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Global Financial Stability Report

Fostering Stability in a Low-Growth, Low-Rate Era

October 2016

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The current report finds that short-term risks to global financial stability have abated since April 2016, but that medium-term risks continue to build. Financial institutions in advanced economies face a number of cyclical and structural challenges and need to adapt to low growth and low interest rates, as well as to an evolving market and regulatory environment. Weak profitability could erode banks’ buffers over time and undermine their ability to support growth. A cyclical recovery will not resolve the problem of low profitability. More deep-rooted reforms and systemic management are needed, especially for European banks. The solvency of many life insurance companies and pension funds is threatened by a prolonged period of low interest rates. Corporate leverage in emerging market economies remains elevated in some countries, but the current favorable external environment presents an opportunity for overly indebted firms to restructure their balance sheets. The political climate is unsettled in many countries. A lack of income growth and a rise in inequality have opened the door for populist, inward-looking policies. These factors make it even harder to tackle legacy problems and further expose economies and markets to shocks. A potent and more balanced policy mix is needed to deliver a stronger path for growth and financial stability, and avoid slipping into a state of financial and economic stagnation. The report also examines how the rise of nonbank financing has altered the impact of monetary policy and finds that fears of a decline in the effectiveness of monetary policy are unfounded. It appears that the transmission of monetary policy is, if anything, stronger in economies with larger nonbank financial sectors. Finally, the report examines the link between corporate governance, investor protection, and financial stability in emerging market economies. It finds that the improvements over the past two decades have helped bolster the resilience of their financial systems. These benefits strengthen the case for further reform.

Front Matter

Chapter 1: Financial Stability Challenges in a Low-Growth, Low-Rate Era

Chapter 1 finds that short-term risks to global financial stability have abated since April 2016, but that medium-term risks continue to build. Financial institutions in advanced economies face a number of cyclical and structural challenges and need to adapt to low growth and low interest rates, as well as to an evolving market and regulatory environment. Weak profitability could erode banks’ buffers over time and undermine their ability to support growth. A cyclical recovery will not resolve the problem of low profitability. More deep-rooted reforms and systemic management are needed, especially for European banks. The solvency of many life insurance companies and pension funds is threatened by a prolonged period of low interest rates. Corporate leverage in emerging market economies remains elevated in some countries, but the current favorable external environment presents an opportunity for overly indebted firms to restructure their balance sheets. The political climate is unsettled in many countries. A lack of income growth and a rise in inequality have opened the door for populist, inward-looking policies. These factors make it even harder to tackle legacy problems and further expose economies and markets to shocks. A potent and more balanced policy mix is needed to deliver a stronger path for growth and financial stability, and avoid slipping into a state of financial and economic stagnation.

Financial Stability Overview
Medium-Term Risks Rising
Emerging Market Economies: A Smooth Deleveraging?
Global Stability Challenges in the New Era
Boxes
Chart Chart	Data Data	1.1 Impact of Brexit
		1.2 The Basel Committee Agenda: Achieving Certainty without Compromising Integrity
Figures
Chart	Data	1.1 Global Financial Stability Map: Risks and Conditions
Chart	Data	1.2 Global Financial Stability Map: Assessment of Risks and Conditions
Chart	Data	1.3 Brexit’s Impact on Financial Markets
Chart	Data	1.4 Decomposition of Equity Market Performance
Chart	Data	1.5 Policy Uncertainty
Chart	Data	1.6 Global Growth Momentum and Interest Rates
Chart	Data	1.7 Sovereign Bond Yields and Term Premiums in Advanced Economies
Chart	Data	1.8 Drivers of Government Bond Yields
Chart	Data	1.9 Effects on Credit Growth of Shocks to Equity Prices
Chart	Data	1.10 Developed and Emerging Market Economy Banks: Capital and Liquidity Indicators
Chart	Data	1.11 Price-to-Book and Return on Equity Decomposition, 2006–15
Chart	Data	1.12 Advanced Economies: Trends in Bank Profitability
Chart	Data	1.13 Bank Performance in a “Cyclical Recovery” Scenario, by Region
Chart	Data	1.14 Stylized Net Capital Impact of Nonperforming Loan Disposal at Euro Area Banks
Chart	Data	1.15 European and U.S. Banks—Operating Efficiency and Cost Rationalization
Chart	Data	1.16 European Banks’ Elevated Cost of Funding
Chart	Data	1.17 European Bank Profitability in a “Structural Reform” Scenario
Chart	Data	1.18 Japanese Banks and Foreign Exchange Funding
Chart	Data	1.19 Low Interest Rates and Insurance Companies
Chart	Data	1.20 U.S. Pension Fund Discount Rate
Chart	Data	1.21 Pension Funding Shortfalls in the United States and the United Kingdom
Chart	Data	1.22 Portfolio Flows to Emerging Market Economies and Asset Prices
Chart	Data	1.23 Corporate Borrowing: Stabilized, but at a High Level
Chart	Data	1.24 Scenarios for Deleveraging in Emerging Market Firms and Default Rates
Chart	Data	1.25 Sensitivity of Emerging Market Economy Assets to Global Policy Uncertainty
Chart	Data	1.26 China: Credit Overhang and Shadow Credit
Chart	Data	1.27 China: Bank Linkages to the Structured Investment Complex
Chart		1.28 Financial Stagnation and Protectionism Scenario: Simulated Peak Effects
Annex Figures
Chart		1.1.1 Financial Stagnation and Protectionism Scenario

Chapter 2: Monetary Policy and the Rise of Nonbank Finance

Chapter 2 studies how nonbank financial institutions may shape the transmission of monetary policy. It finds that nonbanks, if anything, have strengthened the transmission of monetary policy. Nonbanks may amplify the effects of monetary policy on real economic activity because their incentives to take risks are particularly sensitive to changes in monetary policy. However, banks still matter for the transmission of monetary policy because even large firms have limited ability to move away from bank loans and into bond financing after a monetary contraction. Policymakers must continue to adapt the conduct of monetary policy to changes in the composition of financial systems and to be mindful of the implications of monetary policy on financial stability. In this context, the provision of data on nonbank financial intermediaries needs to continue to be enhanced.

Summary
Introduction
Trends in the Transmission of Monetary Policy
Channels of Monetary Policy Transmission
Empirical Evidence on the Transmission of Monetary Policy
Policy Discussion
Conclusions and Policy Recommendations
Boxes
Chart	Data	2.1 Monetary Policy and the Stock Returns of Banks and Nonbanks
Chart Chart	Data	2.2 Exchange Rate Volatility, Monetary Policy, and Nonbanks
Figures
Chart	Data	2.1 The Relative Importance of Nonbank Financial Intermediaries
Chart	Data	2.2 Trends in the Transmission of Monetary Policy
Chart		2.3 Transmission of Monetary Policy through the Reaction of Financial Intermediaries
Chart	Data	2.4 Marked-to-Market Assets by Sector
Chart	Data	2.5 Value at Risk in Risk Management by Asset Class and Year
Chart	Data	2.6 Transmission of Monetary Policy and Size of Nonbank Financial Sector
Chart	Data	2.7 Response to a Monetary Policy Contraction
Chart	Data	2.8 Risk Taking and Monetary Policy in the United States
Chart	Data	2.9 Monetary Policy and Total Assets Owned by Financial Intermediaries
Chart	Data	2.10 Bank Regulation, Monetary Policy, and Total Assets Owned by Financial Institutions
Chart	Data	2.11 Risk Taking by Mutual Funds and Monetary Policy
Chart	Data	2.12 Bond Finance around the World
Chart	Data	2.13 Bond Financing and Monetary Policy
Annex Figures
Chart	Data	Annex Figure 2.1.1 Trends in the Transmission of Monetary Policy—Robustness
Chart	Data	Annex Figure 2.2.1 Summary Statistics

Chapter 3: Corporate Governance, Investor Protection, and Financial Stability in Emerging Markets

Chapter 3 focuses on the links between corporate governance, investor protection, and financial stability across emerging market economies. The chapter finds that corporate governance and investor protection have generally improved in emerging market economies over the past two decades. The analysis supports the notion that stronger corporate governance and investor protection frameworks enhance the resilience of emerging market economies to global financial shocks. The results show that corporate governance improvements foster deeper and more liquid capital markets, allowing them to absorb shocks better. Corporate governance improvements also enhance stock market efficiency, thereby making equity prices less sensitive to external shocks and less prone to crashes. Emerging market economies with better corporate governance and investor protections generally have stronger corporate balance sheets. The financial stability benefits associated with improved corporate governance strengthen the case for further reform. Policies to further bolster the rights of outside investors (especially minority shareholders), bring disclosure requirements fully in line with international best practice, and promote greater board independence are likely to yield financial stability benefits.

Full Text Summary Survey Story

Summary
Introduction
Nexus between Corporate Governance, Investor Protection, and Financial Stability
The Evolving Nature of Corporate Governance and Investor Protection
Corporate Governance, Investor Protection, and Financial Stability
Conclusions and Policy Implications
Boxes
		3.1 Examples of Corporate Governance Reforms in Selected Emerging Market Economies
Chart Chart	Data	3.2 Strengthening Corporate Governance for State-Owned Enterprises in China
Figures
Chart	Data	3.1 Corporate Governance and Equity Returns
Chart	Data	3.2 Corporate Governance and Volatility of Stock Market Returns in Emerging Market Economies
Chart	Data	3.3 Ownership Structure and Closely Held Shares
Chart	Data	3.4 Minority Shareholder Protection
Chart	Data	3.5 Country-Level Corporate Governance and Investor Protection
Chart	Data	3.6 Emerging Market Firm-Level Governance Index
Chart	Data	3.7 Corporate Governance and Firm-Level Valuation
Chart	Data	3.8 Firm-Level Governance and Valuation
Chart	Data	3.9 Corporate Governance and Market Liquidity
Chart	Data	3.10 Stock Return Comovement
Chart	Data	3.11 Stock Market Comovement (R²) over Time
Chart	Data	3.12 Crash Risk
Chart	Data	3.13 Event Study: Firm-Level Governance and Equity Returns
Chart	Data	3.14 Impact of Global Financial Shocks on Equity Returns
Chart	Data	3.15 Corporate Governance and Selected Balance Sheet Indicators
Chart	Data	3.16 Firm-Level Governance and the Bond Market
Chart	Data	3.17 Firm-Level Governance and Solvency
Chart	Data	3.18 Country-Level and Firm-Level Governance and Short-Term Debt

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Global Financial Stability Report

Global Financial Stability Report

Fostering Stability in a Low-Growth, Low-Rate Era

Reports and Related Links:

Loading component...

Loading component...

IMF’s Work

RESOURCES

TOPICS

Flagship Publications

Other Publications

IMF reports and publications by country

Regional Offices

All News

See Also

For Journalists

Press Center

RESOURCES

FLAGSHIPS

KEY SERIES

IMF NOTES

Reports and Related Links:

Front Matter

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