frameworks, and incident reporting regimes; strengthen boards’ responsibility for cybersecurity. - Financial firms should develop and test response-and-recovery procedures; supervisors should mandate exercises and include cyber in stress-test programs. - Improve information sharing and mapping of technological and financial interconnections; bolster third-party risk management and oversight. - Market functioning and central bank readiness: - Proceed with quantitative tightening and balance-sheet reductions with care; monitor market functioning and be ready to provide targeted liquidity and to mobilize interventions to address market stresses. - Ensure banks are prepared to access central bank liquidity and that emergency liquidity assistance frameworks are tested in normal times. ### Outlook and cautionary note - IMF baseline: soft landing for the global economy remains the baseline, with near-term financial stability risks having receded per the IMF’s GaR framework. - Non-baseline risks remain material: - Medium-term downside risks elevated if easy financial conditions prompt excessive risk taking and vulnerability buildup. - Key near-term risks include CRE stress, corporate credit deterioration, stalling disinflation leading to repricing, and potential cyber incidents that could have systemic effects. - Policy emphasis: remain vigilant, use prudential policies, close data gaps, and be ready to act to limit systemic fallout. *International Monetary Fund. Global Financial Stability Report: The Last Mile: Financial Vulnerabilities and Risks. April 2024. (Information in this summary reflects the report’s text as of March 29, 2024, with some figures reflecting information through April 5, 2024.)* ### 2024. The views expressed in this publication are those of the IMF staff and do not necessarily represent ### Global Financial Stability Report: The Last Mile: Financial Vulnerabilities and Risks ### Financial market backdrop and near-term assessment - Financial markets turned "quite optimistic" since October 2023 amid expectations that global disinflation is entering its "last mile" and monetary policy will be easing. - Interest rates are down worldwide, and stocks are up about 20 percent globally. - Corporate and sovereign borrowing spreads have narrowed notably, producing an easing in global financial conditions. - Emerging markets have seen rekindled capital inflows; across all emerging markets, the estimated likelihood of capital outflows over the next year has declined. - The GFSR reflects information available as of March 29, 2024; in Chapter 1, some figures reflect information through April 5, 2024. ### Salient near-term financial fragilities and triggers - Stretched valuations across asset classes driven by compressed risk premiums relative to historical standards, including: - Corporate bond spreads continuing to grind lower despite rising default rates. - Sovereign spreads narrowing even for vulnerable issuers. - Elevated asset price correlations and lower market volatility that raise the risk of sudden, broad repricing. - Potential catalysts that could reverse current sentiment and tighten financial conditions quickly: - Sudden shifts in policy expectations. - A flare-up of geopolitical tensions. - Commodity and supply chain disruptions. - Real estate refinancing pressures highlighted: - An estimated 600 billion of US commercial real estate debt is due this year, creating potential for difficult and costly refinancings and attendant defaults. - Banking-sector and financial-institution signals: - Bank failures in Switzerland and the United States in March 2023 have not spread, and soundness indicators for most financial institutions indicate continued resilience. - Nonetheless, defaults in riskier credit markets have been rising in many countries. ### Medium-term vulnerabilities - Easy financial conditions can lead to the accumulation of vulnerabilities: - Overuse of debt by governments and private-sector borrowers raising debt sustainability concerns for some sovereigns. - Rapid surge in private credit—lending by institutions not regulated like commercial banks—creating opacity and potential fragilities. - Growing risk of malicious cyberattacks associated with deepening digitalization and reliance on technology. ### Regional and sectoral considerations - Emerging markets: - Major emerging markets have demonstrated resilience to interest rate hikes due to improved policy frameworks. - Weaker sovereigns may face renewed drying up of international funding if conditions tighten. - Some frontier economies and low-income countries have recently issued sovereign bonds, taking advantage of investor risk appetite. - Real estate: - Specific segments of commercial real estate with weak prospects are particularly vulnerable to refinancing stress and defaults. - Private credit and nonbank finance: - Private credit growth and opacity are flagged as important medium-term risks that could threaten financial stability if stress emerges. ### Policy recommendations and priorities - Monetary policy and communication: - Push back against overly optimistic expectations about the pace of disinflation and monetary policy easing to mitigate asset repricing risks. - Recent communications by major central banks cautioning that disinflation has not yet been fully achieved are consistent with IMF recommendations. - Financial regulation and supervision: - Use stress tests, early corrective actions, and supervisory tools to ensure banks and other institutions can withstand defaults and other risks. - Enhance reporting requirements to close data gaps, notably in private credit markets. - Prioritize full and consistent implementation of internationally agreed prudential standards, notably finalizing the phase-in of Basel III. - Advance recovery and resolution frameworks to limit fallout from the demise of weaker institutions. - Fiscal and sovereign debt management: - Strengthen efforts to contain debt vulnerabilities, including through appropriate fiscal consolidation, as recommended by the April 2024 Fiscal Monitor. - For emerging markets and frontier economies, fiscal consolidation can lessen the incidence and severity of capital outflows and external funding squeezes. - Cybersecurity: - Recognize growing macrofinancial risks from cyberattacks and strengthen preparedness and mitigation across the financial sector. ### Outlook and cautionary note - The IMF’s baseline remains a soft landing for the global economy, but the GFSR emphasizes non-baseline risks that could materialize. - Near-term financial stability risks have receded, and there is less downside risk to global growth over the coming year per the IMF’s growth-at-risk framework. - Policymakers must remain vigilant and prepare for adverse scenarios, using prudential policies and readiness to act to limit systemic fallout. *International Monetary Fund. Global Financial Stability Report: The Last Mile: Financial Vulnerabilities and Risks. April 2024. (Information in this summary reflects the report’s text as of March 29, 2024, with some figures reflecting information through April 5, 2024.)* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Salient Near-Term Risks - Commercial real estate (CRE) prices have declined by 12 percent globally over the past year in real terms amid rising interest rates and structural changes after the COVID-19 pandemic; US and European office sectors have seen the largest declines. - Banks appear well positioned to absorb CRE losses in aggregate, but certain countries may experience more strains where banks hold large amounts of CRE loans, and within systems some banks could suffer larger losses—exacerbated by issues such as less stable funding. - Residential home prices have continued to adjust downward in most countries but generally remain above prepandemic levels: - Declines in real house prices: –2.7 percent year over year in advanced economies; –1.6 percent year over year in emerging markets. - Household debt sustainability ratios are at modest levels globally; a surge in residential mortgage defaults remains a tail risk. - Market volatility is at multiyear lows for most asset classes; average correlation across equities, bonds, credit, and commodity indices in both advanced economies and emerging markets exceeds the 90th historical percentile. - Low volatility has masked heightened responsiveness of financial conditions to economic data—especially inflation releases—raising the risk that sizable inflation surprises could rapidly decompress volatility and tighten financial conditions across correlated markets. ### Medium-Term Vulnerabilities - Both public and private debt continue to accumulate in advanced economies and emerging markets, amplifying downside risks to growth. - Major emerging markets show resilience after aggressive and early monetary tightening; some have begun cutting cycles. However, with interest rates and deficits still high and growth moderating, several emerging markets face high real refinancing costs relative to economic growth. - Easing global financial conditions has benefited frontier economies and low-income countries; high-yield sovereign spreads have outperformed investment-grade spreads recently, even as many countries face substantial hard currency bond maturities over the next two years and increased holdings of sovereign debt by local banks. - China’s housing market downturn: - Existing home prices and activity measures (starts, sales, real estate investments) have sharply declined; new home price declines have been moderate relative to other episodes. - China’s stock market has come under pressure, and parts of China’s asset management industry have suffered heavy losses that could spill over to bond and funding markets. - Authorities’ stabilization steps since the third quarter of 2023 have yet to turn sentiment around. - Corporate sector vulnerabilities: - Corporate credit spreads narrowed since October 2023 but corporate earnings momentum is weakening in many regions. - Cash liquidity buffers eroded over 2023: as of the third quarter of 2023, the share of small firms with a cash-to-interest-expense ratio below 1 was around one-third in advanced economies and more than half in emerging markets. - Sizable corporate debt will mature in the coming year at interest rates significantly higher than existing coupons, complicating refinancing. - Private credit growth has contributed to a faster recovery in corporate borrowing in this hiking cycle compared with past cycles. Potential vulnerabilities include relatively fragile borrowers, a growing share of semiliquid investment vehicles, multiple layers of leverage, stale valuations, and interconnectedness across market segments. - Government bond market dynamics: - Some advanced economies will likely require heavy government bond issuance to fund fiscal deficits. - Quantitative tightening paces cited: Bank of England £100 billion annually; European Central Bank €212 billion annually; US Federal Reserve $780 billion annually. - New marginal buyers (e.g., hedge funds) may be more price sensitive, implying more medium-term bond market volatility and potential debt-servicing challenges for some countries. - Banking sector resilience and pockets of vulnerability: - Majority of banks showed resilience during the March 2023 turmoil; capital and liquidity buffers improved and bank stock prices have risen. - Banks with aggregate assets of $33 trillion, or 19 percent of global banking assets, have breached at least three of five key risk indicators; Chinese and US banks constitute most of this subset. - Nonbanks and liquidity transformation risks: - Open-end bond funds, including those focused on less liquid assets, have received large inflows; excessive liquidity transformation risks observed previously could reappear. - Cyber risk: - Most cyberattack losses are modest, but the risk of extreme losses has been increasing. - The financial sector is particularly exposed due to sensitive data, high concentration, and interconnectedness; cyber policy frameworks often remain inadequate—especially in emerging market and developing economies. ### Policy Recommendations - Monetary policy: - Central banks should avoid premature easing and appropriately push back against overly optimistic market expectations for policy rate cuts that could complicate the last mile of disinflation. - Where disinflation progress suggests inflation is moving sustainably toward target, central banks should gradually move to a more neutral policy stance. - Debt vulnerabilities and fiscal policy: - Authorities should strengthen efforts to contain debt vulnerabilities, including in emerging market and frontier economies. - In China, robust policies to restore confidence in the real estate sector are critical. - Supervisory and regulatory measures: - Use stress tests and early corrective action to ensure banks and nonbank financial institutions are resilient to strains in commercial and residential real estate and to credit cycle downturns. - Progress on resolution frameworks and readiness to apply them is critical to address weak or failing banks without undermining financial stability or risking public funds. - Quantitative tightening and market functioning: - Quantitative tightening and balance sheet reductions need to proceed with care; central banks should carefully monitor market functioning and mobilize to address potential market stresses. - Ensure banks are prepared to access central bank liquidity and intervene early to address liquidity stress. - Private credit oversight: - Consider a more proactive supervisory and regulatory approach given fast growth in private credit. - Close data gaps, enhance reporting requirements, strengthen cross-sectoral and cross-border regulatory cooperation, and make risk assessments consistent across financial sectors. - Cybersecurity: - Develop a cybersecurity strategy to strengthen financial sector cyber resilience, supported by effective regulation, supervisory capacity, and improved incident reporting. - Financial firms should develop and test response-and-recovery procedures; cross-border coordination is crucial given global and systemic implications. ### IMF Executive Board Views and Policy Emphases - Directors broadly agreed with staff assessments of the global outlook, risks, and priorities; they welcomed continued global resilience despite significant central bank rate hikes. - Growth outlook: global economy may be approaching a soft landing but future growth is expected to be low by historical standards due to high borrowing costs, withdrawal of fiscal support, weak productivity, and geopolitical tensions. - Risks: Directors noted balanced but still material downside risks, including supply disruptions, new price spikes, persistent inflation, capital flow volatility, and potential delayed cooling effects of past monetary tightening. - Policy guidance from Directors: - Central banks should avoid premature easing; normalization pace should be data dependent, tailored to country circumstances, and clearly communicated. - Gradual medium-term fiscal consolidation is recommended to ensure debt sustainability and rebuild fiscal space while protecting vulnerable populations; pace should depend on country conditions and be embedded in credible medium-term frameworks. - Use supervisory tools, including stress tests, to ensure resilience of banks and nonbank financial institutions to credit and real estate risks. - Consider proactive regulatory and supervisory approaches for private credit, including enhanced reporting. - Improve cyber-related governance and legislation; fully implement Basel III. - Advance targeted, carefully sequenced structural reforms to raise medium-term growth—reducing misallocation of capital and labor, increasing female labor participation, enhancing education, strengthening governance, reducing excessive business regulation and trade restrictions, harnessing artificial intelligence, and facilitating the green transition. - Reinvigorate multilateral cooperation to limit costs and risks of climate change, speed the green transition, safeguard open rule-based trade, facilitate debt restructuring, and strengthen the international monetary system. *Source: EXECUTIVE SUMMARY, Global Financial Stability Report: The Last Mile: Financial Vulnerabilities and Risks (April 2024).* ### Chapter 1 at a Glance ### Chapter 1 at a Glance ### Major Findings and Near-Term Outlook - Expectations that global disinflation is entering its “last mile” and monetary policy will be easing have driven up asset prices worldwide since the October 2023 Global Financial Stability Report. - Many emerging markets have shown resilience, and some frontier economies have taken advantage of buoyant risk appetite to issue international debt. - The global economy appears increasingly likely to achieve a soft landing, and cracks in the financial system exposed by high interest rates have not ruptured further. - Near-term global financial stability risks have receded, according to the IMF’s growth-at-risk framework. - Several salient risks remain along the last mile: - Growing strains in the commercial real estate (CRE) sector and signs of credit deterioration among corporates and in some residential housing markets could be exacerbated by adverse shocks. - Stalling disinflation could surprise investors, leading to a repricing of assets and a resurgence of financial market volatility, which has been low despite considerable economic and geopolitical uncertainty. - Medium-term vulnerabilities are building: - Continued accumulation of debt in both public and private sectors. - Some governments may find it difficult to service debt in the future. - Private sector leveraged exposures to financial assets may foretell elevated financial stability risks in the coming years. ### Policy Recommendations - Central banks should avoid easing monetary policy prematurely and push back as appropriate against overly optimistic market expectations for policy rate cuts. Where progress on disinflation is enough to suggest inflation is moving sustainably toward the target, central banks should gradually move to a more neutral stance of policy. - Emerging and frontier economies should strengthen efforts to contain debt vulnerabilities. In China, it is critical to implement robust policies to restore confidence in the real estate sector and avoid further contagion to other sectors of the financial system. - Supervisory and regulatory authorities should use appropriate tools, including stress tests and early corrective action, to ensure that banks and nonbank financial institutions are resilient to strains in commercial and residential real estate and to the deterioration in the credit cycle. - Authorities need to improve the breadth and reliability of the data used to monitor and assess the risks associated with the rapid growth of lending by nonbank financial institutions to firms. - Regulatory and crisis management tools for nonbank financial institutions need to be further developed. ### Introduction and Systemic Context - Financial market sentiment has been buoyant since the October 2023 Global Financial Stability Report: interest rates are down globally on balance; stock markets are up substantially, especially in advanced economies; and corporate and sovereign borrowing spreads have narrowed notably. - Capital inflows have resumed for many emerging markets; some frontier and low-income countries have issued sovereign bonds after a lengthy hiatus. - The disinflationary momentum has slowed more recently in a number of countries, raising the question of whether central banks in these countries will be able to deliver the extent of monetary easing currently expected by investors. - Bank failures in Switzerland and the United States in March 2023 have not metastasized to other parts of the global financial system. Soundness indicators for most financial institutions point to continued resilience. - According to the IMF’s growth-at-risk (GaR) framework, downside risks to global growth in the coming year have declined, although they remain somewhat elevated from a historical perspective. ### Monetary Policy and Financial Market Developments - Market pricing suggests multiple policy rate cuts over the course of this year: - Market pricing currently indicates up to two rate cuts by the Federal Reserve, which are expected over the second half of the year. - Around three European Central Bank cuts by October. - One Bank of England cut by August. - Japan remains an outlier: markets price a gradual increase in the policy rate following the Bank of Japan’s exit from long-standing negative interest rate policy and other unconventional measures. - In many emerging markets, policy expectations are also lower. - Inflation and inflation expectations: - As inflation has slowed, expectations of future inflation have fallen in the euro area but have risen some for the United States since the start of the year. - Core inflation remains above central bank targets in most countries, leaving the global economy susceptible to inflationary shocks. - Option-implied probabilities and survey forecasts signal increased investor disagreement about future US inflation levels expected over the next five years. - Uncertainty about the path of expected policy rates remains elevated: - Interest rate option prices indicate the most likely level of the federal funds rate has declined and is more or less consistent with the level of the median projection for 2024 in the Federal Reserve’s latest Summary of Economic Projections. - From a longer-term perspective, uncertainty about rates—proxied by swaption-implied volatility for one-year rates, one year forward—remains elevated compared with the average before the COVID-19 pandemic. ### Interest Rates, Term Premiums, and Spillovers - Global long-term interest rates have declined, on net, since the October 2023 Global Financial Stability Report, driven by a lower expected path of policy rates and a compression of the term premium. - In the United States: - The 10-year Treasury yield approached 5 percent at one point in late 2023. - A term premium increase of around 70 basis points contributed to that sell-off. - Real risk premiums across future horizons remain elevated compared with the end of the previous tightening cycle in January 2019 and to the average after the global financial crisis. - Spillovers from US term premiums to those in other advanced economies and emerging markets have steadily risen; co-movements among global longer-term interest rates could remain pronounced. ### Asset Prices, Credit, and Leverage - Global equity markets have experienced broad-based rallies since October 2023, with the largest gains in Japan and the United States; Chinese stocks have significantly underperformed. - European and US corporate bond markets have moved in sympathy with the equity rally, with borrowing spreads narrowing for both investment-grade and high-yield issuers. - Signs of “reaching for yield” and rising leverage: - Corporations, even lower-rated ones, are finding financing easier through corporate bond markets and private credit markets that are opaque to policymakers. - Trading strategies that use leverage (for example, bond basis trades or exotic stock options linked to Chinese stocks) have been popular. - Open-end bond funds have received large inflows in recent months, and illiquid asset classes such as private credit are being marketed to retail investors. - Faster credit growth can stimulate aggregate demand, making disinflation more challenging. ### Debt Buildup, Credit Cycle, and Vulnerable Economies - Debt and leverage are continuing to build while the financial system contends with a turning credit cycle that could be hastened if the last mile of disinflation is longer than expected. - Many frontier and low-income countries are still experiencing financing stress, with little to no means of rolling over debt coming due. - More businesses and households are set to default as they grapple with high interest rates and tighter bank lending standards. - Fragile segments: - Commercial real estate (CRE) and weaker banks are front and center in the battle against defaults. - Investor sentiment in China remains weak and may continue to weigh on the distressed property and local government sectors. - In the longer term, a reversal of financial globalization could reduce cross-border banking and investment flows, making diversification of credit risk more challenging. *Source: Chapter 1 at a Glance, text - Chapter 1 at a Glance (April 2024).* ### 1. Option-Implied Probability Distributions of Federal Funds Outcomes ### 1. Option-Implied Probability Distributions of Federal Funds Outcomes ### Option-implied short-term policy distributions and volatility - Option-implied probability densities are based on short-dated interest rate swap options, denominated in US dollars and euros. - Panel findings (visuals described): - United States: probability density displayed across 0.0 to 9.0 percent by the end of 2024 (x-axis range shown as 0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0). - Euro area: leftward shift in rates distribution reflects, in large part, a tepid growth outlook coupled with moderating inflation. - Interest rates’ volatility, corresponding to the near term, remains elevated for both the United States and the euro area. ### Evolution of option-implied uncertainty (near-term swaption volatility and MOVE index) - Short-term interest rate uncertainty is captured by 1y1y at-the-money swaption-implied volatility (1y1y = one-year, one-year forward). - The ICE Bank of America MOVE index tracks the weighted average basket of at-the-money one-month options of 2-, 5-, 10-, and 30-year interest rate swaps. - Panel time span: 2017–2024 with annualized basis points shown (y-axis ticks include 0, 50, 100, 150, 200, 250). - Horizontal dashed lines represent the averages of the USD 1y1y volatility over the periods before and after January 2022. *Sources: Bloomberg Finance L.P.; Federal Reserve; and IMF staff calculations. Note: ECB = European Central Bank; EUR = euro; GFSR = Global Financial Stability Report; MOVE = Merrill Lynch Option Volatility Estimate.* ### Evolution of long-term rates and term premium spillovers - Ten-year bond yields across major advanced and emerging market economies have declined, on net, since the October 2023 GFSR, driven in most cases by a fall in expected path of short-term rates as well as term premiums. - Between mid-September and end-October 2023, term premiums exerted significant upward pressure on yields, reflecting fiscal concerns in the United States, mainly due to higher real risk premiums. - Real risk premiums across future horizons are currently elevated compared to the post-GFC average and following the end of the previous tightening cycle. - Term structure of US real risk premiums: one-year forwards show movements across Apr. 2022, Nov. 22, Jun. 23, Jan. 24. - Spillovers from 10-year US term premiums to other regions: - The measure reported corresponds to the proportion of variation in AE and EM term premium explained by shocks from US term premium (methodology per Diebold and Yilmaz (2009)). - AEs include 20 countries (48 percent to GDP of all AEs) and 15 EMs, amounting to around 76 percent of total EM GDP. - On average, over a longer time period, spillovers to AEs have stood around 45 percent compared to 11 percent for EMs, with significant variation over time (for instance, at the time of the taper tantrum, EM spillover was around 15 percent). - The spillovers shown correspond to a 50-week rolling window. *Sources: Bank of England; Bloomberg Finance L.P.; European Central Bank; Federal Reserve; ICE Bank of America; and IMF staff calculations.* ### Asset prices, earnings expectations, and crypto markets - Market expectations for a soft landing have been a major tailwind for asset prices. - United States corporate sector: positive earnings prospects driven by the mega technology stocks known as the Magnificent 7. - Mag 7 includes Amazon, Apple, Alphabet (GOOGL, Alphabet Class C), Meta, Microsoft, Nvidia, and Tesla. - Since October 2023, earnings optimism and the stock price rally have spread more widely through the market, reflected by price appreciation of the Russell 2000 index. - Decomposition of S&P 500 rise (standard discount cash flow model): driven almost in equal parts by improved earnings projections and investors’ stronger risk appetite. - Sector performance: - Companies with strong margin power (mostly information technology and materials) have outperformed companies with weak margin power. - Companies with weak margin power have traditionally been more sensitive to inflation; despite inflation falling from its peak in June 2022, recovery by these companies has been sluggish. - Crypto markets: - Bitcoin prices have surpassed $70,000 for the first time in history, boosted by recent approval of spot Bitcoin exchange-traded products. - Market capitalization of crypto assets surpassed $2.79 trillion in March 2024. - Risk note: If expectations of a soft landing and continued disinflation no longer remain the baseline, optimism in earnings projections and buoyant risk sentiment could abruptly reverse, dragging stock prices down. *Sources: Bloomberg Finance L.P.; CoinGecko; Haver Analytics; Thomson Reuters; and IMF staff calculations. Note: ETP = exchange-traded product.* ### Financial conditions and bank lending standards - Financial conditions have eased, especially in advanced economies in most regions, supported by investor optimism about a soft landing, lower long-term yields, and rallies in stock and corporate bond markets. - In emerging markets, modest volatility in exchange rates has translated into a lower price of external financing risk, modestly easing financial conditions. - China: financial conditions have eased slightly but remain somewhat tight by historical standards due to growth and property sector issues. - Bank lending standards: - Lending standards tightened sequentially in much of 2022 and 2023, especially in advanced economies, amid concerns about deteriorating borrower risk profiles, expectations of economic slowdowns, and reductions in banks’ risk tolerance. - More recently, tentative signs indicate that tightening in lending standards has stabilized in Brazil, the euro area, and the United States. - Historically, tighter standards appear to portend an ebbing of credit growth over the next year in some countries, most notably the United States, although the connection is more tenuous in others (including Brazil, Japan, and the Philippines). - Financial Conditions Index (FCI) notes: - The IMF FCI captures pricing of risk and incorporates various pricing indicators including real house prices; balance sheet or credit growth metrics are not included. - To decompose the FCI into components—interest rates, corporate valuations, house prices, and external financing risk—outside-the-model adjustments are made to ensure negative signs of the FCI and avoid contrary-to-actual interpretations. ### Growth-at-Risk (GaR) forecasts and scenarios - Near-term downside risk to growth has receded somewhat: - With global financial conditions eased and credit growth having changed little since the October 2023 GFSR, IMF GaR estimates suggest downside risks to global growth for 2024 have receded somewhat, with the balance of risks to growth forecast to be broadly symmetrical. - GaR metric: with 5 percent probability, global growth over 2024 could fall below +0.7 percent, an improvement compared with October 2023 when it stood at just below 0 percent. - From a historical perspective, the current level of forecast downside risk for the near term is still marginally elevated. - Medium-term downside risk to growth remains elevated: - Easy financial conditions at present may prompt excessive risk taking and a buildup of financial vulnerabilities, leading to higher downside risk to growth in the coming years. - Scenarios illustrating shifts in the intertemporal risk trade-off (visualized in Figure 1.9, panel 3): - Scenario 1 (yellow dotted line): If credit growth is held constant at current levels and financial conditions continue to ease to postpandemic lows, the GaR metric for the medium term would deteriorate to about its 20th historical percentile, with some marginal improvement for the near term. - Scenario 2 (white dotted line): If credit growth declines to its slowest pace since, say, 1991, and financial conditions are held constant, near-term downside risk becomes elevated; downside risk to growth is forecast to slightly lessen over the medium term as ensuing deleveraging could support financial stability over time. - GaR framework definition: assesses downside risks by gauging the range of severely adverse growth outcomes, falling within the lower fifth percentile of the conditional growth forecast distribution (referred to as the GaR metric). ### Salient near-term risks and lending-standards evidence - Lending standards tightened across most countries; tighter standards typically forecast lower loan growth. - Country-specific visual indicators (one-year lead lending standards versus annualized quarterly corporate loan growth rate): - Euro area, Japan, United States, Brazil, Mexico, Philippines panels display normalized lending standard series (positive values indicate looser standards; negative values indicate tighter standards). - Example: Philippines lending standards (one-year lead) versus annualized quarterly corporate loan growth rate shown in Figure 1.8, panel 6. *International Monetary Fund | April 2024* ### 5. Mexico Lending Standards (One-Year Lead) ### 5. Mexico Lending Standards (One-Year Lead) ### Commercial Real Estate Stress Has Intensified - CRE prices declined by 12 percent globally over the past year in real terms. - US office sector prices declined by 23 percent; Europe declined by 17 percent. - CRE prices in the Asia-Pacific region (excluding China) remained relatively stable on aggregate. - Drivers of CRE price declines: - Higher global interest rates. - Postpandemic structural changes to CRE demand (work-from-home trend). - Empirical findings and model evidence: - Recent studies (Deghi, Natalucci, and Qureshi, 2022; Gupta, Mittal, and Van Nieuwerburgh 2022) highlighted remote work effects on lease revenues, office occupancy, lease durations, and market rents, affecting CRE valuations in addition to tighter financing conditions. - Chapter 3 of the April 2021 GFSR found the median drop in fair values could reach 15 percent over five years after a permanent increase in the vacancy rate by 5 percentage points. - Market indicators: - Vacancy rates continued to rise in 2023; absorption rates have been negative. - Yields from owning CRE have fallen below the cost of financing CRE purchases with debt in some cases. - Severe adverse scenario (5 percent probability): - Real CRE price declines over the next three years could reach 20 percent in EMEA and 23 percent in North America. - In the office sector, prices could fall more than 25 percent. - US-specific scale: - US CRE debt is estimated at almost $6 trillion. - Of the $1 trillion of debt maturing in the US CRE market in 2024 and 2025, the refinancing gap exceeds $300 billion (analyst estimates). - Market-based financing deterioration: - CMBS issuance down 45 percent from the previous year. - CMBS delinquencies specializing in offices reaching 6.1 percent, up from 1.5 percentage points a year ago. - Banks’ net charge-off rates for CRE loans rose briskly. - REITs stress: - Share of REITs with an interest coverage ratio (ICR) below 1 increased in 2023 relative to previous years. - 15 percent of REITs specializing in the office sector are potentially in debt distress, a 10 percentage point increase from the previous year. - Potential stabilizer: - An easing in financial conditions could aid CRE recovery by lowering investor financial burdens and facilitating refinancing or restructuring of loans. - Offsetting structural challenges: - Scale of past rate hikes, higher labor and material costs, and structurally lower occupancy rates in some sectors suggest challenges may endure. ### Concerns Are Mounting about Banks’ Exposures to Commercial Real Estate - CRE loan shares and exposures: - CRE loans make up a sizable portion of total bank loans in several banking systems (see figure references). - In the United States, CRE loans make up about 18 percent of total bank loans. - Near-term maturities and concentration: - An estimated $277 billion in US CRE loans will mature in 2024, $82 billion of which are backed by office properties (Mandtz, 2023). - Nonperforming loans and coverage: - US nonperforming CRE loan rate at end-2023 reached 0.81 percent, up from 0.40 percent at end-2022. - CRE coverage ratio (loan-loss reserves to NPLs) fell to 154 percent from 200 percent for the banking sector; the decrease was more pronounced for US GSIBs than for other banks. - Despite the decline, the coverage ratio remains relatively high. - Bank behavior: - Banks have tightened lending standards in both the euro area and the United States. - Stock prices of some banks fell sharply after announcements of losses or provisions on US CRE portfolios. - Heterogeneity of credit losses: - Credit losses are expected to vary across CRE categories, geographic regions, and bank sizes. - The proportion of office loans with a high probability of default shows substantial regional differences (criticized rate measure). - CRE subcomponent importance: - Nonfarm nonresidential loans (including office) represent the largest subcomponent of CRE across banks in the United States. ### Vulnerabilities in the US CRE Market and Financial Intermediation - Price and issuance trends: - CRE valuations have plummeted more in the present monetary policy tightening cycle than in previous episodes. - Commercial mortgage originations have declined; maturing CMBS have exceeded new issuance. - CMBS and bank losses: - CMBS delinquency rate rose (office specialization at 6.1 percent). - Bank CRE charge-offs and net charge-off rates increased across multiple sectors. - REIT ICR distributions: - Distribution shifts indicate increased mass of REITs (and office REITs) with EBITDA-to-interest expense ratios below 1 (debt at risk). - Sectoral and temporal indices and measures referenced: - CRE mortgage origination indices, CMBS issuance (billions of US dollars), delinquency rates (percent), and ICR probability densities (latest up to 2023:Q3). ### Key Statistics and Metrics (as reported) - Global CRE price change (real, year-over-year): -12 percent. - US office sector price change: -23 percent. - Europe CRE price change: -17 percent. - Severe adverse three-year-ahead real cumulative CRE price declines (5 percent probability): EMEA -20 percent; North America -23 percent; Office sector > -25 percent. - US CRE debt: almost $6 trillion. - US CRE maturing debt in 2024: $277 billion; office-backed portion: $82 billion. - US CMBS issuance: down 45 percent year-over-year. - CMBS office delinquency rate: 6.1 percent. - CMBS office delinquency increase: up 1.5 percentage points year-over-year. - US CRE nonperforming loan rate: 0.81 percent at end-2023 (0.40 percent at end-2022). - CRE coverage ratio (banking sector): 154 percent at latest versus 200 percent previously. - REITs in potential debt distress (office-specialized): 15 percent (10 percentage point increase from prior year). - Refinancing gap for maturing US CRE debt (2024–25): exceeds $300 billion. - Lending standards tightening: negative net respondent values in euro area and United States (figural depiction). *Global Financial Stability Report: The Last Mile: Financial Vulnerabilities and Risks (April 2024), Chapter 1.* ### CHAPTER 1 FINANCIAL FRAGILITIES ALONG ThE LAST MILE OF dISINFLATION ### CHAPTER 1 FINANCIAL FRAGILITIES ALONG ThE LAST MILE OF dISINFLATION ### Commercial Real Estate (CRE) Exposures and Nonperforming Loans - GSIBs from the United States are more exposed to problematic office CRE areas in central business districts than are small banks (Glancy and Wang 2023). - GSIBs have significantly smaller CRE exposures to Tier 1 capital (Figure 1.12, panel 4). - Nonperforming loans are expected to climb further in the coming quarters; example: in the United States, quarterly CRE nonperforming loans and losses did not peak until nine quarters after the start of the global financial crisis in mid-2007. - One-third of US banks, mainly small and medium banks, with $3.7 trillion in total assets, reported CRE exposures exceeding 300 percent of their Tier 1 capital plus the allowance for credit losses. - A large non-GSIB bank reported sizable provisions for CRE-related loan losses in its fourth quarter 2023 earnings release (Box 1.3). ### Residential Real Estate: Recent Developments and Risks - Since the October 2023 Global Financial Stability Report, residential home prices have continued to move modestly downward in most countries, although they are generally still above the prepandemic average (Figure 1.13, panel 1). - Quarterly real house prices declined more among advanced economies (−2.7 percent year over year, based on latest available data) than in emerging markets (−1.6 percent). - The Chinese property market has fared worse than other countries, for reasons other than interest rate pressures (see the section “Chinese Asset Prices Face a Difficult Turnaround amid Weak Sentiment”). - Debt sustainability ratios across advanced economy households are still at modest levels based on the latest data (the third quarter of 2023; Figure 1.13, panel 3, green bars). - Assuming the average interest on households’ outstanding debt increase further in the fourth quarter of 2023, in line with the average quarterly pace observed in 2023, debt service ratios could increase by up to almost 2 percentage points (Figure 1.13, panel 3, red dots). - The effect would be larger in more leveraged consumer markets such as Denmark, The Netherlands, and Sweden. - With modest household debt burdens and more stringent underwriting standards since the global financial crisis, the risk of a surge in residential mortgage defaults remains contained. - In the United States: - Monthly home prices have risen by 6.1 percent since the beginning of last year (Figure 1.13, panel 4). - Mortgage rates declined from a peak of 7.8 percent to 6.8 percent, but 30-year mortgage rates are still around 3 percentage points above pandemic lows. - Mortgage originations are 21 percent lower than one year ago (Figure 1.13, panel 4). - Mortgage debt service interest rate calculations use reference mortgage rates from the G10 Accounts, with country-specific treatments noted (panel 3 note). ### Compressed Volatility and High Cross-Asset Correlations - Volatility has declined to multiyear lows for most asset classes (Figure 1.14, panel 1). - Volatility risk premium, measured as the spread between market-implied volatility and model-based fair value, have fallen across maturities since the October 2023 Global Financial Stability Report. - Shorter-dated volatility risk premiums are now deeply in negative territory, similar to levels just before the start of the tightening cycle in 2022 (Figure 1.14, panel 2). - Low volatility may reflect investor complacency and could exacerbate any sudden reassessment of the policy or economic outlook. - Intraday financial conditions move appreciably in response to core consumer price index surprises (actual core inflation number minus the Bloomberg survey median), reflecting investor attention to the Federal Reserve’s data dependence (Figure 1.14, panel 3). - Average correlation across advanced economy and emerging market equities, bonds, credit, and commodity indices is high, exceeding the 90th historical percentile (Figure 1.15, panel 1); shocks hitting correlated markets could cause simultaneous price reversals and contagion. - Structural factors contributing to higher correlations: - Increase in passive investing and ETFs (Figure 1.15, panel 2). - ETFs focused on high-yield and emerging market bonds are more sensitive to market-wide proxies, such as S&P 500 returns, than their respective underlying indices (Figure 1.15, panel 3). - Hedge funds have shifted toward trading index-level securities (futures, options, ETFs), reducing asset-specific differentiation (Figure 1.15, panel 4). - Multi-strategy hedge funds’ assets increased to almost $700 billion from $356 billion in 2020. - The ratio of gross notional exposure of derivatives to net asset value for multi-strategy hedge funds rose to 14.8 in the second quarter of 2023 from 5.5 in the fourth quarter of 2014. ### Medium-Term Vulnerabilities and Emerging Market Resilience - Most major emerging markets have shown resilience to the external environment. - Inflation has eased markedly in many emerging markets, having responded to early and proactive monetary tightening (Figure 1.16, panel 1), most notably in Latin America. - Measures of core inflation peaked in early 2023 in Latin America and have continued to decline for most economies. - On average, emerging market central banks have raised policy rates by 780 basis points from trough to peak after the pandemic, compared with an average increase of just 400 basis points by advanced economy central banks. - Early tightening widened the average nominal interest rate differential between emerging markets and the United States to over 6 percentage points. - Real rates also rose on an ex ante basis (Figure 1.16, panel 2). - Emerging market currencies experienced modest volatility against the dollar overall; volatility rose substantially for currencies in Latin America and CEEMEA when advanced economies began rate hikes, but declined soon after (Figure 1.16, panel 3). - For Asian currencies, volatility has been low throughout the cycle. - Portfolio flows to emerging markets recovered since the October 2023 Global Financial Stability Report; the IMF’s measure of capital flows-at-risk improved, and flows to local currency bond and equity markets in emerging markets (excluding China) were robust in the final quarter of 2023 before softening in early 2024. *Source: CHAPTER 1 FINANCIAL FRAGILITIES ALONG ThE LAST MILE OF dISINFLATION (text - CHAPTER 1 FINANCIAL FRAGILITIES ALONG ThE LAST MILE OF dISINFLATION)* ### 2024. Chinese portfolio inflows have rebounded ### 2024. Chinese portfolio inflows have rebounded ### Portfolio flows and capital flow-at-risk - Chinese portfolio inflows "have rebounded somewhat in recent months." - Across all emerging markets, the estimated likelihood of outflows over the next year declined from 32 percent to 27 percent. - The 5th percentile of one-year-ahead capital outflows fell to 2.3 percent of GDP. - EM portfolio inflows accelerated in the fourth quarter of 2023 before moderating in the first quarter of 2024. - Capital flow-at-risk has improved on the back of improved risk sentiment, with the conditional probability distribution shifting toward inflows. ### Interest rate differentials, market expectations, and FX/volatility - With inflation abating in major emerging markets, many central banks have started to cut interest rates. - Since the start of 2023, Latin American interest rate differentials compared with the United States have declined by nearly 200 basis points on average, led by Brazil and Chile. - In CEEMEA, the average differential has declined by about 120 basis points. - Markets have been pricing a declining interest rate differential in relation to the United States since early in 2022. - For Asia excluding China and CEEMEA, expectations for one-year-ahead interest differentials peaked in the first and third quarters of 2022, respectively, and have been on the decline since. - Latin American markets correctly predicted a year before that policy differentials would peak in late 2022. - The market has therefore acknowledged progress in the fight against inflation, which has kept currency volatility, capital outflows, and other external pressures at bay and allowed major emerging markets to focus monetary policy on inflation. - Investors could be too sanguine if policy rate differentials narrow faster than currently priced in, particularly if advanced economies keep rates higher than anticipated to fight stubbornly high inflation. - Historically, emerging markets have faced spillovers of term premium shocks in the United States; should this scenario play out, countries with strong current accounts, fiscal credibility, and relatively lower short-term debt will tend to face more moderate capital flow stress. - The strength of institutional frameworks and the depth of domestic capital markets can plausibly impact emerging market resilience to external financial stress. ### Geopolitical developments in MENA and funding conditions - An escalation of current conflicts in the Middle East and North Africa (MENA) could trigger a repricing of emerging market sovereign risk, resulting in tighter financing conditions as markets reassess potential default risk amid heightened uncertainties. - Market indicators suggest that contagion from the conflict remains contained for now: despite initial heightening of risk aversion in October, energy prices and implied volatility have moderated. - Hard currency bond spreads tightened for most MENA sovereigns, some to levels even tighter than before the current conflict. - Major MENA sovereigns and firms continue to tap international markets to raise funding; funding conditions in MENA have improved, alongside broader EMs, indicating that contagion risk is contained. ### Investors’ focus on fiscal sustainability and bond market dynamics - Emerging market local currency bond yields are still broadly trading near the upper end of their historical range on a nominal basis and, to a lesser degree, on an inflation-adjusted basis. - Yields could remain elevated in the years ahead as investors demand additional compensation (term premiums) for holding emerging market bonds instead of receiving US long-term real interest rates. - In several emerging markets, term premiums are now substantially higher than their prepandemic levels, together with higher expected short-term rates. - In the hard currency bond market, emerging markets across the ratings spectrum will need to refinance or issue new debt close to current secondary market yields, which are significantly above the coupons paid on existing debt stock. - Averaged across emerging markets, net domestic local currency bond issuance is nearly 1 percentage point of GDP higher than in prepandemic years. - Banks, and in some cases central banks, stepped in to absorb significant amounts during 2020–21 but have since slowed their purchases, while foreign inflows have not been consistent in recent years. - Nonbank financial institutions have become influential buyers in several countries, although the depth of that investor base, allocation strategies, and regulatory frameworks vary considerably across countries, offering no guarantee they will remain the marginal buyers if policy or investor preferences change. - Emerging markets facing sizeable expected debt issuance and uncertainty about who will absorb additional debt are more likely to experience market instability even absent external shocks. - Emerging market hard-currency sovereign spreads narrowed recently—likely a result of the easing in global financial conditions—but market-implied default rates over the next five years remain higher than in 2019 for some sovereigns, even after adjusting for recent credit rating changes. - The persistent balance sheet erosion of some emerging market sovereigns, a lack of evident fiscal consolidation despite periods of robust growth, and a disproportionate increase in the share of external borrowings by some emerging markets have increased investor attention to medium-term debt sustainability. - With interest rates settling at higher levels than before the pandemic, inflation coming down, and growth moderating, an increasing number of emerging market sovereigns have high real refinancing costs relative to economic growth and face large interest payments as a share of government revenues. - The gap between five-year-ahead real local currency interest rates (implied by long-term government bond yields) and consensus forecasts of real growth is expected to increase. *International Monetary Fund | April 2024* ### 1.5 to 3.0>3.0 ### 1.5 to 3.0>3.0 ### Sovereign debt vulnerabilities and fiscal risks - Without fiscal consolidation, more sovereigns will find it difficult to service debt, see their fiscal buffers dwindle, and face even higher sovereign interest rates; a “debt begets more debt” vulnerability may be building, particularly in a high-for-longer interest rate environment. - Data and measurement notes: - Implied market default rates derived from five-year CDS spreads assume a 50 percent recovery rate. - Five-year historical default range referenced from Moody’s, Fitch, and S&P sovereign default studies. - Average maturity of local currency government debt is a simple average of 14 major sovereigns with all data as of March 28, 2024. - Ex post real yields are local currency government financing rates minus trailing 12-month inflation rate. - Implied government financing rates proxied by five year local currency government yields. - Ex ante estimates consider consensus 5-year estimates of real economic growth and inflation; projected refinancing rates reflected by local 5y5y forward, adjusted for differences in term premiums as of December 31, 2023. ### Frontier economies and low‑income countries (LICs): financing trends and near‑term pressures - Financing conditions have improved as lower secondary market yields (reduced spreads plus lower Treasury yields) made issuance more affordable, yet issuance remained minimal throughout 2022 and 2023. - Net issuance (gross issuance minus maturing bonds) has essentially been zero over the past year. - Frontier issuers’ recent issuance profile: - Many bonds sold in 2017–21 were relatively short-dated; about half of that debt had 10 or fewer years’ initial maturity. - Frontier issuers have a combined $30 billion in foreign currency bonds coming due in 2024 and 2025, about the same amount as aggregate debt that matured in the entire five-year period from 2019 to 2023. - Implications: - Even if markets are receptive to rolling over these maturities, replacement debt is likely to carry much higher coupons, increasing fiscal burdens. - The interest rate burden is high by historical standards as these countries have increasingly borrowed on commercial rather than concessional terms. - Debt restructurings and issuance developments: - Progress in restructuring cases has helped sentiment (examples: Zambia and Ghana negotiations described). - Domestic financing and sovereign–bank linkages: - With external markets effectively closed in prior years, fiscal authorities turned to domestic markets; local banking institutions increased holdings of sovereign debt, raising sovereign–bank nexus risks. - This trend is pronounced for low‑income countries in Africa. - If financing conditions tighten again, local markets in these countries could be pressured further. ### China: housing market, LGFVs, and local fiscal strains - Housing market dynamics: - China’s housing market downturn shows few signs of bottoming out. - Declines in new home prices have been moderate compared with major correction episodes (for example, Japan in the early 1990s), while existing home prices and activity measures such as starts, sales, and investments have dropped off sharply. - Limited new home price adjustment plus extended forbearance for struggling developers have restrained negative spillovers to bank balance sheets but disincentivized debt restructuring needed for recovery. - Policy measures and market response: - Recent support policies—mortgage rate cuts, easing of home purchase restrictions, promises for affordable housing and urban redevelopment—have had limited success in restoring homebuyer confidence. - Financing conditions for the property sector remain tight for both banks and market-based financing despite official guidance to support the housing market. - Presale revenue declines and local government pressures: - Large declines in presale revenues have prevented some construction projects from completing and depressed land‑sale proceeds to local governments. - Local government financing vehicles (LGFVs) face large debt repayments over the next two years; many LGFVs have high debt-to-earnings ratios, raising questions about commercial viability. - LGFVs in financially weaker provinces face higher financing costs. - Measurement and data notes: - China residential price is based on the average of primary and secondary market price index from National Bureau of Statistics. - LGFV public finance condition ranking is based on local governments’ general budget deficit and official debt. ### China: equity markets, derivative products, and asset managers - Equity market performance and investor sentiment: - Chinese and Hong Kong SAR stock prices declined as much as 11 and 14 percent, respectively, since the October 2023 Global Financial Stability Report, despite a strong rally in global markets. - The CSI equity market has declined 45 percent since the peak in 2021 and trades at a multiyear low valuation measured by the forward-price-to-earnings ratio; investors are not yet ready to “buy the bottom.” - Fragile sentiment reflects disappointment about macro policy support, uncertainty in the property market outlook, and rising geopolitical risks. - Structured products and market mechanics: - “Snowball product”: structured deposit with embedded derivatives offering bond‑like coupons to high‑net‑worth investors if small‑cap CSI indices stay within a predetermined range; leverage can be used to boost returns. - If stock prices fall below that range, investors lose coupon payments and leveraged investors can face margin calls. - Banks and securities firms selling these products—estimated at US$45 billion outstanding—effectively hold short positions on stocks and hedge by buying stock futures. - As small‑cap indices fell and leveraged investors failed margin calls, sellers liquidated products and unwound futures hedges, widening the stock‑futures basis and amplifying selling pressure. - Related products marketed offshore (for example, equity-linked investments in Korea) can transmit spillovers regionally. - Note: there is an estimated $20 billion of equity-linked investments in Korean markets. - Asset management industry exposure and risks: - As of 2023, total assets under management across various products were ¥110 trillion or nearly 90 percent of GDP. - The 45 percent equity market decline since 2021 reduced net asset value of equity and hybrid mutual funds by over 20 percent (valuation losses and redemptions). - Many trust products experienced large losses over the past three years, resulting in widespread defaults of real‑estate‑focused trust products; trust products are not allowed to use leverage and their investor base is mostly institutions and high‑net‑worth individuals. - Wealth management products and investment funds focused on public sector debt: - Combined size is three times as large as trust funds. - Large fixed‑income exposures consist almost entirely of credit bonds, making them more vulnerable to credit and rollover risks in a corporate bond market with average maturity of only three years. - Credit bonds may account for a sizable share of credit bond holdings of wealth management products; credit bond share is about 25 percent of total assets under management for wealth management products and credit mutual funds. - The investor base is more retail focused and prone to run risks; wealth management products are held almost exclusively by retail investors who are also bank depositors and often lack experience handling investment volatility. - Historical episode: in late 2022, a spike in bond yields led to large‑scale redemptions by retail investors fearing wealth management product losses, inducing further yield spikes that spilled over to broader funding markets; large liquidity injections into the interbank market by the People’s Bank of China stabilized redemptions and funding rates. - Interconnectedness and leverage: - Interbank lending and lending between banks and nonbank financial institutions have increased notably in recent years. - Financial leverage in the interbank market, proxied by repo transaction volume, has risen sharply recently. - Shocks from wealth management products and mutual funds could quickly spread to banks through tightening credit and funding conditions, particularly affecting banks with higher wholesale funding exposures such as small and medium‑sized banks. - Ratings and domestic credit structure: - Most Chinese corporate bonds are rated AA and above, as state‑owned enterprises are the primary issuers; domestic ratings place considerable weight on perceived implicit guarantees and tend to be static with limited risk differentiation except for bonds rated below AA. ### Emerging concern: corporate default risk and earnings outlook - Since the October 2023 Global Financial Stability Report, global corporate earnings projections have been bolstered by prospects of a likely soft landing and expectations of monetary easing, reversing earlier downward trends. - At the sectoral level, interest rate sensitive sectors such as consumer discretionary showed improvement in earnings projections. *International Monetary Fund | April 2024* ### 1. Asset Management Industry: Total Assets and Allocation ### 1. Asset Management Industry: Total Assets and Allocation ### Asset management industry structure and allocation - Charted asset classes include: WMP, Mutual funds, Private funds, Trust funds, Insurance, AMP. - Time series coverage shown from Jan. 2021 to Oct. 2023 and includes total assets (trillions of renminbi) and asset allocation (percent of total assets). - Note: NAV = net asset value; WMP = wealth management product. ### Bond market impact from WMP redemption - Charted metric: Bond Market Impact from WMP Redemption (Trillions of renminbi). - Data sources: AMAC; Bloomberg Finance L.P.; China Trustee Association; China Wealth; and Insurance Asset Management Association of China. ### Key statistics and axis scales shown (as presented) - Total assets axis scale labels: 0, 5, 10, 15, 20, 25, 30, 35 (trillions of renminbi). - Asset allocation axis scale labels: 0, 10, 20, 30, 40, 50, 60, 70, 80, 90, 100 (percent). - Time points shown: Jan. 2021, Apr. 21, Jul. 21, Oct. 21, Jan. 22, Apr. 22, Jul. 22, Oct. 22, Jan. 23, Apr. 23, Jul. 23, Oct. 23. --- ### Corporate credit markets and vulnerabilities ### Recent market behavior and valuation signals - Spreads narrowed broadly, including riskier segments, despite energy-sector equity underperformance. - The proportion of CCC- or lower-rated firms in the speculative-grade corporate bond index was halved over the past decade. - Models indicate corporate spread valuations are stretched and could face sharp upward adjustment should a soft landing not materialize. - For high-yield bonds, misalignments relative to fundamentals are described as severe for both US and euro area issuers by historical standards. ### Corporate earnings and refinancing pressures - The rise in corporate earnings since 2020 is losing momentum. - Cash liquidity buffers eroded through 2023: share of small firms with a cash-to-interest expense ratio below 1 was around 33 percent in advanced economies and 55 percent in emerging markets as of Q3 2023. - Under a scenario where interest expense rises in line with current market yields, these shares would rise to 38 percent and 59 percent, respectively. - Corporate bankruptcies have steadily increased in the euro area, Japan, and the United States, led by smaller firms. - A considerable amount of corporate debt will mature in the coming year across countries at interest rates significantly higher than existing coupon rates. - Net rating upgrades among investment-grade firms have fallen sharply on a market-cap-weighted basis. - Simulation for US BBB-rated firms (BBB+, BBB, and BBB– issuers rated by S&P) indicates higher probability of default for some firms by 2025 even under a soft-landing scenario. - Global private nonfinancial corporate credit growth is recovering relatively quickly in this hiking cycle compared with previous ones. ### Figures and indices referenced (as presented) - Global 12-month-forward EPS quarter-over-quarter changes (percent) and implied US policy rate change (basis points) presented. - Corporate sector spread change and global equity sector changes shown since October 2023. - Global speculative grade corporate bond market (Billions of US dollars, percent) series from 2003–2023. - Global 12-month-trail Earnings per Share Ratios (Indices, January 2023 = 100) from Jan. 2020 to Jan. 2024. - US Excess Bond Premium (Percentage points) historic series (1990–2023). - Corporate Bond Spread Misalignments (Deviation from fair value per unit of risk, quarterly averages; percentile right scale) with series through 24:Q1. --- ### Weaker tail corporate borrowers — vulnerabilities and projections ### Cash buffers and default risk - Share of debts issued by firms with cash-to-interest expense ratio below 1: around 33 percent (advanced economies) and 55 percent (emerging markets) as of Q3 2023. - Under market-yield interest expense scenario: 38 percent (advanced economies) and 59 percent (emerging markets). - US bankruptcies counted as the sum of Chapters 7 and 11; US small businesses proxied by Chapter 13 bankruptcies. - Projected probability of default of US BBB firms based on SEP Median Scenario (simulation based on J.C. Duan et al., BuDA framework, version 3.5.1) shows marginal deterioration by 2025 for some firms. ### Refinancing costs and maturing debt - Additional cost of refinancing versus maturing corporate bonds presented as percentage points and billions of US dollars, comparing 2021:Q1 with 23:Q3 (SA) across advanced economies and emerging markets. - Blended yields-weighted average coupon (percentage points) and bonds maturing (billions of US dollar) series across 2010–2024 shown. - Global non-financial corporate credit to GDP: year-over-year percentage point changes displayed across cycles; current cycle peaked or plateaued in Mar. 2024. --- ### Government bond supply, demand, and term-premium implications ### Supply outlook and auction dynamics - Some advanced economies will likely require heavy government bond issuances in coming years to fund fiscal deficits and service debt at higher interest rates. - Example Treasury supply announcements: May 2023 Treasury announced supply of $547 billion; expectation for Aug. 2023 was $593 billion; Treasury announced supply of $601 billion (all in terms of 10-year equivalents). - Increased supply has been associated with increased sensitivity of intraday yields to the auction tail. ### Real term premium and issuance projections - Projections relate US 10-year real term premiums to the share of Treasuries outstanding net of Federal Reserve holdings. - Projections use parametric bootstrap techniques and consider forecasts for Federal Reserve holdings by year-end 2025, with ellipses delineating 68 and 95 percent CIs. ### Shift in buyer base and market implications - US net issuances of Treasury securities increasingly absorbed by the nonbank sector (households and hedge funds); banks have been net sellers. - In Europe, government bond issuance, especially from core euro area countries, is increasingly purchased by households, asset managers, and the foreign sector. - New marginal buyers (notably hedge funds) are more price sensitive and more attuned to debt sustainability than past buyers (such as central banks), implying more volatility and potential upward pressure on term premiums. ### Quantitative tightening (QT) effects - Central bank quantitative tightening reduces central bank holdings and withdraws liquidity, affecting both long-term government bond markets and short-term funding markets. - Bank of England announced reduction of the UK government bond portfolio by £100 billion over the following year (announcement in September 2023). - Redemptions of the government bond portfolio in the ECB’s Asset Purchase Program are estimated to reach approximately €260 billion in 2024, with another €45 billion announced from redemptions in the Pandemic Emergency Purchase Programme of the ECB. - The Federal Reserve is shrinking its Treasury holdings by $60 billion per month, but may taper quantitative tightening in the second half of 2024. - QT can result in scarcity of central bank reserves, increasing interbank borrowing costs and affecting banks’ transactions and regulatory liquidity management. ### Demand base visualization (as presented) - Breakdown of bond demand by holder type includes: Foreign official, Foreign bank, Foreign nonbank, Domestic central bank, Domestic bank, Domestic nonbank, and Total. - Time slices shown include 2022:Q3 through 2023:Q4 for regional analyses. *International Monetary Fund | April 2024.* ### 1. Net Purchases of US Treasuries, by ### 1. Net Purchases of US Treasuries, by ### Net Purchases of US Treasuries, by Investor Sectors (Billions of US dollars, NSA) - Chart bars labeled (from figure): Federal Reserve Banks; MMF and other asset managers; Insurance; GSE and dealers; Foreigners; Hedge funds. - Horizontal axis tick values shown in source: –1,500; –1,000; –500; 0; 500; 1,000; 1,500; 2,000. - Note in source: NSA = not seasonally adjusted. - Finding stated in source: "Hedge funds have become marginal buyers of Treasuries since the start of latest round of QT in the United States." ### Net Purchases of EGBs, by Investor Sector (Billions of euros) - Chart bars labeled (from figure): Domestic bank; Domestic central bank; Foreign banks; Foreign official; Domestic nonbank; Foreign nonbanks. - Horizontal axis tick values shown in source: –150; –100; –50; 0; 50; 100; 150; 200; 250; 300; 350. - Panel data coverage note: "Panels 2 and 3 reflect data until 2023:Q2 (latest available)." - Finding stated in source: "In Europe, the foreign nonbank sector was the largest marginal buyer of European government bonds, albeit with considerable heterogeneity across issuer countries." - Acronym preserved: EGB = European government bond. ### Net Purchases of EGBs, by Issuer (Billions of euros) - Issuers listed in source: Austria; France; Belgium; Germany; Ireland; Greece; Italy; Portugal; The Netherlands; Total; Spain. - Horizontal axis tick values shown in source: –100; –50; 0; 50; 100; 150; 200; 250. - Panel data coverage note: "Panels 2 and 3 reflect data until 2023:Q2 (latest available)." ### Notes, Sources, and Definitions (preserved wording) - Sources: Federal Reserve Board; Arslanalp and Tsuda 2012; and IMF staff calculations. - Note: "Sovereign bond holdings of domestic hedge funds are included residually in the household category of the flow of funds and investor holdings. Panels 2 and 3 reflect data until 2023:Q2 (latest available). EGB = European government bond; GSE = government-sponsored enterprise; MMF = money market fund; NSA = not seasonally adjusted." ### Contextual findings and related observations (from nearby text in the unit) - "Hedge funds have become marginal buyers of Treasuries since the start of latest round of QT in the United States." - "In Europe, the foreign nonbank sector was the largest marginal buyer of European government bonds, albeit with considerable heterogeneity across issuer countries." *Source: IMF staff figures and notes from the Global Financial Stability Report chapter excerpt (figures and accompanying text).* ### 2. Response of Bank CDS Spreads to a One Standard Deviation Shock ### 2. Response of Bank CDS Spreads to a One Standard Deviation Shock to Sovereign CDS Spreads ### Empirical responses and key statistics - Bank CDS spreads rose by only 4 basis points at the outset in the recent period following a sovereign CDS shock. - Panels 2 and 3 present impulse response functions to a 10-basis point sovereign spread shock from a panel VAR (1), with sovereign CDS spreads ordered before average bank CDS spreads. Fixed effects are included in the panel VAR. - The ten AE countries used in panels 1, 2 and 3 are: Australia, Belgium, France, Germany, Italy, Japan, The Netherlands, Spain, Switzerland, the United Kingdom and the United States. - The 12 major EMs are: Brazil, Chile, Colombia, Hungary, India, Indonesia, Malaysia, Mexico, the Philippines, Poland, South Africa, and Türkiye. - Within a country, CDS spreads for all Global Systemically Important Banks (GSIBs) are averaged. - Despite the more modest recent spillback, sovereign CDS-spread reactions to their own shock have been more or less the same over the past decade. - Panel 2 shows the ratio of the aggregated bank holdings of sovereign debt across the ten AEs to aggregated sovereign debt outstanding. ### Data sources and notes - Sources: Arslanalp and Tsuda (2012, 2014); Bloomberg Finance L.P.; Capital IQ; and IMF staff calculations. - Definitions and acronyms: AE = advanced economy; CDS = credit default swap; EM = emerging market economy; GFC = global financial crisis; GSIBs = global systemically important banks; VAR = value at risk. ### Liquidity mismatch at open-end investment funds — findings - Liquidity mismatches are rising in open-end investment funds that invest in less-liquid assets while allowing daily redemptions. - The amplification mechanism of shocks strengthens when: - (1) investment funds hold a substantial share of a given market’s assets, - (2) the investment funds are subject to volatile redemption flows, and - (3) the underlying market is relatively illiquid. - High-yield corporate bond, leveraged-loan, and emerging market hard currency bond funds stand out on these three dimensions because these markets are relatively illiquid and the funds have historically been subject to large peak outflows. - Government and investment-grade corporate bond funds have seen strong inflows in recent years. - Certain fund types experienced large inflows since the onset of the pandemic: investment-grade US corporate bond funds received close to 70 percent of their prepandemic net asset value in inflows. - Fund flows are highly sensitive to market sentiment and closely correlated with the performance of the relevant asset class; this relationship is particularly pronounced in the high-yield corporate bond market. - The 5 percent fund flow at risk was defined in Chapter 1 of the October 2023 Global Financial Stability Report; the value reflects that historically outflows surpassed this value, expressed in terms of net asset value, 5 percent of the time. ### Figure- and panel-level observations (as presented) - Figure panels show: - Panel 1: Fund Flow at Risk and Market Liquidity (liquidity score and fund flow at risk). - Panel 2: Cumulative Fund Flows since January 2020 (Percentage of net asset value; black lines with whiskers indicate the minimum and maximum since January 2020). - Panel 3: Peak Fund Outflows and Peak Drawdowns since January 2020 (Percentage of net asset value). - Panel 4: US Corporate Bond Fund Flows and Asset Class Returns (Fund flows as percentage of assets under management, return in percent). - Notes for figure panels: - Panel 1 focuses on mutual fund flows, while panels 2 and 3 reflect both mutual fund and ETF flows. - Fund flow at risk reflects the 5th percentile of weekly fund flows—that is, in 5 percent of the time, fund outflows surpass the fund flow at risk. - EU stands for Western Europe, following EPFR’s classification. The label “US leveraged loan” links to the EPFR classification of “bank loan funds.” - In panel 4, asset class performance is based on the Bloomberg Barclays total return indices for US investment grade and high yield corporate bonds. ### Policy recommendations and measures - Monetary policy: - Stance of monetary policy should reflect country-specific circumstances. - In economies with persistent inflation, central banks should not prematurely ease. - Central banks should push against overly optimistic investor expectations for monetary policy easing. - Where disinflation progress is sufficient, central banks should gradually move to a more neutral policy stance. - Clear communication is crucial to avoid unwarranted market volatility. - Central bank balance sheet and market functioning: - Monitor market functioning using a broad spectrum of indicators encompassing liquidity conditions and funding rates in money markets. - Stand ready to address market stresses if needed and be attuned to uneven distribution of liquidity and central bank reserves across banks. - Clearly communicate objectives and steps for removing liquidity, emphasizing willingness to use all other available liquidity support tools. - Prepare emergency liquidity assistance frameworks in normal times and ensure all banks periodically test access to central bank instruments. - Fiscal policy and sovereign debt: - Fiscal adjustment can support disinflation; focus on rebuilding buffers, lowering term premiums, and containing the rise in debt. - Pace and composition of adjustments should depend on aggregate demand strength and available fiscal space. - Governments should reprioritize spending to protect the most vulnerable within budget constraints. - Authorities should monitor the changing composition of the demand base for government bonds and assess potential risks. - Use of the Securities and Exchange Commission rules mandating central clearing in Treasury markets should be complemented by rule development for access to the clearing house and evaluation of potential transaction costs. - Financial sector resilience and supervision: - Conduct stress-testing exercises for CRE exposures that incorporate scenarios of large CRE price declines, including smaller banks with material exposure to CREs. - Review banks’ CRE valuation assumptions and ensure provisions are adequate. - Reduce CRE-related systemic risks from nonbank financial institutions by ensuring effectiveness of liquidity management tools, considering leverage limits, and enhancing data collection. - Consider requiring CRE funds to redeem shares at lower frequency and require long notice or settlement periods; depending on further analysis, consider structuring such funds as closed-end funds. - Build buffers (for example, countercyclical capital buffers or sectoral systemic risk buffers) where circumstances allow; release buffers if stresses materialize. - Ensure supervisors require corporate governance and risk management commensurate with banks’ risk profiles, including capital and liquidity stress tests. - Pay attention to asset classification, provisions, and exposures to interest rate and liquidity risks. - Prioritize full, timely, and consistent implementation of internationally agreed-upon prudential standards; avoid deviations from Basel III that could increase regulatory fragmentation. - Emerging markets and sovereign debt restructuring: - Strengthen efforts to contain risks associated with high debt vulnerabilities through creditor communications, multilateral cooperation, and international support. - Countries near debt distress should enhance early contact with creditors. - Use the G20 Common Framework where applicable, including in preemptive restructurings, and work to improve the forum’s effectiveness. - Continued use of enhanced collective action clauses in international sovereign bonds and development of majority voting provisions in syndicated loans would help facilitate restructurings. - Countries able to access funding should borrow prudently and avoid excessive debt issuance. - Market development and data: - Promote depth of local currency markets in emerging markets and foster a stable and diversified investor base. - For market development, strive to: - (1) establish a sound legal and regulatory framework for securities, - (2) develop efficient money markets, - (3) improve the transparency of both primary and secondary markets, - (4) improve the predictability of issuance, - (5) bolster market liquidity, and - (6) develop robust market infrastructure. - Ensure access to sufficient and reliable data to analyze vulnerabilities from origination practices and chains of bank and nonbank intermediation in the corporate debt market. - Enhance reporting requirements to improve monitoring and risk management of credit, liquidity, leverage, valuations, and interconnectedness risks; consider a more intrusive supervisory and regulatory approach for private credit where warranted. - China-specific recommendations: - Use accommodative macroeconomic policies along with structural and pro-market reforms to bolster near-term activity and ensure a smooth transition toward higher-quality growth. - Property sector policies should prioritize completing housing and restructuring troubled property developers in a timely manner. - Consider additional monetary policy easing, especially through lower interest rates, and reorientation of public expenditures toward households. - Implement comprehensive fiscal reforms to ensure sustainability of local government finances and prevent adverse spillovers. - Phase out forbearance measures, maintain adequate loss-absorbing buffers, and strictly enforce prudential policies to restructure weak banks and safeguard financial stability. - Continue progress in reducing nonbank financial sector risks and enhance liquidity and maturity risk management and data coverage. - External pressures and capital flows: - Central banks in emerging markets should be cautious about easing policy rates too aggressively. - Integrate policies using the IMF’s Integrated Policy Framework where applicable. - Foreign exchange interventions may be appropriate provided they do not impair policy credibility or substitute for necessary adjustments. - In imminent crises, capital flow management measures may be an option as part of a broader policy package but should not substitute for warranted macroeconomic adjustments or domestic macroprudential policies. *Source: IMF staff calculations and analysis as presented in the content unit.* ### CHAPTER 1 FINANCIAL FRAGILITIES ALONG ThE LAST MILE OF dISINFLATION ### CHAPTER 1 FINANCIAL FRAGILITIES ALONG ThE LAST MILE OF dISINFLATION ### Liquidity provision, resolution frameworks, and cross-border coordination - Central banks should be ready to provide liquidity against a broad universe of assets while abiding by the appropriate principles concerning collateralization, conditions, and state guarantees. - Further progress on adopting and implementing recovery and resolution frameworks is critical to proactively address weak or failing banks without undermining financial stability or risking public funds. - International resolution standards apply to all banks that may prove to be systemic in times of wider stress; planning and preparation for resolution have focused mainly on the largest banks and, in many countries, the scope of this work should be expanded. - Resolution plans must be more flexible and public backstop funding mechanisms for resolution strengthened. - Resolution regimes for systemic and other large nonbank financial institutions, including central counterparties and insurers, should be introduced or further developed. - Regulatory coordination across sectors and jurisdictions is essential to identify risks, undertake effective actions, and manage crisis situations. - Jurisdictions should ensure data-sharing arrangements allow for timely coordination to identify cross-sectoral risks and determine further action as needed. - Given a strong and multifaceted sovereign–bank nexus in certain countries, policy responses should be tailored and may include: - strengthening medium-term fiscal frameworks in countries with limited fiscal space; - considering capital surcharges on banks’ holdings of sovereign bonds above specific thresholds; - enhancing the banking crisis management framework; - fostering a deep and diversified investor base, particularly where local currency bond markets are underdeveloped. ### Crypto assets and Bitcoin ETPs: investor base expansion and systemic linkages - The approval of spot bitcoin exchange-traded products (ETPs) by the US Securities and Exchange Commission in early January 2024 led to record-breaking inflows and widened Bitcoin adoption. - Key statistics and observations: - Net inflows in the top 12 bitcoin funds reached more than $12 billion in the first quarter after the approval. - Bitcoin reached a new all-time high price of $73,805 on March 14, 2024. - ETPs have removed certain frictions to investing in bitcoin, widening the potential investor base and attracting both retail and institutional investors. - Risks and transmission channels: - The spot market remains unregulated, exposing investors to significant risks. - ETP-driven inflows could drive large shifts in asset allocation, potentially causing selling pressure on other asset classes as investors reallocate into bitcoin. - Increased interconnectedness between traditional financial institutions and the crypto ecosystem could amplify systemic risk via contagion if large crypto price swings force investors to liquidate positions in other assets. - Portfolio optimization evidence: - Using a hypothetical investment universe (gold, US Treasuries, investment-grade and high-yield bonds, S&P 500, and bitcoin) and maximizing the portfolio Sharpe ratio, year-by-year optimal allocations to Bitcoin exhibited pronounced fluctuations, with minimal or zero exposures in almost half of the years between 2011 and 2023—reflecting extreme volatility. ### Intertemporal risk trade-offs for US growth under alternative credit growth scenarios (Growth-at-Risk) - Framework and calibration: - Analysis uses the IMF’s growth-at-risk framework and historical tightening cycles (1972–74, 1977–80, 1980–81) as parallels for current high-inflation precedents. - Scenario 1 is calibrated on the average quarterly credit growth over the two-year period following those tightening cycles. - Scenario 2 is calibrated on the minimum quarterly credit growth over the same two-year periods. - Scenario outcomes and parameters: - Under the baseline, medium-term risks are forecast to be elevated relative to near-term risks given current household and corporate credit growth. - Scenario 1 (household credit growth at 1.8 percent per quarter): - Near-term downside risk improves relative to baseline. - Medium-term risks may remain elevated at around the baseline. - Scenario 1 (corporate credit growth at 2.3% per quarter): - Near-term risk improves but medium-term risk deteriorates, reflecting increased vulnerability due to shorter average debt maturities (around eight years for corporate bonds and syndicated loans). - Scenario 2 (household credit growth at –0.5 percent per quarter): - Households’ near-term risks deteriorate considerably relative to baseline, with negligible improvement in medium-term risks. - Scenario 2 (corporate credit growth at 0.8 percent per quarter) is reported in figures as alternative calibration for corporates. - Additional notes: - The medium term is calculated as the average between years 4 and 8. - Growth-at-Risk (GaR) term structure focuses on the fifth percentiles of the growth forecast distribution. ### US regional banks: recovery, remaining vulnerabilities, and the weak tail - Aggregate developments since March 2023 turmoil: - Between March 2023 and January 31, 2024, deposit outflows stabilized (+3 percent) and the US regional bank equity index rebounded (+19 percent). - Persistent vulnerabilities and concentration risks: - Unrealized losses remained elevated at $477 billion in the fourth quarter of 2023, even after a significant drop owing to repricing of forward rates in December 2023. - The median ratio of unrealized losses to Tier 1 capital is high, with large dispersions across banks. - One-third of US banks, mostly small and medium-sized ones, hold exposures to commercial real estate (CRE) exceeding 300 percent of their capital plus the allowance for credit losses—these banks represent 16 percent of total banking system assets. - More than 100 banks (about 3 percent of banking system assets) have the combination of: - CRE concentration above 300 percent of capital plus allowance for credit losses; - unrealized losses greater than 25 percent of Tier 1 capital; - a ratio of uninsured deposits to total deposits greater than 25 percent. - Weak tail and systemic scale: - The weak tail of banks remains elevated in the first half of 2024. - The weak tail, mainly small and medium-sized banks, collectively represents an estimated $5.5 trillion in total assets, accounting for almost 23 percent of total banking system assets. - Market sentiment risks: - Market shifts in expectations about timing and pace of US interest rate cuts, and announcements of substantial losses at a major regional bank exposed to CRE, have prompted significant stock-index declines (for example, a 10 percent decline in the regional bank stock index in January 2024). - Concerns are pronounced for banks with high unrealized bond losses from recent interest rate increases, concentrated CRE exposures, and large potential liquidity pressures from uninsured deposits and less-stable funding. *International Monetary Fund | April 2024 — CHAPTER 1, “FINANCIAL FRAGILITIES ALONG ThE LAST MILE OF dISINFLATION”* ### CHAPTER 1 FINANCIAL FRAGILITIES ALONG ThE LAST MILE OF dISINFLATION ### CHAPTER 1 FINANCIAL FRAGILITIES ALONG ThE LAST MILE OF dISINFLATION ### Chapter at a Glance (Chapter 2 summary points included in the unit) - The chapter assesses vulnerabilities and potential risks to financial stability in corporate private credit, a rapidly growing asset class that now rivals other major credit markets in size. - Private credit provides long-term financing to firms too large or risky for banks and too small for public markets, but migration of credit from regulated banks and transparent public markets to more opaque private credit raises potential risks. - Firms borrowing private credit tend to be smaller and riskier than their public market counterparts; the sector has never experienced a severe economic downturn at its current size and scope, creating the possibility of delayed realization of losses, a spike in defaults, and large valuation markdowns. - Identified vulnerabilities include: - Relatively fragile borrowers. - Increased exposure of pensions and insurers to the asset class. - A growing share of semiliquid investment vehicles. - Multiple layers of leverage. - Stale valuations. - Unclear interconnections between participants. - Overall financial stability risks are difficult to assess fully because necessary data are unavailable; despite limitations, such risks appear contained at present. - Given private credit’s size and role in credit creation—now large enough to compete directly with public markets—it may become macro-critical and amplify negative shocks to the economy. - Rapid growth, increasing competition from banks on large deals, and pressure to deploy capital may lead to deterioration in pricing and nonpricing terms (including lower underwriting standards and weakened covenants), raising the risk of future credit losses. - If private credit remains opaque and continues to grow exponentially under limited prudential oversight, its vulnerabilities could become systemic. ### How Private Credit Started and Has Grown - Private credit developed over approximately 30 years as a lending solution for middle-market companies deemed too risky or large for commercial banks and too small for public markets. - Loans are typically negotiated directly between borrowers and one or more alternative asset managers; terms often include enhanced covenants and customized provisions (for example, the option to capitalize interest payments in times of poor liquidity). - Private credit has grown rapidly since the global financial crisis, taking market share from bank lending and public markets. - Private credit assets grew to approximately $2.1 trillion globally in combined assets and undeployed capital commitments in 2023. - This estimate includes assets of private credit funds ($1.7 trillion globally, as of 2023), business development companies, and private collateralized loan obligations, and therefore underestimates the overall size of private credit globally. - Geographic and size details: - Assets under management (deployed and committed) of private credit managers located in the United States reached $1.6 trillion as of June 2023, growing at an average annual rate of 20 percent over the last five years. - Private credit accounts for 7 percent of the credit to nonfinancial corporations in North America, comparable with the shares of broadly syndicated loans and high-yield corporate bonds. - In Europe, private credit increased at an average rate of 17 percent per year over the same period and accounts for 1.6 percent of corporate credit. - Asian private credit accounts for about 0.2 percent of credit to nonfinancial corporations and has grown at 20 percent annually over the last five years. - Market structure and investors: - The most common private credit investment vehicle accounts for approximately 81 percent of the total market: a closed-end fund with a capital call structure and limited life cycle. - An additional 5 percent of the market consists of specialized collateralized loan obligations (CLOs) that invest in middle-market private credit. - Business development companies (BDCs) account for 14 percent of the market (a rapidly growing segment in the United States, often public and open to retail investors). - Typical investors include pension funds, insurance companies, sovereign wealth funds, and family offices. - The growth in private credit has followed the rise in private equity; managers whose umbrella firm is also active in private equity hold more than three-quarters of private credit assets, and about 70 percent of private credit deals have borrowing companies sponsored by a private equity firm. ### How Private Credit Could Threaten Financial Stability (vulnerabilities and risk channels) - Key risk channels analyzed: borrowers, liquidity mismatches, leverage, asset valuations, and interconnectedness. - Migration of credit provision from regulated and transparent markets to private credit increases vulnerabilities because: - Bank loans are subject to prudential regulation and supervisory oversight, and bond markets and broadly syndicated loans have comprehensive disclosure that fosters market discipline and price discovery; private markets are comparatively lightly regulated and more opaque. - Private credit loans are unrated, rarely traded, typically “marked to model” by third-party pricing services, and lack standardized contract terms. - Rising risks and potential implications may be difficult to detect in advance due to opacity. - Severe data gaps: - Interconnections and potential contagion risks faced by large financial institutions from exposures to private credit are poorly understood and highly opaque. - The private credit sector has never experienced a severe downturn at its current size and scope; many risk-mitigating features have not yet been tested. - Current assessment: - At present, the financial stability risks posed by private credit appear contained. ### Policy Recommendations (from the chapter) - Encourage authorities to consider a more intrusive supervisory and regulatory approach to private credit funds, their institutional investors, and leverage providers. - Close data gaps so supervisors and regulators may more comprehensively assess risks, including leverage, interconnectedness, and the buildup of investor concentration. - Enhance reporting requirements for private credit funds and their investors, and leverage providers to allow for improved monitoring and risk management. - Closely monitor and address liquidity and conduct risks in funds—especially retail—that may be faced with higher redemption risks. - Implement relevant product design and liquidity management recommendations from the Financial Stability Board and the International Organization of Securities Commissions. - Strengthen cross-sectoral and cross-border regulatory cooperation and make asset risk assessments more consistent across financial sectors. *International Monetary Fund | April 2024* ### CHAPTER 2 ThE RISE ANd RISkS OF PRIVATE CREdIT ### CHAPTER 2 ThE RISE ANd RISkS OF PRIVATE CREdIT ### Systemic and sectoral risks from private credit growth - Rapid growth of private credit assets under management may: - Lower underwriting standards and render risk models obsolete. - Reduce risk premiums and weaken covenants as pressure to deploy capital increases. - Immediate vulnerabilities that could become systemic if trends continue: - Borrower vulnerabilities: private credit is typically floating rate and caters to relatively small borrowers with high leverage; in a downturn—particularly a stagflation scenario—rising financing costs could generate a surge in defaults and a corresponding spike in financing costs. - Capital losses for end investors: some insurance and pension companies have significantly expanded investments in private credit and other illiquid investments, risking being caught unaware by a dramatic rerating of credit risks across the asset class. - Liquidity risks: currently low but could rise with the growth of semiliquid retail funds; most private credit funds pose little maturity transformation risk, yet semiliquid funds could increase first-mover advantages and run risks. - Interconnectedness via multiple layers of leverage: the private credit value chain includes leveraged players from borrowers to funds to end investors; modest fund leverage can still cause significant capital calls in a downside scenario with potential transmission to leverage providers and forced simultaneous reductions in exposures. - Valuation uncertainty and opacity: absence of price discovery and supervisory oversight complicates performance monitoring; fund managers may be incentivized to delay realization of losses while raising new funds and collecting performance fees, potentially leading to deferred loss recognition followed by a spike in defaults and dramatic markdowns. - Cross-sector spillovers: prime candidates for risk include entities with high exposure to private credit markets—such as insurers influenced by private equity firms and certain pension funds—with private-equity-influenced insurers owning significantly more exposure to less-liquid investments than other insurers. - Conduct concerns from retail participation: increasing retail investment in private credit raises the risk that investment risks and redemption restrictions are misrepresented to less sophisticated investors. ### Characteristics of private credit borrowers - Size and sector concentration: - Median firm size by issuer type: - Private credit: $0.5 billion - Leveraged loans: $4.6 billion - High-yield bonds: $4.5 billion - Investment-grade bonds: $16 billion - Private credit sector allocation by last three-year deal volume (percent shares): Information technology, 41%; Healthcare, 14.5%; Consumer discretionary, 11.5%; Industrials, 8.5%; Raw materials and natural resources, 8.2%; Telecoms and media, 6.1%; Financial and insurance services, 5.8%; Other, 4.5%. - Leverage and collateral: - Private credit borrowers are typically highly leveraged middle-market companies, significantly smaller than broadly syndicated loan or high-yield bond issuers. - They have higher debt-to-earnings ratios but better asset coverage than syndicated loan counterparts. - Many private credit loans are secured, which mitigates credit losses; collateralization can be lower in sectors such as software where unitranche and mezzanine loans are more common. - Interest rate exposure: - Private credit borrowers almost exclusively use floating rate loans. - By contrast, for a sample of 518 North American and 157 European high-yield corporate bond issuers, the average share of variable rate debt is 29.4 percent at the end of 2022. - Private credit reliance on variable rate instruments accelerates the transmission of benchmark rate increases into firms’ cost of debt. - The share of payment-in-kind (PIK) interest in BDC interest income has doubled since 2019. - The proportion of firms with unsustainable interest coverage ratios (ICR < 1) has increased to over one-third among firms with size and leverage characteristics similar to private credit borrowers. ### Reasons firms use private credit and its advantages - Primary drivers: - Challenges accessing traditional funding sources: weaker firms with low or negative earnings and high leverage are less likely to secure bank loans and are more inclined to borrow from nonbank sources. - Private debt fund managers report financing companies and leverage levels that banks would not fund. - Some borrowers are excluded from syndicated loan markets because of size or lack of high-quality collateral. - Transaction benefits: - Flexibility: repayment schedules and collateral requirements can be tailored. - Speed of execution: transactions often executed more quickly than traditional bank loans or public debt offerings. - Confidentiality: private execution attracts borrowers seeking discretion. - Cost trade-off: private credit involves a higher cost; interest rates on private credit loans tend to exceed yields for market-based alternatives. ### Credit performance, mitigants, and cyclicality - Historical credit losses and default patterns: - Despite riskier borrower profiles, private credit credit losses historically have not exceeded losses in high-yield bonds and are comparable to leveraged loans. - Headline default rates for private credit indices tend to be relatively high because they include covenant defaults that often lead to renegotiated terms rather than true payment defaults. - Private equity sponsorship as a mitigant: - Private equity sponsors may inject capital to preserve long-term value, reducing defaults during transient stress. - Evidence from the leveraged-loan market shows lower default rates during periods of stress for private-equity-sponsored firms compared with nonsponsored firms. - Cyclicality evidence: - Mixed findings: private credit managers argue private credit remains accessible during downturns when traditional funding contracts. - During March 2020, private credit lending did not “dry up” while high-yield bond and leveraged-loan issuance contracted strongly; private credit lending remained more stable subsequently. - Structural analysis shows private credit market activity is less responsive to a sudden credit shock than high-yield bond and leveraged-loan markets. - Countervailing evidence of procyclicality: capital deployment in private equity and private credit is positively correlated with stock market returns; BDC market data indicate new private credit loans contract when banks tighten lending standards. - New lending by private credit funds appears less procyclical than BDC lending. ### Liquidity structure and risks of private credit funds - Fund structures and liquidity management: - Private credit funds hold highly illiquid underlying assets but generally design structures to minimize liquidity and maturity transformation risk through long-term lockups and redemption constraints. - Most private credit fund investors (e.g., insurance companies and pension funds) lock a portion of their investments for periods compatible with closed-end fund life cycles. - Sources of liquidity stress: - Credit facilities offered by private credit funds to borrowers can generate liquidity stress. - The shift toward semiliquid evergreen structures increases liquidity risks over time. - Limited secondary market for private corporate loans heightens illiquidity concerns, though structures like private credit CLOs and closed-end funds mitigate maturity transformation risk. *Italic: Source — CHAPTER 2 ThE RISE ANd RISkS OF PRIVATE CREdIT, text - CHAPTER 2 ThE RISE ANd RISkS OF PRIVATE CREdIT* ### 2. Response of US Issuance to a Credit Risk ### 2. Response of US Issuance to a Credit Risk Shock ### Response of issuance and private credit activity to a credit shock - New BDC lending appears more correlated with bank lending conditions than private credit overall; fundraising in private credit shows a weaker relationship to bank lending conditions. - The response of new private credit deals and fundraising to a credit shock is not as consistently negative as the response of leveraged-loan and high-yield bond issuance. - Figure context: issuance response estimated using Structural Vector Autoregression models with quarterly high-yield corporate bond spreads and issuance volumes; identification by Cholesky ordering (spreads first, issuance second). Number of lags: one lag for leveraged loan, high-yield bond issuance and private credit deal volume; two lags for fundraising. ### Liquidity structure and redemption features - Semiliquid structures (which often allow limited windows for redemptions) are more common in funds that aim to provide liquidity while investing in illiquid assets; examples include perpetual nontraded BDCs. - Redemptions in semiliquid structures are often constrained by gates, fixed redemption periods, and suspension clauses, but these tools have not been tested in a severe runoff scenario. - Evidence of redemption stress: redemption pressures have sometimes forced certain large private credit fund managers to allow redemptions above established limits. - Some funds, particularly in Europe, have adopted more frequent redemption periods (for instance, monthly or even more often), which may exacerbate liquidity risks. - Private credit funds often combine loans with revolving facilities; a correlated drawdown of such credit lines could suddenly increase private credit funds’ need for cash (risk likened to the “dash for cash” in 2020). - Semiliquid structures may broaden investor base to include retail investors and appeal to institutional investors; recent legislation in Europe (ELTIFs) and the United Kingdom (LTAFs) may support this trend. ### Risks from increasing retail investor share and semiliquid funds - Trend toward semiliquid products can increase maturity transformation within the private credit industry. - Insurers and pension funds have transformed products (shift to unit-linked insurance products and defined-contribution plans), potentially increasing their demand for liquidity in underlying investments and further pushing the trend toward semiliquid structures. - Unit-linked insurance products: policy-holders often subject to a minimum lock-in period, additional fees, and taxes for early surrender (these constraints discourage early surrender, but insurers often allow policyholders to change investment allocations). ### Multiple layers of leverage and interconnectedness - Private credit investors, funds, and borrowers deploy leverage extensively, forming a complex multilayered structure. - Channels described: 1. Investors (insurance firms and pension funds) may use leverage and be vulnerable to credit deterioration, downgrades, defaults, and margin/collateral calls. 2. Private credit investment vehicles may employ leverage within funds, through special-purpose vehicles (SPVs) or holding companies; leverage can be increased via collateralized fund obligations. 3. Private credit borrowers extensively deploy leverage; many borrowers are backed by private equity sponsors, leading to higher debt or leverage ratios deemed excessive by banks. - Hidden and multiple layers of leverage, combined with data gaps, could magnify losses and trigger spillovers during forced deleveraging scenarios. - Evaluation from a network perspective by prudential authorities is critical but impeded by data constraints. ### Leverage at fund level and BDCs - Evidence from a US Federal Reserve confidential study: most closed-end private credit funds are unleveraged but some use financial and synthetic leverage; funds at the 95th percentile have: - borrowing-to-assets ratios of about 1.27 - derivatives-to-assets ratios of about 0.66 - Sources of debt for BDCs include unsecured bonds and notes, secured bonds and notes, revolving credit (secured bank credit), and other instruments. - BDC regulatory leverage cap: debt-to-equity ratio capped at 2 (which was increased from 1 in 2018); BDCs often set internal limits more conservative than regulatory caps. - Median BDC leverage has steadily increased over the past 20 years but remains substantially below the regulatory cap of 2. - Private credit CLOs: securitization enables tranche purchases by investors; ratio of CLO non-equity tranches over equity tranches often about 6 to 1. - Table summary (characteristics of leverage in private credit vehicles): - Closed-End Funds: Debt-to-equity ratios ~0 to 1.3×; leverage sources include portfolio financing, NAV loans, subscription lines, derivatives; rollover risk Yes; collateral call frequency varies (typically quarterly); main lenders Banks, insurers, pension funds; Total AUM (United States) ~$1.2 trillion. - BDCs: Debt-to-equity ratios ~0.8 to 1.2×; leverage sources include secured bank lines of credit and secured/unsecured bonds; rollover risk Yes; collateral call frequency varies (typically quarterly); main lenders Banks, insurers, pension funds; Total AUM (United States) ~$300 billion. - Middle-Market CLOs: All debt-to-equity: ~6×; AAA to other classes: ~1×; leverage sources include term leverage through structured notes; rollover risk No; collateral call frequency None (cash-flow structure); main lenders Insurers, pension funds, hedge funds, banks; Total AUM (United States) ~$100 billion. ### Rollover and collateral-call risks - Leverage provided by commercial banks often includes loan-to-value triggers, exposing private credit funds to large collateral calls in stress. - Leverage providers may mark assets down significantly due to borrower riskiness and lack of comparable public pricing data. - Private credit funds frequently provide revolvers or credit lines to their borrowing firms; sudden correlated drawdowns of these credit lines could create considerable funding needs for private credit funds. - Anecdotal evidence suggests private credit funds maintain significant cushions to mitigate rollover risk, but such pressures were observed during the height of COVID-19 stress in 2020. - Unlike banks, private credit providers did not have access to central bank lending facilities, nor were central banks able to buy private credit assets to support asset prices. ### Valuations and stale pricing - Private credit loans tend to suffer from stale valuations because of absence of secondary markets, limited comparable transactions, and irregular appraisals. - Stale valuations could create a first-mover advantage and increase the risk of runs for private credit funds; risk is mitigated by restrictions on investor redemptions in many funds. - Valuing private credit assets often requires mark-to-model approaches in the absence of observable price inputs; such approaches are subjective and can increase potential for managerial manipulation. - Asset managers frequently seek third-party pricing services, but third-party valuation may not fully address risks; evidence indicates profit-driven service providers may prioritize client retention over impartiality. - Accounting standards (US GAAP, IFRS) provide guidance but do not mandate specific valuation techniques; regulatory frameworks focus on documentation, governance, and disclosures rather than prescribing valuation methodologies. ### BDC-based evidence on valuations and discounts - BDCs provide granular reporting and quarterly position-by-position accounting fair-value marks, offering a window into private credit valuation practices. - Typical BDC portfolios: most BDCs have portfolios concentrated in first- and second-lien senior secured loans, which typically represent 70 to 90 percent of their investment portfolios; portfolios often distributed across 100 to 200 borrowers. - Analysis findings: - Reaction of BDC loans to credit shocks is much smaller than that of B-rated leveraged loans, despite lower credit quality of BDCs’ loan portfolios. - Smaller valuation adjustments in loan accounting are offset by an additional discount on market prices of BDC shares; the discount widens during stress periods and is proxied by general market repricing of credit risk (proxied by the LSTA US Leveraged Loan 100 Index). - Adjustments to private credit loan values are smaller and slower than in public markets; deviations tend to persist for several quarters, after which share prices and net asset value per share converge. - Markets differentiate BDCs based on qualitative and quantitative characteristics (sector exposures, organic growth ability, transparency). - For other nontraded private credit funds, discounts are even larger because of lack of transparency. ### Potential effects of infrequent valuations - Stale valuations could provide a first-mover advantage and increase runoff risks in downside scenarios, but current structural limits on redemptions significantly mitigate this risk. - Industry commentary notes that in illiquid asset classes, valuation uncertainty may reduce the benefits of frequent mark-to-market; frequent mark-to-market may also exacerbate procyclical tendencies and increase market volatility. *Italic: Source — Chapter 2, "The Rise and Risks of Private Credit," Global Financial Stability Report, April 2024.* ### 1. Accounting Fair Value of BDCs’ ### 1. Accounting Fair Value of BDCs’ ### Valuation dynamics for BDCs and convergence after shocks - Public BDCs: Price/NAV (ratio) history is shown across dates from Dec. 2007 to Mar. 24. - Price and NAV take at least four quarters to converge after an unexpected shock. - Panel 3: Impulse response is based on an AR(1) model using quarterly data; the shock is sized to one standard deviation. - Key terms and acronyms preserved: BDC = business development company; CI = confidence interval; LL = leveraged loan; NAV = net asset value. - Sources cited in the analysis: 10-Q/10-K disclosures of BDCs; Bloomberg Finance L.P.; S&P Capital IQ; and IMF staff calculations. ### Interconnectedness between private credit and private equity - Many firms that manage private credit funds also manage private equity funds; larger private credit funds are more likely to be involved in private equity. - About 70 percent of private credit deals are sponsored by private equity firms. - New-issue volume for US private-equity-backed borrowers and the split of sponsored and nonsponsored private credit deals are shown by region (North America, Europe, Other regions). ### Exposures of traditional financial institutions to private credit - Aggregate bank lending to private credit funds in the United States: about $200 billion at the end of 2021. - That $200 billion represented less than 1 percent of US banks’ assets (Federal Reserve 2023). - Credit risks to banks are mitigated by the secured nature of the loans, though concentrated bank exposures cannot be ruled out due to limited data. ### Pension funds’ exposures, illiquidity, and leverage - Sample and scale: 26 large pension funds that disclose gross notional exposure of derivatives—combined assets under management of more than $7 trillion, which is about 17.5 percent of global pension fund assets. - Change in level 3 assets: - Average level 3 assets/investable assets: 2016: 31%; 2022: 42%. - Almost half of the increase in average level 3 assets can be accounted for by the rise in allocation to private credit since 2016. - Private credit share of level 3 assets for selected pension funds with embedded derivatives leverage increased between 2016 and 2022. - Financial leverage of selected pension funds (using gross notional exposure of derivatives as proxy): - Average financial leverage rose to 80 percent of assets in 2022 from 67 percent in 2016. - Pension funds’ increased allocation to illiquid investments and use of derivatives heighten vulnerability to margin and collateral calls, which could amplify stress in government bond, equity, and corporate bond markets where pension funds have large footprints. ### Private-equity-influenced life insurers: size, illiquidity, and capital - US private-equity-influenced life insurers’ assets: - Manage well more than $1 trillion, over 15 percent of all US life insurance assets (Figure 2.14, panel 1). - 2023 estimate calculated using information from the websites of 28 individual US private-equity-influenced life insurers. - Illiquid exposures: - Median exposure to level 3 assets for private-equity-influenced life insurers is currently 20 percent of assets, compared with 6 percent for a sample of the largest 50 insurers globally. - Calculation for private-equity-influenced life insurers’ level 3 assets is based on a sample of 15 entities. - The global insurers estimate in panel 2 is from a sample of 50 large insurance groups with assets of more than $15 trillion (about 40 percent of all insurance assets globally). - Capital adequacy: - Risk-based capital ratios for US private-equity-influenced insurers are shown; panel 3 includes 16 US private-equity-influenced life insurers for which ratios were found. - The US insurers’ risk-capital ratio comparison uses a sample of the largest 20 US insurers; direct international comparisons of risk-based capital ratios are not made. ### Vulnerabilities and potential spillovers - Stale or infrequent valuations in private credit can: - Distort capital allocation. - Exacerbate conflicts of interest (for example, managers having incentives to maintain high valuations during fundraising, and fees tied to valuations). - Undermine investor confidence and hinder timely assessment of losses in downturns. - Rising allocations to private credit increase the share of illiquid assets held by pension funds and insurers, raising concerns about market disruptions and susceptibility to margin and collateral calls. - Private-equity-influenced insurers can channel stable premium flows into private credit, structured credit, real estate, and infrastructure funds arranged by private equity firms, concentrating illiquid exposures. *Italic: Source — Chapter excerpt titled "1. Accounting Fair Value of BDCs’" from the IMF GLOBAL FINANCIAL STABILITY REPORT: THE LAST MILE: FINANCIAL VULNERABILITIES AND RISKS (April 2024).* ### CHAPTER 2 ThE RISE ANd RISkS OF PRIVATE CREdIT ### CHAPTER 2 ThE RISE ANd RISkS OF PRIVATE CREdIT ### Exposure and solvency of insurers and pension funds - Life insurers influenced by private equity reinsure portfolios with offshore reinsurers (primarily in Bermuda), which often invest in more illiquid assets. - These private-equity-influenced reinsurers have expanded their assets to over a $1 trillion, constituting about 4 percent of total life insurance assets globally. - Some insurers show greater exposure to illiquid investments and have solvency capital ratios weaker than the average, raising the risk that regulatory capital could be eroded much faster in scenarios of rapid increases in corporate defaults. - Embedded leverage in structured credit investments (such as CLOs and other asset-backed securities) constitutes a significant part of illiquid exposures and can aggravate losses in stress scenarios. - Pension funds and insurance companies face capital call liquidity pressures from private credit funds: - US pension funds had $69 billion in uncalled capital commitments as of the end of 2021. - US insurers had $23 billion in uncalled capital commitments as of the end of 2021. - Shifts toward defined-contribution and unit-linked products increase investor-facing exposure to private credit: - The share of unit-linked products of European insurers rose to 24 percent in June 2023 from 18 percent at the end of 2017. ### Competition with banks and underwriting standards - Private credit has expanded rapidly, intensifying competition with banks in syndicated loan markets and moving into larger corporate lending previously served by broadly syndicated loan or corporate bond markets. - Private credit funds have partnered with banks and other institutional investors on larger deals; industry commentary suggests underwriting standards and covenants have deteriorated in this segment. - A sharp rise in defaults in an economic downturn could produce significant losses for bank and nonbank lenders, particularly if credit risk is not properly priced when extended. ### Policy recommendations — overarching - Authorities should consider a proactive supervisory and regulatory approach to private credit given its rapid growth and interconnectedness. - Countries where private credit markets or exposures are material should undertake comprehensive reviews of regulatory requirements and supervisory practices. - Enhance reporting requirements and supervisory cooperation on cross-sectoral and cross-border bases to address data gaps and monitor vulnerabilities and spillovers. ### Credit risk supervision - Current prudential requirements for insurers and pension funds often do not consider the credit performance of underlying loans; requirements are frequently determined by legal form and rating rather than underlying loan performance. - Multiple layers of leverage make it harder for end investors to monitor underlying loan performance and collateral quality. - Recommendations: - Supervisors of insurers and pension funds with high private credit exposure should enhance monitoring of aggregate portfolio risks in private credit. - Insurance and pension supervisors should adopt some banking supervisory practices regarding credit risk, strengthening assessments and prudential requirements for credit exposures via structured products and direct lending. - Supervisors of private credit funds should closely monitor underwriting practices and credit risks, paying attention to potential systemic amplification via liquidity, leverage, and interconnectedness risks. ### Liquidity risk management - Liquidity mismatch risks in most private credit funds currently appear minimal, but growth of semiliquid structures raises concerns. - Many countries still permit open-end structures and frequent redemptions (sometimes daily) for funds investing in highly illiquid assets, creating potential liquidity mismatch. - Retailization increases the probability of investor redemption waves by investors unfamiliar with liquidity features. - Recommendations: - Securities regulators should adopt FSB and IOSCO recommendations on product design and liquidity management tools. - Private credit funds should create and redeem shares at lower frequency than daily or require long notice or settlement periods; authorities should consider requiring such funds to be closed-end. - Regulators should require stringent use of liquidity management tools and stress testing where product design permits significant liquidity mismatch. - For funds permitting retail participation, regulators should require comprehensive and clear disclosures on potential risks and redemption limitations. ### Leverage monitoring and management - Current reporting requirements are insufficient to assess leverage comprehensively across private credit, obscuring potential transmission of funding shortfalls from leverage providers. - Fund-level reporting may not capture complex, multi-layered leverage sources (subscription lines, leveraged special-purpose vehicles, feeder funds); reporting is fragmented across borders and sectors. - Recommendations: - Regulators should enhance risk management practices for supervised institutions providing leverage to private credit firms, including thematic reviews of liquidity management practices. - Stress exercises should include scenarios with tightening funding availability, markdowns of levered portfolios, and sudden drawdowns of credit facilities by corporate borrowers. - Fill data gaps by enhancing comprehensive reporting of leverage across the value chain, with close domestic and international cooperation. - Insurance and pension supervisors should address excessive risk taking by adjusting prudential requirements under the principle of “same activity, same risk, same regulation.” - If monitoring finds excessive leverage with systemic implications, securities regulators should consider regulatory tools such as leverage caps. ### Asset valuation risks - Regulatory frameworks for private credit funds focus on documentation, governance, and disclosures but generally do not specify asset valuation methodologies. - Managers’ valuation discretion leads to wide variation in valuation for the same asset across funds and entities; many institutional investors may lack incentive to challenge managers’ valuations. - IOSCO and the International Valuation Standards Council have engaged to identify approaches to enhance valuation quality. - Recommendations: - Supervisors should closely monitor valuation approaches and procedures of private credit funds, insurers, and pension funds. - Where valuation risks are heightened, strengthen regulation on valuation independency, governance, and frequency. - Consider mandating independent external valuations and audits, increasing frequency of external valuations and audits, and enhancing managers’ internal governance on valuation. - Improper or fraudulent valuation should prompt timely and strict actions, including enforcement. ### Interconnectedness and concentration risks - Risk taking in private credit is concentrated in some jurisdictions and subsectors. - Differences in regulatory requirements across sectors may encourage excessive exposures by insurance companies and pension funds; banks continue to provide leverage to private funds and affiliates. - Data gaps hinder monitoring of concentration and interconnectedness risks. - Recommendations: - Supervisors should fill data gaps and cooperate, including across borders, to monitor interconnectedness risks effectively. - The authority responsible for systemic risk monitoring should lead analyses of overall private credit trends and contagion risks. - Sector regulators should coordinate to address data gaps and gain better understanding of interconnectedness; cross-border cooperation is important where cross-border connections are significant. - International bodies (such as the Financial Stability Board and IOSCO) can support global data improvements. - If regulatory arbitrage across sectors and borders leads to excessive concentration, regulators should coordinate to ensure more consistent risk assessments and corresponding prudential treatments. ### Conduct and investor protection risks - Increasing retail participation raises conduct risks; regulatory frameworks have assumed investor sophistication and applied a light touch to investor protection. - Existing rules cover conflicts of interest in detail, but retailization and more frequent redemptions may exacerbate valuation and follow-on investment conduct concerns. - Recommendations: - Conduct supervisors should closely monitor conduct risks and enhance disclosure requirements, particularly on conflicts of interest. - Regulatory requirements for retail-facing activities should be stringent; supervisors should monitor distribution channels, marketing practices, and tailor suitability tests to prevent mis-selling. - Ensure retail investors (including unit-linked product holders and defined-benefit plan participants) fully understand higher credit and liquidity risks of private credit investments and redemption limitations. - Continue monitoring conflicts of interest in sponsored deals involving affiliated private debt and private equity managers, noting privately negotiated transactions lack market pricing. *Source: CHAPTER 2 ThE RISE ANd RISkS OF PRIVATE CREdIT (text - CHAPTER 2 ThE RISE ANd RISkS OF PRIVATE CREdIT).* ### CHAPTER 2 ThE RISE ANd RISkS OF PRIVATE CREdIT ### CHAPTER 2 ThE RISE ANd RISkS OF PRIVATE CREdIT ### Private credit in Asia — overview and market structure - Asia’s private credit market is growing rapidly but remains relatively small, totaling about $93 billion and accounting for about 5 percent of the global total. - Most investors in Asia are local and focus on smaller deals. - Global allocation to private credit in Asia remains limited at “0 to 5 percent of assets under management.” - Regions with highly liquid banking systems or those experiencing modest growth tend to have small or nonexistent private credit markets. - China, India, and Indonesia are highlighted as emerging examples; Australia and New Zealand have more mature markets with active participation from superannuation funds. - Many credit funds have investment teams based in Hong Kong SAR and Singapore; private credit in Korea has also grown steadily. - Several international alternative asset managers have launched Asia-focused funds; a recent industry survey showed many institutional investors in the region intend to increase allocations to private credit. ### Market segmentation and activities - Unlike in the United States, Asia’s private credit market primarily fills the gaps banks leave rather than financing relatively large transactions. - Private credit funds in Asia focus on: - acquisition financing, - asset-light businesses, - distressed debt, - financing the high-yield segment, which remains underdeveloped in many emerging markets and developing economies in the region. - About half of capital raised in Asia’s private credit market is for special situations, although direct lending is gaining share. - Most funds are closed-end structures: - 6 to 8 years for performing credit, - up to 10 years for distressed assets. - Covenants tend to be tighter in emerging market Asia because of weaknesses in investor protection. ### Geography and market participants - Major centers and contributors include: - Singapore, - Hong Kong SAR, - Australia, - India, - China, - Other jurisdictions in the region. - Mezzanine, direct lending, special situations and distressed debt, and venture debt are identified market segments. - Regional portfolios are fragmented by differences in currencies, regulatory environments, and investor protection regimes. *This box was prepared by Natalia Novikova.* --- ### CHAPTER 3 CYBER RISK: A GROWING CONCERN FOR MACROFINANCIAL STABILITY ### Key trends and magnitude - The number of cyberattacks has almost doubled since before the COVID-19 pandemic. - Since 2020, the aggregated reported direct losses from cyber incidents have amounted to almost $28 billion (in real terms). - Total direct and indirect costs of cyber incidents are estimated in external studies to range from 1 to 10 percent of global GDP. - Almost one-fifth of the reported cyber incidents in the past two decades have affected the financial sector. - Financial firms have reported direct losses totaling almost $12 billion since 2004 and $2.5 billion since 2020. - The number of cyberattacks surged after Russia’s invasion of Ukraine in February 2022. - Advisen-based data (as of February 22, 2024) and CISSM data show sharp increases in malicious incidents and affected records over 2004–23. - Growing digital connectivity (measured through internet use and international bandwidth) is associated with the rise in cyber incidents. ### Financial sector exposure and notable incidents - Banks are the most frequent targets among financial firms, followed by insurers and asset managers. - Financial institutions in advanced economies, particularly in the United States, have been more exposed to cyber incidents than firms in emerging market and developing economies. - Example operational impacts and responses: - JPMorgan Chase reported experiencing 45 billion cyber events per day while spending $15 billion on technology every year and employing 62,000 technologists, many focused on cybersecurity. - A ransomware attack on the US arm of the Industrial and Commercial Bank of China on November 8, 2023, temporarily disrupted trades in the US Treasury market. - A cyber incident at a financial institution or critical infrastructure can create macrofinancial stability risks via three channels: - loss of confidence, - lack of substitutes for critical services, - interconnectedness of technological and financial systems. ### Attention, insurance, and reporting trends - Business leaders and financial sector participants increasingly consider cyber insecurity a top risk to global macrofinancial stability. - Mentions of cyber risks have surged in firms’ earnings call reports in recent years. - The share of firms taking out cyber risk insurance relative to general liability insurance contracts has grown. - The total number of cyber incidents and losses may still be underestimated due to lagged reporting, firms’ reputation concerns, and lack of formal reporting requirements in many countries, particularly in emerging market and developing economies. ### Policy recommendations (from “Chapter 3 at a Glance”) - Strengthen cyber resilience of the financial sector by developing: - an adequate national cybersecurity strategy, - appropriate regulatory and supervisory frameworks, - a capable cybersecurity workforce, - domestic and international information-sharing arrangements. - Strengthen reporting of cyber incidents by financial firms to supervisory agencies to allow for more effective monitoring of cyber risks. - Supervisors should hold board members responsible for managing cybersecurity and promoting risk culture, cyber hygiene, and cyber training and awareness. - Financial firms should develop and test response and recovery procedures to remain operational in the face of cyber incidents. - National authorities should develop effective response protocols and crisis management frameworks to deal with systemic cyber crises. *Chapter authors: Rafael Barbosa, Benjamin Chen, Oksana Khadarina, Tatsushi Okuda, Ravikumar Rangachary, Enyu Shao, Felix Suntheim (lead), Tomohiro Tsuruga; guidance by Fabio Natalucci and Mahvash Qureshi; expert advisor René M. Stulz.* ### 1. Cybersecurity Keywords in Firms’ ### 1. Cybersecurity Keywords in Firms’ Earnings Calls ### Trends in attention and insurance - Firms’ earnings calls show mentions of words related to cybersecurity (examples: “cybersecurity,” “cyberattack,” “cyber threat,” “data loss,” “data integrity,” “data security,” “information theft,” “data breach,” “phishing,” “malware,” “ransomware”) measured per 10,000 sentences (chart scale 0–7; time span indicated from 2002:Q1 through 2023). - Cyber insurance coverage has risen along with insurance premiums (panel reference; no numeric premium value reported in the text). - Panel 2 metric: ratio of new cyber risk insurance contracts to new general liability contracts for large firms (annual revenues > $100 million) is shown alongside the median premium associated with cybersecurity insurance contracts (rate per million of insurance coverage in thousands of US dollars, left scale; percent, right scale). ### Central bank, regulator, and international attention - Central banks and financial regulators increasingly consider cyber risk in financial stability reports and supervisory stress tests (panel 3, green bars). - Key recognitions and actions: - European Systemic Risk Board, Financial Stability Oversight Council (US), and Bank of England’s Financial Policy Committee have recognized cyber risk as a source of systemic risk. - Bank of England launched cyber stress tests in 2022 and in March 2024 its Financial Policy Committee published a macroprudential approach to operational resilience considering cyber risks. - The European Central Bank plans a thematic stress test on banks’ cyber resilience in 2024. - Standard-setting and international bodies’ outputs (panel 3, red line) include: - Basel Committee on Banking Supervision principles for operational resilience (2021). - Financial Stability Board: convergence in cyber incident reporting, practices for incident response and recovery, maintaining the cyber lexicon, and work to design a format for incident reporting exchange (FIRE); toolkit to enhance third-party risk management and oversight (FSB 2023). - Committee on Payments and Market Infrastructures and IOSCO guidance on cyber resilience; IOSCO outsourcing principles (2016, 2021); International Association of Insurance Supervisors operational resilience report (2023); G7 cyber expert group papers (2016, 2017, 2018, 2020, 2022a, 2022b). ### Dataset and scope used in the chapter - The chapter relies on a comprehensive firm-level data set on more than 170,000 cyber events reported by approximately 90,000 companies globally. - Advisen Cyber Loss Data cover 40 advanced and 125 emerging market countries; data are compiled from publicly verifiable sources (news media, governmental and regulatory sources, state data breach notification sites, and third-party vendors). ### Transmission channels from cyber incidents to macrofinancial stability - Three key channels: - Loss of confidence: service disruption, compromised data integrity/confidentiality, data/systems unavailable → deposit outflows (“cyber runs”), trading halts, asset price volatility, decline in domestic credit provision, disruption to payment services (for example, remittances). - Lack of substitutes for critical services: disruption of FMIs, third-party IT service providers, cloud providers → rapid materialization of financial stability risks. - Interconnectedness: technological linkages (multiple firms using same software) and financial linkages (interbank market, settlement systems, common asset holdings) → propagation of shocks across the financial system. - Nonfinancial sector incidents can undermine financial stability by disrupting critical infrastructure (for example, electricity grids) or government functioning (for example, management of government debt), raising credit or liquidity risks and sovereign risk premia. ### Emerging technologies and amplification of cyber risks - AI and GenAI: - AI can improve detection of risk and fraud but can also be exploited for malicious activities (example references: Boukherouaa and others 2021; Boukherouaa and Shabsigh 2023). - Survey of senior cybersecurity experts at large US companies: 46 percent expect GenAI to make organizations more vulnerable to attacks and 85 percent believe that recent attacks have been powered by GenAI (Deep Instinct 2023). - Example deepfake scam: January 2024, scammers tricked employees of a multinational firm into transferring HK$200 million (US $26 million) by creating a group video call using deepfake technology. - As of June 2023, there were seven recorded instances in Advisen related to AI companies losing data after a cyber incident. - Quantum computing risk: potential ability to quickly break encryption algorithms used in financial systems could magnify losses from cyberattacks (references: Sedik and others 2021; Office of the President of the United States 2022). ### Losses to firms from cyber incidents (reported direct losses) - Median reported direct loss to a firm from all cyber incidents: $0.4 million. - Three-fourths of reported losses are below $2.8 million. - Losses from malicious incidents are more than five times as large as those from nonmalicious incidents; malicious incidents around $0.5 million (text wording preserved). - Most cyber extortions or malicious data breaches have resulted in losses of up to $12 million; distribution is heavily skewed with some incidents imposing losses of hundreds of millions of US dollars. - Reported direct losses at central institutions: number of incidents at such institutions has been relatively stable at 10 to 20 incidents per year (Online Annex Figure 3.1.1, panel 3). ### Extreme loss estimates (generalized extreme value approach) - Method: generalized extreme value distribution estimated using data of losses caused by cyber incidents from 2012 to 2021, controlling for country characteristics (GDP and information technology infrastructure); sample conditional on countries with more than 10 incidents per year. - Findings: - The median maximum loss in a country in a given year has more than doubled since 2017 to $141 million in 2021, equivalent to about 50 percent of the average firm’s operating income. - Once every 10 years, a cyber incident is expected to result in a $2.5 billion loss, about 800 percent of the average firm’s operating income. - Financial firms: estimated maximum losses in a year are about $152 million in a median year and up to $2.2 billion once every 10 years. ### Stock market reaction and broader economic costs - Equity-market-based estimates capture direct and indirect costs because stock prices are forward looking. - Empirical result: when controlling for market movements and other factors, stock prices do not on average react strongly to cyber incidents (chart reference: Figure 3.6, panel 1). - Stock returns do seem to respond to cyberattacks on average: firms’ stock returns fall by 0.1 percentage points to 0.2 percentage points, although the effect is not statistically (text truncated; exact statistical qualification preserved as in source). - Reported direct losses may understate total economic costs because firms typically do not report indirect losses such as lost business, reputational damage, or investments in cybersecurity. ### Policy relevance and interventions noted - Private incentives to address cyber risks may differ from the socially optimal level of cybersecurity; public intervention may be necessary (references: Kopp, Kaffenberger, and Wilson 2017; Kashyap and Wetherilt 2019). - The chapter assesses financial stability implications of cyber risks and discusses policy options to mitigate such risks, including: incorporating cyber risk into supervisory stress tests and financial stability reports, standard-setting guidance to strengthen cyber resilience, convergence in incident reporting, effective practices for incident response and recovery, and tools to enhance third-party risk management and oversight (examples cited from Basel Committee, FSB, IOSCO, IAIS, CPMI, G7 outputs). *Source: Chapter 3, "Cyber Risk: A Growing Concern for Macrofinancial Stability," Global Financial Stability Report, International Monetary Fund, April 2024.* ### 1. Distribution of Direct Firm Losses, by Incident Type, 2012–23 ### 1. Distribution of Direct Firm Losses, by Incident Type, 2012–23 ### Distributional findings and extreme-loss estimates - Panel summaries indicate substantial right-skew in direct firm losses: medians and interquartile ranges are shown for losses greater than zero; whiskers represent maximum losses (excluding outliers). - The probability of a firm experiencing an extreme loss of $2.5 billion as a result of a cyber incident is about once every 10 years. - Estimated maximum annual loss (all firms): density functions show nontrivial probability mass up to $2,500 million (panel range displayed 0–2,500 Millions of US dollars). - Estimated maximum annual loss (financial firms): for financial firms, an extreme loss could be about $2.2 billion, up from about $300 million in 2017. - Panel 2 country/group distribution shows country-level losses (dots) for CAN, European Union, AUS, GBR, IND, JPN, SGP, USA and “All” with scale up to 3,000 Millions of US dollars (axis labels include 0 500 1,000 1,500 2,000 2,500 3,000). ### Market-value effects versus reported direct losses - At the firm-incident level, the loss in market capitalization was larger than the reported direct loss in about 90 percent of cases. - Stock market reactions correspond to losses of up to $90 million of firms’ market value and are substantially larger than firms’ reported direct losses. - Abnormal return event-study results: - All cyber incidents: abnormal returns generally not statistically significant on average (panel 1). - Malicious incidents: associated with a drop in equity prices of 0.1 percentage points to 0.2 percentage points (panel 2). - Malicious incidents, small firms: losses are larger and more significant for smaller firms (panel 3). Small firms are defined as firms with total assets below the 25th percentile of the sample distribution. ### Sample and data notes - Panels 3 and 4 (maximum-annual-loss densities) show estimated posterior density functions of the highest loss of all firms and financial firms in a year. - Sources cited in figures: Advisen Cyber Loss Data; Capital IQ; and IMF staff calculations. --- ### 2. Drivers of Cyber Incidents ### Broad determinants (firm and country level) - Econometric analysis (probit model on 16,945 firms in 42 countries, 2014–2022) identifies key drivers: - Telecommunications infrastructure: moving from the 10th percentile to the 90th percentile of the United Nations’ Telecommunication Infrastructure Index raises the likelihood of a cyber incident from 0.5 percent to more than 2 percent. - Mean likelihood of experiencing a cyber incident in a given year in the sample is 1.2 percent. - Geopolitical tensions (Geopolitical Risk Index) similarly increase the likelihood of cyber incidents. - Firm size and asset intangibility raise the probability of experiencing a cyber incident. - Firms in countries with more developed cyber legislation (Maplecroft Cyber Legislation Index) are less likely to be targets. ### Telework effects and governance - Teleworkability and pandemic shift: - Firms that shifted to telework during the COVID-19 pandemic (especially those that were only moderately teleworkable before) experienced an increase in cyber incidents. - Firms in sectors with high telework propensity before the pandemic were more likely to have cyber incidents pre-pandemic but saw a decline in probability after the pandemic. - Cyber governance differences: - Firms with high pre-pandemic teleworkability had stronger governance arrangements: more board members with cybersecurity expertise, presence of cybersecurity and data privacy policies, and higher scores on a privacy data management index. - Firms appear to improve governance during and after the pandemic along these dimensions. - Learning effect: - The probability of a cyberattack is 1.2 percentage points lower for firms that experienced an attack in the past two years. - Evidence indicates firms increase the number of board members with cyber expertise after an incident. --- ### 3. Cyber Threat Landscape in the Financial Sector ### Exposure and concentration - Financial firms handle large amounts of customer data and transactions, increasing attractiveness to attackers. - Banks account for about half of the financial sector’s cyber incidents; financial-sector incidents form a sizeable share of all cyber incidents. - Large banks show lower Bitsight cybersecurity ratings relative to some peers, suggesting higher vulnerability despite potentially more sophisticated cybersecurity practices. - Bitsight Cybersecurity Ratings range: 250 to 900 (higher values indicate lower risk). ### Three amplifying characteristics of financial-sector vulnerability - High market concentration: - Market concentration of banks is high at country and global levels for critical services (payment services, custody banking), increasing systemic vulnerability if those services are disrupted. - Dependence on common third-party IT providers: - More than 50 percent of IT providers of global systemically important banks supply their products and services to two or more G-SIBs, indicating widespread overlap. - IT providers of about 20 percent of insurers and 25 percent of asset managers similarly supply services to two or more institutions in their groups. - Sectoral spillovers have occurred: cyber events originating in IT have affected multiple other sectors. - Interconnectedness and contagion risk: - High interconnectedness among financial institutions can exacerbate contagion; a cyber incident can ripple through payment processing, liquidity positions, and trust in the financial system, with potential to trigger market selloffs or runs. ### Operational and liquidity risks - Cyber incidents could pose liquidity risks for banks through depositor behavior: - Empirical analysis on US banks (2014–22) shows modest and somewhat persistent deposit outflows after a cyberattack. - Smaller banks are more susceptible to deposit outflows after cyber incidents; smaller banks are defined as those with deposit holdings below the two-thirds percentile. - Examples of third-party provider incidents cited in text: - Ransomware attack on Trellance (December 2023) caused outages at 60 US credit unions. - NotPetya infection linked to an accounting software update in 2017 spread across many firms. - SolarWinds software update in 2020 exposed thousands of customers to potential cyberattack. --- ### 4. Key quantitative figures and model notes (as presented) - Extreme-loss probability: $2.5 billion extreme loss ~ once every 10 years. - Financial-firm extreme loss estimate: about $2.2 billion (up from about $300 million in 2017). - Mean annual firm probability of a cyber incident in sample: 1.2 percent. - Telecommunication Infrastructure Index example: 10th → 90th percentile raises incident likelihood from 0.5 percent to more than 2 percent. - Market-value hit: up to $90 million of firms’ market value in event studies. - Event-study sample sizes: 836 (all incidents) and 644 (malicious incidents). - At the firm-incident level: market-cap loss larger than reported direct loss in about 90 percent of cases. - Bitsight ratings range: 250–900. - IT provider overlap: >50 percent of IT providers for G-SIBs serve two or more G-SIBs; ~20 percent of insurers’ IT providers and ~25 percent of asset managers’ IT providers serve two or more institutions in their groups. - Deposit-susceptibility definition: smaller banks = deposit holdings below the two-thirds percentile. *Sources: Advisen Cyber Loss Data; Capital IQ; and IMF staff calculations.* ### 2. Response of Wholesale and Retail Deposits to a Malicious Cyber ### 2. Response of Wholesale and Retail Deposits to a Malicious Cyber Incident, Deviation from the Baseline, US Smaller Banks, 2014–22 ### Key empirical findings on deposit outflows and bank liquidity - Retail and wholesale deposits at smaller banks tend to decline by about 5 percent in cumulative terms some six quarters after a malicious cyber incident. - The sample period for the quarterly deposit-response analysis is the first quarter of 2014 to the fourth quarter of 2022. - Panels 3 and 4 (figures referenced in the source) cover a sample of 88 large banks included in the 2022 assessment of global systematically important banks. - The text also reports results across a sample of 80 large global banks showing large variation in reverse outflow rates for unsecured wholesale and retail deposits. - When facing 25 percent outflows of wholesale (retail) deposits, the liquidity coverage ratios of about 20 (60) percent of banks would drop below 100 percent (the regulatory requirement). - Definition: the “reverse outflow rate” represents outflows from deposits with a maturity of less than 30 days (or undetermined maturity). - In the hypothetical reverse outflow analysis, banks are assumed to sell their high-quality liquid assets in response to deposit outflows. ### Link between liquidity vulnerability and cybersecurity - Banks that are potentially more exposed to liquidity risk from outflows of wholesale and retail deposits also tend to have lower median cybersecurity ratings, indicating co‑exposure to cyber and liquidity risks among relatively large banks. - Malicious incidents considered include cyber extortion, malicious data breach, identity fraudulent use/account access, network and website disruption, phishing, spoofing, social engineering, and skimming and physical tampering. ### Fintech, crypto, and evolving cyber risks - The rapid evolution of fintech increases cyber risks through greater digitalization and interconnectedness. - Decentralized finance has grown rapidly since 2020; cyberattacks on decentralized finance (which employs smart contracts) have been common and often caused large losses. - Central bank digital currencies have not experienced known successful cyberattacks, but may present unknown and unpredictable risks because they may rely on novel technologies, such as distributed ledger technology, for which there is no widely accepted cybersecurity framework. - Hackers have frequently targeted crypto assets, and cyberattacks on crypto exchanges have increased; increasing integration of crypto assets into the financial system could pose risks, for example from cyber runs on fiat-backed stablecoins. ### Cybersecurity preparedness across countries (IMF survey and indices) - IMF survey of central banks and supervisory authorities: covered 74 emerging market and developing economies (originally conducted in 2021 with a follow-up in 2023). - Only 47 percent of the surveyed countries had formulated a national and financial-sector-focused cybersecurity strategy. - About half of surveyed jurisdictions had implemented dedicated cybersecurity regulations; 54 percent had adopted data privacy laws. - Survey findings on supervisory and testing practices: - Half of the surveyed emerging market and developing economies reported they have specialized cyber risk supervision units. - 72 percent mandate regular cyber tests and exercises, with 22 percent actively managing such tests. - Almost half of surveyed jurisdictions have the power to examine third-party service providers. - 27 percent include cyber risk in their stress test programs. - Only 8 percent of jurisdictions had developed a cyber map identifying main technological and service connections between financial institutions. - Only 28 percent report that financial entities systematically share information and intelligence with one another. - About 50 percent of central banks and supervisory authorities share data with other jurisdictions (this did not increase). - Only 49 percent of countries have cybersecurity incident reporting regimes. - The Cybersecurity Preparedness Index: - Ranges from 0 to 5 (5 represents the highest level of cyber preparedness). - The average score across emerging market and developing economies in 2023 is 3 (slightly up from 2.8 in 2021). - Half of the countries score below 3, and more than one-fifth score below 2. - Regional pattern: cyber preparedness is relatively lower across Africa and Asia; Latin America shows improvement. - About two-thirds of recent IMF capacity-building initiatives related to regulatory and supervisory aspects of cybersecurity have focused on Africa and Asia. ### Limitations and empirical context - Limited empirical evidence exists on possible outflow rates after a severe cyber incident; historical examples are sparse (example: a 10 percent retail deposit run in Bulgaria on June 27, 2014). - Liquidity requirements to date appear to have generally been sufficient to address historically modest deposit outflows after cyber incidents (see referenced figure panels). - Regulatory capital requirements take operational risk (including cyber risk) into account, but liquidity requirements are not primarily designed on the basis of stress scenarios that include cyber incidents. ### Policy recommendations and supervisory priorities - Establish adequately skilled cyber risk supervision units to conduct on-site assessments and collect relevant data for off-site supervision. - Map financial and technological connections to identify systemic risks from interconnectedness and concentrations in third-party service providers. - Encourage cyber “maturity” among financial firms, including: - Board-level access to cyber expertise. - A three-lines-of-defense approach (business, risk management, audit). - Cyber hygiene measures such as anti-malware and multifactor authentication. - Cyber training and awareness. - Strengthen reporting of cyber incidents to supervisory agencies and prioritize global data collection and information sharing among financial sector participants. - Require firms to develop and test response and recovery procedures to remain operational amid cyber incidents; identify critical business services and ensure tested disaster recovery plans and crisis management frameworks are in place. - Monitor cyber-related liquidity risk in stress assessments and ensure central bank business continuity contingency plans factor in cyber risk, including liquidity provision in a crisis. *Source: IMF staff analysis in Chapter 3, “CYBER RISK: A GROWING CONCERN FOR MACROFINANCIAL STABILITY,” Global Financial Stability Report: The Last Mile: Financial Vulnerabilities and RiskS (April 2024).* ### CHAPTER 3 CYBER RISk: A GROwING CONCERN FOR MACROFINANCIAL STABILITY ### CHAPTER 3 CYBER RISk: A GROwING CONCERN FOR MACROFINANCIAL STABILITY ### Cross‑border coordination and incident reporting - Cyberattacks often emanate from outside a financial firm’s home country and proceeds can be routed across borders, impeding accountability and recovery. - Cross‑border coordination is crucial to mitigate cyber risks; developing international protocols on cooperation is essential. - Reporting of cyber incidents needs to be harmonized across countries to facilitate information sharing across borders. - The Financial Stability Board (2023) has issued recommendations to achieve greater convergence in cyber incident reporting and is designing a format for incident reporting exchange (FIRE) to promote common information elements and requirements for incident reporting. ### National cybersecurity frameworks and institutional arrangements - Governments need to facilitate institutional arrangements to preserve cybersecurity. - Elements of national cybersecurity strategy mentioned: - Criminalize cyberattacks through cybersecurity laws. - Identify critical infrastructure. - Establish computer incident response teams. - Spread public awareness on cyber hygiene. - Cyber response and recovery objectives for financial market infrastructures include meeting a two-hour recovery time in the event of an extreme cyberattack scenario; some infrastructures lack plans to meet this objective. ### Cyber insurance: uptake, limits, and potential effects - Firms are increasingly relying on cyber insurance to protect against financial losses from cyber incidents. - Coverage limits remain low: - About 60 percent of insurance policies in the United States have coverage limits below $1 million. - Almost all have coverage below $10 million. - Limited data on total losses, attempted attacks that did not materialize, and key risk indicators (such as investments in cybersecurity) may contribute to restricted availability of cyber insurance. - Availability of insurance that covers ransomware could facilitate ransom payments and thereby make attacks more attractive. ### IMF activities, toolkits, and international policy engagement - The IMF helps member countries conduct cyber risk assessments and strengthen cybersecurity frameworks for the financial sector through: - Financial Sector Assessment Programs. - Capacity building: training courses, workshops, and technical assistance missions. - The IMF has developed the Cyber Risk Supervision Toolkit comprising: - Model regulation. - A risk assessment tool. - A supervisory process document. - A supervisory manual. - The IMF contributes to international cyber-related policy efforts with standard‑setting bodies such as the Basel Committee on Banking Supervision, the Financial Stability Board, and the International Organization of Securities Commissions. ### Financial market infrastructures (FMIs): role, vulnerabilities, and incidents - FMIs include payment systems, central securities depositories, securities settlement systems, central counterparties, and trade repositories; they facilitate clearance and settlement of payments, securities, derivatives, and other transactions. - FMIs conduct significant transaction volumes; cyberattacks could affect the entire financial system. - Notable outages and disruptions: - In 2020, a software error disrupted the European Central Bank’s TARGET2 system for approximately 11 hours, causing a complete failure of all payment transactions in the system; backup systems and contingency modules were also initially unable to function. - In 2021, an operational error caused nearly all US Federal Reserve Board services (such as Fedwire and FedACH) to be unavailable or significantly limited for 3 hours. - In December 2023, a cyberattack disrupted the national payment system in Lesotho, preventing local banks from conducting interbank transactions in the country. - Dependence on critical service providers (IT infrastructures, telecommunications) could increase cyber risk. - SWIFT is used by more than 11,000 financial institutions in more than 200 countries; fraudulent payment messages routed through SWIFT have been a common attack vector, often targeting banks in emerging market and developing economies. ### SWIFT‑related attacks: cases and mitigation - Bangladesh Bank heist (February 2016): - Hackers sent fraudulent transfer requests to the Federal Reserve Bank of New York after stealing credentials. - Total transfer requests: $850 million (most blocked); approximately $101 million transferred to foreign bank accounts; $81 million later funneled through casinos. - Banco de Chile (May 2018): - Suffered a $10 million theft after cyberattacks on 9,000 computers and 500 servers obscured a fraudulent SWIFT transfer. - To secure accounts, the bank disconnected workstations and suspended operations at 400 branches for two weeks. - SWIFT response: - Customer Security Controls Framework established in 2016 with three objectives: “Secure the environment,” “Know and limit access,” and “Detect and respond.” - The SWIFT Customer Security Controls Framework v2024 contains 32 security controls, 25 of which are mandatory. - Since 2019, SWIFT‑related cyberattacks have been less successful, suggesting the framework has been effective and highlighting the importance of coordinated efforts to improve users’ preparedness. ### Cyber risk for crypto assets and stablecoins - Crypto assets are increasingly targeted by cyberattacks, frequently focusing on crypto exchanges, platforms, and hot wallets; major crypto assets targeted include bitcoin and ether. - Historical cyber incidents cited: - 2014: Mt. Gox lost 850,000 bitcoins because of hacks. - 2016: $60 million in ether stolen from the DAO. - 2021: More than $600 million taken from Poly Network. - 2017: WannaCry ransomware demanded bitcoin payments. - 2021: Colonial Pipeline paid nearly 75 bitcoins (equivalent to $4.4 million) for a decryption tool. - Ransomware activity has greatly increased since 2019; ransomware attackers frequently receive crypto value (figure context). - Stablecoins: - Stablecoins represent about 10 percent of the crypto market. - Most stablecoins are fiat‑backed and hold assets such as US Treasuries, money market funds, and bank deposits. - Fiat‑backed stablecoin reserves have high concentration; for example, Tether represents 70 percent and USD Coin represents 18 percent of reserves of fiat‑backed stablecoins (December 2023, panel 3). - The total amount of fiat‑backed stablecoin reserves is comparable to the average daily transaction volume of US Treasury bills—about $120 billion in 2022. - Cyber incidents can cause depegging and run risk: - August 2022: Hackers exploited a bug in a newly deployed liquidity pool, minting 3 billion Acala USD and causing Acala USD to depeg from the US dollar, with substantial outflows from the crypto‑backed stablecoin protocol. - The Acala USD run did not result in significant spillovers to the financial system. - Institutional investors and some large banks have nontrivial crypto exposures (direct and through assets under custody); monitoring crypto exposures is warranted to preserve financial stability. - Cyberattacks on crypto assets may affect prices by: - Placing a large amount of stolen cryptocurrency on the market causing short‑term oversupply. - Disrupting market infrastructures. - Adversely affecting investor sentiment through theft of personal financial information. - Regulatory developments: - On January 10, 2024, the Securities and Exchange Commission approved the listing and trading of a number of spot bitcoin exchange‑traded products. - In December 2022, the Basel Committee on Banking Supervision finalized standards for banks on monitoring and managing exposures to crypto assets and urged national regulators to implement the standards by 2025. ### Cyber resilience testing and preparedness of FMIs - International guidance on FMI cyber resilience includes CPMI‑IOSCO (2016) guidance on establishing and operationalizing a cyber‑resilience framework. - An assessment (CPMI‑IOSCO 2022) of 37 FMIs from 29 jurisdictions (self‑assessment questionnaire) found that some FMIs lack cyber response and recovery plans to meet the two‑hour recovery objective and many do not conduct cyber resilience testing to the standards set by the guidance. - The IMF has received several requests for capacity development and training on cyber risk of FMIs since 2022. *Italic: Source — CHAPTER 3 CYBER RISk: A GROwING CONCERN FOR MACROFINANCIAL STABILITY (text - CHAPTER 3 CYBER RISk: A GROwING CONCERN FOR MACROFINANCIAL STABILITY).* ### CHAPTER 3 CYBER RISk: A GROwING CONCERN FOR MACROFINANCIAL STABILITY ### CHAPTER 3 CYBER RISK: A GROWING CONCERN FOR MACROFINANCIAL STABILITY ### Major thematic focus - Cyber risk as a systemic and macrofinancial stability concern for the financial sector. - Emphasis on operational resilience, third-party risk management, ransomware resilience, and the role of cybersecurity governance and spending. - Coverage of evolving threats including ransomware, supply-chain attacks (SolarWinds), and implications of emerging technologies (Generative AI, quantum computing). - Cross-cutting policy and supervisory frameworks referenced for financial-sector cyber risk management. ### Key referenced studies, reports, and official documents (by topic) - Generative AI and cybersecurity - Deep Instinct. 2023. “Generative AI and Cybersecurity: Bright Future or Business Battleground?” Voice of SecOps, 4th ed. - Microsoft. 2023. “Microsoft Digital Defense Report.” Redmond, WA. - Sedik, Tahsin, Majid Malaika, Michel Gorbanyov, and Jose Deodoro. 2021. “Quantum Computing’s Possibilities and Perils.” IMF Blog, September. - Financial-sector cyber risk analysis and academic research - Duffie, Darrell, and Joshua Younger. 2019. “Cyber Runs.” Hutchins Center Working Paper 51, Brookings Institution. - Eisenbach, Thomas M., Anna Kovner, and Michael Junho Lee. 2022. “Cyber Risk and the US Financial System: A Pre-Mortem Analysis.” Journal of Financial Economics 145 (3): 802–26. - Eisenbach, Thomas M., Anna Kovner, and Michael Junho Lee. 2023. “When It Rains, It Pours: Cyber Risk and Financial Conditions.” Staff Report 1022, Federal Reserve Bank of New York. - Florackis, Chris, Christodoulos Louca, Roni Michaely, and Michale Weber. 2023. “Cybersecurity Risk.” Review of Financial Studies 36 (1): 351–407. - Jamilov, Rustam, Hélène Rey, and Ahmed Tahoun. 2023. “The Anatomy of Cyber Risk.” NBER Working Paper 28906. - Kopp, Emanuel, Lincoln Kaffenberger, and Christopher Wilson. 2017. “Cyber Risk, Market Failures, and Financial Stability.” IMF Working Paper 2017/185. - Ma, Yiming, Yao Zeng, and Anthony Zhang. 2023. “Stablecoin Runs and the Centralization of Arbitrage.” Unpublished. - Supervision, standards, and policy toolkits - Financial Stability Board. 2023. “Final Report on Enhancing Third-Party Risk Management and Oversight–A Toolkit for Financial Institutions and Financial Authorities.” - Group of Seven (G7) series: - 2016. “G7 Fundamental Elements of Cybersecurity for the Financial Sector.” - 2017. “G-7 Fundamental Elements for Effective Assessment of Cybersecurity in the Financial Sector.” - 2018. “G-7 Fundamental Elements for Threat-LED Penetration Testing.” - 2020. “G-7 Fundamental Elements of Cyber Exercise Programmess.” - 2022a. “G7 Fundamental Elements for Third-Party Cyber Risk Management in the Financial Sector.” - 2022b. “G7 Fundamental Elements of Ransomware Resilience For The Financial Sector.” - International Association of Insurance Supervisors (IAIS). 2016. “Issues Paper on Cyber Risk to the Insurance Sector.” - IAIS. 2023. “Issues Paper on Insurance Sector Operational Resilience.” - International Organization of Securities Commissions (IOSCO). 2021. “Principles on Outsourcing Final Report.” - SWIFT. 2023. “Swift Customer Security Controls Framework v2024.” - Regulatory and oversight reports - Financial Stability Oversight Council (FSOC). 2023. “Annual Report.” US Department of the Treasury. - US Department of the Treasury. 2022. “Annual Report.” - US Department of the Treasury. 2023. “The Financial Services Sector’s Adoption of Cloud Services.” - Office of the President of the United States. 2022. “Memorandum on Improving the Cybersecurity of National Security, Department of Defense, and Intelligence Community Systems.” - US Government Accountability Office (US GAO). 2021. “SolarWinds Cyberattack Demands Significant Federal and Private-Sector Response.” - Industry surveys and market assessments - Ernst & Young/Institute for International Finance (EY/IIF). 2024. “Managing through Persistent Volatility: The Evolving Role of the CRO and the Need for Organizational Agility.” 13th Annual EY/IIF Global Bank Risk Management Survey. - Moody’s. 2023. “Cyber Budgets Increase, Executive Overview Improves, but Challenges Lurk under the Surface.” Special Report. - Statista. 2022. “Cybercrime Expected to Skyrocket in Coming Years.” - World Economic Forum (WEF). 2023. “The Global Risks Report 2023.” - Firm-level impacts, IT investment, and market responses - Healey, Jason, Patricia Mosser, Katheryn Rosen, and Adriana Tache. 2018. “The Future of Financial Stability and Cyber Risk.” Brookings Institution. - Kamiya, Shinichi, Kang Jun-Koo, Kim Jungmin, Andreas Milidonis, and René M Stulz. 2021. “Risk Management, Firm Reputation, and the Impact of Successful Cyberattacks on Target Firms.” Journal of Financial Economics 139 (3): 719–49. - He, Zhiguo, Sheila Jiang, Douglas Xu, and Xiao Yin. 2023. Rev. ed. “Investing in Lending Technology: IT Spending in Banking.” NBER Working Paper 30403. - Modi, Kosha, Nicola Pierri, Yannick Timmer, and Maria Soledad Martinez Peria. 2022. “The Anatomy of Banks’ IT Investments: Drivers and Implications.” IMF Working Paper 2022/244. - Milunovich, George, and Seung Ah Lee. 2022. “Measuring the Impact of Digital Exchange Cyberattacks on Bitcoin Returns.” Economics Letters 221 (C): 110893. - Huang, Xiaoran, Juan Lin, and Peng Wang. 2022. “Are Institutional Investors Marching into the Crypto Market?” Economics Letters 220 (C): 110856. - Classification, measurement, and supervisory practice - Harry, Charles, and Nancy Gallagher. 2018. “Classifying Cyber Events.” Journal of Information Warfare 17 (3): 17–31. - Gaidosch, Tamas, Frank Adelmann, Anastasiia Morozova, and Christopher Wilson. 2019. “Cybersecurity Risk Supervision.” IMF Departmental Paper 2019/014. ### Implicit policy and supervisory priorities signaled by the references - Strengthening third-party risk management and oversight frameworks, including adoption of toolkit approaches (Financial Stability Board). - Emphasizing ransomware resilience and incident-response practices (G7 2022b; industry reports). - Enhancing cyber-exercise programs and threat-led testing to assess preparedness (G7 2018; G7 2020). - Aligning prudential supervision with cyber risk realities, incorporating operational resilience and stress-testing (ECB 2022; FSOC 2023; IMF working papers). - Monitoring technological trends (Generative AI, cloud adoption, quantum computing) and their security implications for financial stability. *Source: CHAPTER 3 CYBER RISK: A GROWING CONCERN FOR MACROFINANCIAL STABILITY (text - CHAPTER 3 CYBER RISk: A GROwING CONCERN FOR MACROFINANCIAL STABILITY)* --- _Source: https://www.imf.org/-/media/files/publications/gfsr/2024/april/english/text.pdf_