## _071613b

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---

### GLOBAL LIQUIDITY: THE CONCEPT
- Interest in global liquidity has increased in recent years, linked to the global financial crisis and to spillovers from prolonged monetary accommodation in advanced economies.
- Common element in most definitions: the “ease of financing” at a particular point in time, shaped by the macroeconomic environment, the stance of monetary policies, financial regulation, financial innovation, and risk appetite.
- Emphasis on ease of financing from international sources, reflecting both availability of funds at a national level and the extent of international financial integration.
- Price-based indicators highlighted:
  - Policy rates, secured and unsecured money markets, swap and bond markets, spreads between market segments.
  - Implied market volatility measures (such as VIX for the S&P 500) as proxies for investor risk appetite and willingness to provide funding.
- Limitations of price indicators and role of quantity indicators:
  - Price indicators may not tell the whole story when markets are not complete.
  - Quantity measures capture how price conditions translate into actual activity and potential risk.
  - A given price can be consistent with a range of liquidity outcomes because of distortions, frictions, and limits to arbitrage.
  - During rapid innovation or turmoil, the relation between outcomes and prices can be unusually volatile; quantity indicators can provide useful additional information.
  - Example: in the run up to the global financial crisis, global policy rates rose but financial innovation and rising leverage produced easier liquidity; post-crisis, interest rates fell sharply while quantity of financing to households and firms was much reduced.
- Juxtaposing price and quantity dynamics provides a richer framework: risk exposures often highest when funding prices are lowest; combined analysis helps identify supply and demand drivers of liquidity.

### QUANTITY INDICATORS: ASSETS
- Asset-based indicators focus on credit aggregates, well covered by BIS international banking statistics.
- CGFS (2011) view: global liquidity = i) official liquidity (created by central banks through conventional and unconventional policies) + ii) private liquidity (generated by financial institutions through credit creation).
- Empirical emphasis:
  - Internationally, private liquidity has tended to dominate official liquidity.
  - Most global liquidity is created privately via international cross-border credit extension.
  - Private cross-border credit accounts for a sizable share of overall credit worldwide, especially in eastern Europe and Latin America.
- Rationale:
  - Credit-based indicators capture the end of the financial-intermediation chain and are tied to literature linking credit growth to financial vulnerabilities.

### QUANTITY INDICATORS: LIABILITIES
- Traditional proxies: pooled monetary aggregates and money-supply measures, focusing on the multiplier from narrow money to broad money.
- Structural shift:
  - Intermediation has moved away from deposit-based funding toward wholesale funding, securitization, and collateral-based funding, weakening standard monetary aggregates as measures of global liquidity.
- Emphasis on funding environment and liabilities:
  - Distinction between core liquidity and noncore liquidity:
    - Core liquidity: traditional deposit-based funding (benefits from access to explicit public backstop).
    - Noncore liquidity: collateral-based funding associated with the shadow banking system (typically lacks explicit public backstop).
- Fund staff preliminary estimate (focused on liabilities of institutions in the United States, United Kingdom, euro area, and Japan):
  - Core global liquidity: sum of total resident deposits in commercial banks and other depositary corporations.
  - Noncore global liquidity: sum of a wide variety of debt securities and nonresident deposits (including money market mutual fund shares/units; deposits by nonresidents; debt securities, including asset-backed commercial paper; asset–backed securities, including agency and non-agency mortgage-backed securities; and loans).
- Empirical behavior:
  - Global liquidity has more than doubled since 1999 in nominal terms.
  - Two thirds of this increase is attributable to noncore liquidity, particularly since 2004.
  - In the lead up to the global financial crisis, noncore was the key driver of acceleration in global liquidity, while core funding (relative to GDP) increased only gradually.
  - The United States dominates noncore liquidity; the U.S. noncore measure closely mirrors New York Fed efforts to measure the U.S. shadow banking sector.

### RECENT DEVELOPMENTS
- Post-crisis policy responses:
  - Policy partly aimed at addressing a general tightening of “private” global liquidity.
  - Looser “official” liquidity through monetary easing partly compensated for a dramatic tightening of “private” liquidity.
  - Crisis caused a dramatic collapse in noncore liquidity as risk aversion rose and collateral-based markets froze, forcing shadow banks to scale back.
  - Policy role included boosting funding available to traditional “core” banks and using unconventional measures to support specific market segments and alleviate tail-risk fears.
- Divergence between price and quantity indicators:
  - Price-based indicators suggest post-crisis easy funding, but quantity indicators have not shown a general upturn.
  - From the asset side: collapse in cross-border credit flows over 2008–09; since 2010 international claims effectively stagnant through late 2013.
  - From the funding side: noncore liquidity continued to shrink as a proportion of GDP with no sign of rebound (data subject to longer lags).
  - Cross-country differences: after a sharp drop in 2009, cross-border credit growth resumed in the Asia-Pacific region and Latin America, but remained largely negative in Emerging Europe.

### SURVEILLANCE IMPLICATIONS
- Existing surveillance emphasis:
  - Fund surveillance has generally emphasized price measures in assessing liquidity and funding issues.
  - The global financial stability map (GFSR) reports a composite measure of stress in funding markets and liquidity conditions in secondary markets.
  - The WEO tracks key global interest rates when assessing global financial conditions.
  - Emphasis on price partly reflects timeliness of high-frequency data for surveillance.
- Role of quantity measures in surveillance:
  - Quantity measures are also monitored, especially credit-based indicators.
  - Analysis of global lending is common in multilateral, regional, and bilateral surveillance.
  - Focus on patterns of lending by important global and regional banks and changes in cross-border transmission of the global credit cycle.
  - GFSR highlights funding and liquidity developments affecting specific market segments and institutions, e.g., links between search for yield and increased demand for leverage pushing risks to the nonbank sector.
  - WEO monitors credit aggregates across major global economic regions as part of macro-financial surveillance.
  - Staff research (IMF, 2010) suggests rising global liquidity tends to boost emerging-market asset prices.
  - Preliminary research suggests the cross-country impact of noncore liquidity is somewhat larger than for core liquidity.
- Conjunctural perspective and policy challenges:
  - Merit in carefully monitoring liquidity trends: quantity-based indicators subdued while global interest rates remain low.
  - Concern that once balance-sheet repair is complete, previous intermediation channels could lead to rapid resumption in worldwide lending.
  - Signs of renewed interest in structured credit products suggest conditions for funding with noncore liabilities may soon improve.
  - Revival of credit could be an upside growth risk for major advanced economies but could complicate policy for countries already above capacity and create challenges for financial stability in countries facing large and volatile capital inflows.

### Need for further analytical and empirical work
- Conceptual and empirical grasp on the nature of liquidity and its effects is "still at a very early stage," and practical applications for surveillance are "still evolving."
- Key tasks identified:
  - Close data gaps on the creation of credit and liquidity by different institutions (including nonbanks) and other asset classes across all major economies.
  - Regularly update the perimeter of regulated entities for which data are collected, because financial innovation can create new forms of noncore liquidity, including in response to the changing international regulatory architecture.
  - Develop a more solid analytical and quantitative framework to understand relationships between various quantity- and price-based indicators, including:
    - How these relationships change over the cycle or during periods of turmoil.
    - Better identification of the importance of demand and supply factors in changing observed variables.
  - Deepen understanding of how noncore liquidity developments affect financial stability and the real economy over the global leverage cycle.
  - Study the link between monetary policy, including unconventional measures, and their impact on global liquidity measures.

### Measuring disequilibria and surveillance relevance
- As analytical building blocks improve, it will be important to consider how to define and measure disequilibria in global liquidity conditions that are more indicative of potential imbalances and directly relevant for surveillance.
- The text notes this is "a daunting task already at a national level," implying substantial further work is required to approach this at a global level.
- Prior work: Rüffer and Stracca (2006) provided an early conceptual and quantitative analysis of "excess" global liquidity as a disequilibrium measure.

### Empirical tools and existing exercises
- Staff-developed Global VAR (GVAR) framework has been used to explore the relationship between emerging-market asset prices and components of liquidity (Mohaddes and Raissi, 2013).
  - Data limitations restricted that exercise to U.S. liquidity measures, but U.S. measures account for a large part of the broader global indicator, especially for shadow-bank intermediation.
  - The GVAR framework accounts for trade and financial linkages, including through global commodity prices.
  - Findings cited:
    - Higher global liquidity is typically associated with a "(modest) real appreciation" in emerging market currencies and tends to support other EM asset prices.
    - The impact of noncore liquidity on emerging markets is "significantly larger," possibly reflecting allocation to riskier asset classes.

### Data gaps (Box 1 summary)
- Adequately measuring liquidity—particularly noncore liquidity—is difficult; caveats apply to analyses.
- Cross-country differences exist in definitions of quantity indicator components; differences may reflect distinct financial sector business models.
- It is not feasible to compute core and noncore liabilities for all G-20 countries.
- Even for the G-4 countries under analysis, there are large cross-country differences in reporting of noncore liabilities:
  - Detailed information: United States (and to a lesser extent the United Kingdom).
  - Limited information: Euro area and Japan.
- Many instruments counted as "noncore liquidity" are used in repo transactions while others are used as collateral in securitized instruments, so changes in volume of liquidity may be exaggerated during both increasing leverage and deleveraging.
- Ongoing initiatives to improve data on noncore liabilities, both domestic and cross-border, include outputs of the IMF/FSB "The Financial Crisis and information Gaps" work and the G-20 Data Gaps Initiative (DGI).
- The Standardized Reporting Forms (SRF) database measures claims to various sectors (including nonresidents, private corporations, and other claims on private residents) separately for deposit corporations (banks, or core liquidity) and other financial corporations (noncore liquidity).
  - Benefits of the SRFs include:
    - (i) improvement in cross-country comparability of monetary data;
    - (ii) higher quality of monetary data based on the Monetary and Financial Statistics Manual and its accompanying Compilation Guide;
    - (iii) improvement in the timeliness of monetary data;
    - (iv) fewer discrepancies in the data in the various Fund reports and publications.

### Implicit policy and surveillance implications
- Improved data and analytical tools would enable surveillance to better:
  - Detect and interpret shifts in the composition of liquidity (core vs. noncore).
  - Assess cross-border transmission of liquidity and implications for emerging markets.
  - Gauge the financial-stability and real-economy impact of liquidity cycles, including the role of noncore funding growth in excess of deposits as a marker of financial imbalance (see Hahm and others, 2012).
- Surveillance should incorporate evolving definitions and measures as regulatory perimeters and financial innovations change the nature of liquidity.

*Source: _071613b - EXECUTIVE SUMMARY*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### GLOBAL LIQUIDITY: THE CONCEPT
- Interest in global liquidity has increased in recent years, linked to the global financial crisis and to spillovers from prolonged monetary accommodation in advanced economies.
- Common element in most definitions: the “ease of financing” at a particular point in time, shaped by the macroeconomic environment, the stance of monetary policies, financial regulation, financial innovation, and risk appetite.
- Emphasis on ease of financing from international sources, reflecting both availability of funds at a national level and the extent of international financial integration.
- Price-based indicators are key to judging financing conditions:
  - Policy rates, secured and unsecured money markets, swap and bond markets, spreads between market segments.
  - Implied market volatility measures (such as VIX for the S&P 500) as proxies for investor risk appetite and willingness to provide funding.
- Price indicators may not tell the whole story when markets are not complete:
  - Quantity measures capture how price conditions translate into actual activity and potential risk.
  - Quantity indicators can better reflect the range and dynamics of prices and spreads than a few benchmark rates in some cases.
  - A given price can be consistent with a range of liquidity outcomes because of distortions, frictions, and limits to arbitrage.
  - During rapid innovation or turmoil, the relation between outcomes and prices can be unusually volatile; quantity indicators can provide useful additional information.
  - Example: in the run up to the global financial crisis, global policy rates rose but financial innovation and rising leverage produced easier liquidity; post-crisis, interest rates fell sharply while quantity of financing to households and firms was much reduced.
- Juxtaposing price and quantity dynamics provides a richer framework: risk exposures often highest when funding prices are lowest; combined analysis helps identify supply and demand drivers of liquidity.

### QUANTITY INDICATORS: ASSETS
- Asset-based indicators focus on credit aggregates, well covered by BIS international banking statistics.
- CGFS (2011) view: global liquidity = i) official liquidity (created by central banks through conventional and unconventional policies) + ii) private liquidity (generated by financial institutions through credit creation).
- Internationally, private liquidity has tended to dominate official liquidity.
  - Most global liquidity is created privately via international cross-border credit extension.
  - Private cross-border credit accounts for a sizable share of overall credit worldwide, especially in eastern Europe and Latin America.
- Credit-based indicators capture the end of the financial-intermediation chain and are tied to literature linking credit growth to financial vulnerabilities.

### QUANTITY INDICATORS: LIABILITIES
- Traditional proxies: pooled monetary aggregates and money-supply measures, focusing on the multiplier from narrow money to broad money.
- Shift in intermediation away from deposit-based funding toward wholesale funding, securitization, and collateral-based funding has weakened standard monetary aggregates as measures of global liquidity.
- Current literature emphasizes the overall funding environment of globally active institutions and the full range of liabilities of the financial sector (bank and nonbank).
  - Distinction between:
    - Core liquidity: traditional deposit-based funding (benefits from access to explicit public backstop).
    - Noncore liquidity: collateral-based funding associated with the shadow banking system (typically lacks explicit public backstop).
- Fund staff preliminary estimate focused on liabilities of institutions in the United States, United Kingdom, euro area, and Japan:
  - Core global liquidity: sum of total resident deposits in commercial banks and other depositary corporations.
  - Noncore global liquidity: sum of a wide variety of debt securities and nonresident deposits (including money market mutual fund shares/units; deposits by nonresidents; debt securities, including asset-backed commercial paper; asset–backed securities, including agency and non-agency mortgage-backed securities; and loans).
- Empirical behavior:
  - Global liquidity has more than doubled since 1999 in nominal terms.
  - Two thirds of this increase is attributable to noncore liquidity, particularly since 2004.
  - In the lead up to the global financial crisis, noncore was the key driver of acceleration in global liquidity, while core funding (relative to GDP) increased only gradually.
  - The United States dominates noncore liquidity; the U.S. noncore measure closely mirrors New York Fed efforts to measure the U.S. shadow banking sector.

### RECENT DEVELOPMENTS
- Post-crisis policy partly aimed at addressing a general tightening of “private” global liquidity.
  - Looser “official” liquidity through monetary easing partly compensated for a dramatic tightening of “private” liquidity.
  - Crisis caused a dramatic collapse in noncore liquidity as risk aversion rose and collateral-based markets froze, forcing shadow banks to scale back.
  - Policy role included boosting funding available to traditional “core” banks and using unconventional measures to support specific market segments and alleviate tail-risk fears.
- Price-based indicators suggest post-crisis easy funding, but quantity indicators have not shown a general upturn:
  - From the asset side: collapse in cross-border credit flows over 2008–09; since 2010 international claims effectively stagnant through late 2013.
  - From the funding side: noncore liquidity continued to shrink as a proportion of GDP with no sign of rebound (data subject to longer lags).
  - Cross-country differences: after a sharp drop in 2009, cross-border credit growth resumed in the Asia-Pacific region and Latin America, but remained largely negative in Emerging Europe.

### SURVEILLANCE IMPLICATIONS
- Fund surveillance has generally emphasized price measures in assessing liquidity and funding issues:
  - The global financial stability map (GFSR) reports a composite measure of stress in funding markets and liquidity conditions in secondary markets.
  - The WEO tracks key global interest rates when assessing global financial conditions.
  - Emphasis on price partly reflects timeliness of high-frequency data for surveillance.
- Quantity measures are also monitored, especially credit-based indicators:
  - Analysis of global lending is common in multilateral, regional, and bilateral surveillance.
  - Focus on patterns of lending by important global and regional banks and changes in cross-border transmission of the global credit cycle.
  - GFSR highlights funding and liquidity developments affecting specific market segments and institutions, e.g., links between search for yield and increased demand for leverage pushing risks to the nonbank sector.
  - WEO monitors credit aggregates across major global economic regions as part of macro-financial surveillance.
  - Staff research (IMF, 2010) suggests rising global liquidity tends to boost emerging-market asset prices.
  - Preliminary research suggests the cross-country impact of noncore liquidity is somewhat larger than for core liquidity.
- Conjunctural perspective and policy challenges:
  - Merit in carefully monitoring liquidity trends: quantity-based indicators subdued while global interest rates remain low.
  - Concern that once balance-sheet repair is complete, previous intermediation channels could lead to rapid resumption in worldwide lending.
  - Signs of renewed interest in structured credit products suggest conditions for funding with noncore liabilities may soon improve.
  - Revival of credit could be an upside growth risk for major advanced economies but could complicate policy for countries already above capacity and create challenges for financial stability in countries facing large and volatile capital inflows.

*Source: _071613b - EXECUTIVE SUMMARY*

### 18.      To deepen the use of these indicators in surveillance, further work would be needed to

### 18.      To deepen the use of these indicators in surveillance, further work would be needed to

### Need for further analytical and empirical work
- Conceptual and empirical grasp on the nature of liquidity and its effects is "still at a very early stage," and practical applications for surveillance are "still evolving."
- Key tasks identified:
  - Close data gaps on the creation of credit and liquidity by different institutions (including nonbanks) and other asset classes across all major economies.
  - Regularly update the perimeter of regulated entities for which data are collected, because financial innovation can create new forms of noncore liquidity, including in response to the changing international regulatory architecture.
  - Develop a more solid analytical and quantitative framework to understand relationships between various quantity- and price-based indicators, including:
    - How these relationships change over the cycle or during periods of turmoil.
    - Better identification of the importance of demand and supply factors in changing observed variables.
  - Deepen understanding of how noncore liquidity developments affect financial stability and the real economy over the global leverage cycle.
  - Study the link between monetary policy, including unconventional measures, and their impact on global liquidity measures.

### Measuring disequilibria and surveillance relevance
- As analytical building blocks improve, it will be important to consider how to define and measure disequilibria in global liquidity conditions that are more indicative of potential imbalances and directly relevant for surveillance.
- The text notes this is "a daunting task already at a national level," implying substantial further work is required to approach this at a global level.
- Reference to prior work: Rüffer and Stracca (2006) provided an early conceptual and quantitative analysis of "excess" global liquidity as a disequilibrium measure.

### Empirical tools and existing exercises
- Staff-developed Global VAR (GVAR) framework has been used to explore the relationship between emerging-market asset prices and components of liquidity (Mohaddes and Raissi, 2013).
  - Data limitations restricted that exercise to U.S. liquidity measures, but U.S. measures account for a large part of the broader global indicator, especially for shadow-bank intermediation.
  - The GVAR framework accounts for trade and financial linkages, including through global commodity prices.
  - Findings cited:
    - Higher global liquidity is typically associated with a "(modest) real appreciation" in emerging market currencies and tends to support other EM asset prices.
    - The impact of noncore liquidity on emerging markets is "significantly larger," possibly reflecting allocation to riskier asset classes.

### Data gaps (Box 1 summary)
- Adequately measuring liquidity—particularly noncore liquidity—is difficult; caveats apply to analyses.
- Cross-country differences exist in definitions of quantity indicator components; differences may reflect distinct financial sector business models.
- It is not feasible to compute core and noncore liabilities for all G-20 countries.
- Even for the G-4 countries under analysis, there are large cross-country differences in reporting of noncore liabilities:
  - Detailed information: United States (and to a lesser extent the United Kingdom).
  - Limited information: Euro area and Japan.
- Many instruments counted as "noncore liquidity" are used in repo transactions while others are used as collateral in securitized instruments, so changes in volume of liquidity may be exaggerated during both increasing leverage and deleveraging.
- Ongoing initiatives to improve data on noncore liabilities, both domestic and cross-border, include outputs of the IMF/FSB "The Financial Crisis and information Gaps" work and the G-20 Data Gaps Initiative (DGI).
  - The Standardized Reporting Forms (SRF) database measures claims to various sectors (including nonresidents, private corporations, and other claims on private residents) separately for deposit corporations (banks, or core liquidity) and other financial corporations (noncore liquidity).
  - Benefits of the SRFs include:
    - (i) improvement in cross-country comparability of monetary data;
    - (ii) higher quality of monetary data based on the Monetary and Financial Statistics Manual and its accompanying Compilation Guide;
    - (iii) improvement in the timeliness of monetary data;
    - (iv) fewer discrepancies in the data in the various Fund reports and publications.

### Implicit policy and surveillance implications
- Improved data and analytical tools would enable surveillance to better:
  - Detect and interpret shifts in the composition of liquidity (core vs. noncore).
  - Assess cross-border transmission of liquidity and implications for emerging markets.
  - Gauge the financial-stability and real-economy impact of liquidity cycles, including the role of noncore funding growth in excess of deposits as a marker of financial imbalance (see Hahm and others, 2012).
- Surveillance should incorporate evolving definitions and measures as regulatory perimeters and financial innovations change the nature of liquidity.

*Source: _071613b - 18.      To deepen the use of these indicators in surveillance, further work would be needed*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2013/_071613b.pdf_