International Monetary Fund

World Economic and Financial Surveys

Global Financial Stability Report

Moving from Liquidity- to Growth-Driven Markets

April 2014

The April 2014 Global Financial Stability Report (GFSR) assesses the challenging transitions that the global financial system is currently undergoing on the path to greater stability. Chapter 1 finds that these transitions are far from complete, and stability conditions are far from normal. For advanced and emerging market economies alike, a successful shift from liquidity-driven to growth-driven markets requires a number of elements. The report discusses these elements, including: a normalization of U.S. monetary policy that avoids financial stability risks; financial rebalancing in emerging market economies amid tighter external financial conditions and higher corporate debt levels; further progress in the euro area’s transition from fragmentation to robust integration; and the successful implementation of Abenomics in Japan to deliver sustained growth and stable inflation. Chapter 2 examines the role of the composition of the investor base and local financial systems for the stability of emerging market portfolio flows and asset prices. Chapter 3 looks at the issue of too-important-to-fail and provides new estimates of the implicit funding subsidy received by systemically important banks.



Front Matter

Chapter 1. Making the Transition from Liquidity- to Growth-Driven

1.1 Deleveraging Trends in Selected Advanced Economies
1.2 Is the Japanese Financial System Rebalancing, and What Are the Financial Stability Implications?
1.3 Recent Periods of Turbulence in Emerging Market Economies
1.4 Macroprudential Policy in the United States
1.5 Financial Regulatory Reform: Can We Make It to the Finish Line?
1.6 Rollout of Banking Union Is Progressing, but Challenges Remain
1.7 European Union Bank Deleveraging
1.1 Issuance Trends for U.S. High-Yield Bonds and Loans
Data 1.1.1 Indebtedness and Leverage in Selected Advanced Economies
Data 1.1.2 Reduction in Gross Debt Levels in Selected Advanced Economies from the 2009–13 Peak
Data 1.2 Change in 10-Year Government Bond Yields
Data 1.3 Correlation and Beta between the U.S. Term Premium in the United States and other Major Advanced Economies
Data 1.4 Debt, Leverage, and Credit in Selected Emerging Market Economies
Data 1.5 Change in Gross Debt Levels in Selected Emerging Market Economies
Data 1.6 Summary of Indicators
1.7 Yield Curve Data Sources
Data 1.8 Correlation of Term Premium Estimates
Data 1.9 Sensitivity to the U.S. Term Premium
Data 1.10 Granger Causality
1.11 Coverage of Firms by S&P Capital IQ
1.12 Credit Variables Used in the Vector Autoregression Exercise
Data 1.1 Global Financial Stability Map
Data 1.1.1 Trends in Indebtedness in Selected Advanced Economies since the Crisis
Data 1.2 Global Financial Stability Map: Assessment of Risks and Conditions
Data 1.2.1 Japanese Financial System
Data 1.3 Federal Reserve Lending Survey and Institute for Supply Managmenent New Orders: Green Shoots?
Data 1.3.1 Asset Class Performance
Data 1.4 U.S. Nonfinancial Coirporations: Credit Cycle Indicators
Data 1.5 U.S. Nonfinancial Corporations: Key Financial Indicators
Data 1.6 S&P 500 Price-to-Earnings Ratio
Data 1.7 Decomposition of Equity Market Performance
Data 1.8 U.S. High-Yield Bond and Leveraged Loan Issuance with Lower Standards
Data 1.9 Leveraged Loans: Debt-to-EBITDA Ratio for Highly Leveraged Loans
Data 1.10 U.S. Nonfinancial Corporations: Market-Based Financing
Data 1.11 Federal Reserve Guidance Gaining Credibility?
Data 1.12 Ten-year U.S. Treasury Rate Projectsions Based on Exit Scenario
Data 1.13 Global Interest Rate Scenarios
Data 1.14 Bond Flows to Emerging Market Economies and Domestic Credit in the Face of Tighter External Conditions
Data 1.15 Private Sector Gross Debt and Credit in Selected Emerging Market Economies
Data 1.16 Current Account Balance and Real Rates Now and Pre-Financial Crisis
Data 1.17 Policy Space
Data 1.18 Ratio of International Reserves to 2014 External Financing Requirements
Data 1.19 Coverage of Current Account by Foreign Direct Investment
Data 1.20 Corporate Debt in Emerging Markets
Data 1.21 Emerging Market Bank Resilience
Data 1.22 China: Wealth Management Products and Trusts
Data 1.23 China: Selected Financial Sector Developments
Data 1.24 Total and Retail Portfolio Flows to Selected Emerging Market and Other Economies
Data 1.25 Share of Nonresidential Holdings of Local Currency Government Debt and Market Liquidity
1.26 Summary of Selected Emerging Market Policy Actions since May 2013
Data 1.27 Bank Credit and Market Indicators
Data 1.28 Euro Area Bank Asset Quality
Data 1.29 Euro Area Bank Profitability, Buffers, and Interest Rates
Data 1.30 Assets of Banks in the Euro Area
1.31 Simulated Cumulative Response of Bank Corporate Credit
Data 1.32 Euro Area Write-Down Potential
Data 1.33 Strength of Insolvency Procedures and Nonperforming Loans in Advanced Economies, 2013
Data 1.34 Sources of Nonfinancial Corporate Credit, 2013:Q3
Data 1.35 Term Premium Estimates under Alternative Affine Models
Data 1.36 CEMBI Model Quarterly Spreads and Model Fits
1.37 Vector Autoregression Model Residuals
1.38 Comparing the Effects on Credit of One-Time Shocks: Cumulative Impulse Response Functions

Chapter 2. How Do Changes in the Investor Base and Financial Deepening
Affect Emerging Market Economies?

2.1 A Primer on Mutual Funds
Evolving Emerging Market Assets and Their Investor Bases
Data 2.2 Financial Deepening in Emerging Markets
Identifying the Financial Stability Effects of Changes in the Investor Base and in Local Financial Systems
Data 2.3 Investment Strategies of Institutional Investors
2.4 Are Investors Differentiating among Emerging
Markets during Stress Episodes?
2.5 Measuring Herding
Policy Implications and Conclusions
2.1 Size of Global and Local Institutional Investors and Mutual Funds
2.2 Role of Financial Deepening in Dampening the Impact of Global Financial Shocks on Asset Prices
2.3 Summary of Methods and Results
2.4 Sample Economies
2.5 Definition of Variables Used in Estimations
2.6 Local Macroeconomic Factors and Global Financial Shocks—The Effect on Asset Prices and Portfolio Flows
2.1 Investor Base for Bonds in Emerging Markets
Data 2.2 Trends in Capital Flows to Emerging Markets
Data 2.3 Transformation of Investment Options in Emerging Markets
Data 2.4 Emerging Markets: Shares in Economic Activities and Financial Markets
Data 2.5 Allocation to Emerging Market Assets
2.6 Integration of Emerging Market Assets into Global Markets
2.7 Herding among Equity and Bond Funds Investing in Emerging Markets
2.8 Mutual Fund and Institutional Investor Flows
2.9 Cumulative Monthly Portfolio Flows to Emerging Markets from Different Types of Investors during Distress Episodes
2.10 Flow Sensitivity to Global Financial Conditions by Fund Characteristics
2.11 Drivers of Global and Dedicated Funds’ Flows into Emerging Markets around the Global Financial Crisis
2.12 The Effects of Financial Deepening on the Sensitivities of Asset Returns to Global Risk Factor
Data 2.13 Sensitivity of Local Yields to Portfolio Flows and Decline in Global Market Making

Chapter 3. How Big is the Implicit Subsidy for Banks Considered Too
Important to Fail?

Data 3.1 Cross-Border Banking Linkages
3.2 Benefits and Risks of Large Banks
3.3 Estimating Implicit Too-Important-to-Fail Subsidies
3.4 Banks and Sovereign Linkages
3.5 Recent Policy Initiatives Addressing the Too-Important-to-Fail Issue
3.6 Higher Loss Absorbency for Systemically Important Banks in Australia
3.2 The Ratings-Based Approach
3.1 Summary of the Estimates of Implicit Subsidies
3.2 Event Study
3.3 Summary of Policy Measures
3.4 Sample of Systemically Important Banks (as of 2012)
3.5 Benchmark Credit-Rating Estimation Results to Explain the Overall Ratings
3.6 Unit Rating Uplift: Robustness for Different Samples
3.1 Effects of Too-Important-to-Fail Protection on a Simplified Bank Balance Sheet
Data 3.2 Changes in the Number of Banks and the Size of the Banking Sector
3.3 Total Assets of Large Banks
3.4 Concentration in the Banking Sector
3.5 Bond Spread Differential between Systemically Important Banks and Other Banks
3.6 U.S. Banks’ Average Bond Duration
3.7 Bond Spread Differential for U.S. Banks with Similar Leverage
3.8 Mean Implicit Subsidy for Systemically Important Banks Estimated with the Contingent Claims Analysis Approach
3.9 Implicit Subsidy by Type of Bank in the United States
3.10 Average Subsidies Derived from Credit Ratings
3.11 Subsidies Derived from Credit Ratings for a Bank Just Below Investment Grade
3.12 Implicit Subsidy Values for Global Systemically Important Banks
3.13 Event Tree of Government Policies to Deal with Systemically Important Banks

Statistical Appendix

Data 1. Major Net Exporters and Importers of Capital, 2013
2. Sovereign Credit Default Swap Spreads
3. Selected Credit Default Swap Spreads
4. Selected Spreads
5. Implied Volatility Indices
6. U.S. Corporate Bond Market
7. Euro Area Corporate Bond Market
Data 8. U.S. Commercial Paper Market
Data 1. Capital Market Size: Selected Indicators, 2012
Data 2. MSCI Equity Market Indices
Data 3. Emerging Markets Bond Index: EMBI Global Sovereign Yield Spreads
Data 4. Emerging Market Private External Financing: Total Bonds, Equities, and Loans
Data 5. Emerging Market Private External Financing: Bonds
Data 6. Emerging Market Private External Financing: Equity
Data 7. Emerging Market Private External Financing: Loans
Data 8. Equity Valuation Measures: Dividend-Yield Ratios
Data 9. Equity Valuation Measures: Price/Earnings Ratios
Data 10. Emerging Markets: Mutual Funds
(*)Please note that effective with the April 2011 issue, the IMF’s Statistics Department has assumed responsibility for compiling the Financial Soundness Indicators tables and they are no longer part of this appendix. However, these tables will continue to be linked to the GFSR Statistical Appendix on the IMF’s public website.
The following symbols have been used throughout this appendix:

. . . to indicate that data are not available;
—— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

- between years and months (for example, 2008–09 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

/ between years (for example, 2008/09) to indicate a fiscal or financial year.

“Billion” means a thousand million; “trillion” means a thousand billion.

“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

“n.a.” means not applicable.

Minor discrepancies between constituent figures and totals are due to rounding.
Disclaimer: As used in this volume the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.