Global Financial Stability Report

Sovereigns, Funding, and Systemic Liquidity

October 2010

On this site, 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. Dependent territories of member countries are listed alphabetically followed by a description of the constitutional relationships with their member countries.

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The Global Financial Stability Report provides semiannual assessments of global financial markets and addresses emerging market financing in a global context.*

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Contents

Executive Summary (1000 Kb pdf file)

Preface (376kb pdf file)

Chapter I. Economic Uncertainty, Sovereign Risk, and Financial Fragilities

Full Text   |   Video    |   Boxes   |    Figures   |   Tables   |   Press Points

A. What Is the Outlook for Global Financial Stability?
B. Sovereign Risks and Financial Fragilities
C. Sovereign and Banking System Spillovers
D. Managing Upside Risks to Emerging Markets
E. Policy Priorities
Annex 1.1. Impact of Adverse Growth Shock on Advanced Economy Debt Ratios
Annex 1.2. Systemic Contingent Claims Analysis of Banking and Sovereign Risk
Annex 1.3. Analyzing Portfolio Inflows to Emerging Markets and Other Advanced Markets
Annex 1.4. Asia’s Local Currency Corporate Bond Market—A New Spare Tire
Annex 1.5. Where Now for Fannie and Freddie? A Review of the Options
References

Chapter II. Systemic Liquidity Risk: Improving the Resilience of Institutions and Markets

Full Text   |   Video    |   Boxes   |    Figures   |   Press Points


Summary
Review of the Systemic Liquidity Shock through Various Short-Term Funding Markets
Funding Markets as Propagation Channels of Systemic Liquidity Risk
Policies to Strengthen the Resilience of Funding Markets
Policies to Strengthen Prudential Liquidity Regulations for Institutions
Outstanding Policy Issues in Addressing Systemic Liquidity Risk
Conclusions and Policy Considerations
References

Chapter III. The Uses and Abuses of Sovereign Credit Ratings

Full Text   |   Video    |   Boxes   |   Figures   |   Press Points


Summary
Basic Rating Definitions and Principles
The Evolving Roles and Regulation of Credit Ratings and Credit Rating Agencies
Fundamental Sovereign Credit Risk Analysis
The Accuracy and Informational Value of Sovereign Ratings
Conclusions and Policy Implications
Annex 3.1. Credit Rating Agencies around the World
References

Glossary (277KB pdf file)

Annex: Summing Up by the Acting Chair

Statistical Appendix (1,6KB pdf file)

Key Financial Centers:      Figures    |   Tables
Emerging Markets:           Figures    |   Tables
Financial Soundness Indicators:           Tables

Boxes

    1.1 Japan: Risk of Sovereign Interest Rate Shock
    1.2 Risk Transmission between Sovereigns and Banks in Europe
    1.3 Risks of a Double Dip in the U.S. Real Estate Markets
1.4 China’s Banking System: Managing Challenges after Credit Expansion
    1.5 Brazil's Tax on Capital Inflows, 2009–10
1.6 Macroeconomic Costs of Regulatory Measures
1.7 Key Findings of the U.S. Financial Sector Assessment Program
1.8 Calibrating a Sovereign Risk-Adjusted Contingent Claims Analysis Balance Sheet
    2.1 Role of Money Markets
2.2 Disruptions to Cross-Border Funding and Foreign Exchange Swaps
2.3 The Repo Markets: A Primer
2.4 What Went Wrong in Financial Firms' Liquidity Risk Management Practices?
2.5 Repo Infrastructure: Trading, Clearing, and Settlement
Chart Data 3.1 The Global Credit Rating Agency Landscape
3.2 Spillover Effects of Sovereign Rating Downgrades
    3.3 Developments in the Regulation of Credit Rating Agencies
    3.4 An Overview of the Factors Influencing Sovereign Credit Ratings
3.5 Empirical Studies of Rating Determinants
Chart Data 3.6 Greece: An Examination of the Evolution of Rating Actions
3.7 Empirical Tests of Rating Information Value
3.8 Point-in-Time versus Through-the-Cycle Credit Ratings

Tables

Data 1.1 Sovereign Market and Vulnerability Indicators
Data 1.2 Low-Growth Shock: Impact Analysis and Ranking
  2.1 Typical Haircut on Term Securities Financing Transactions
  3.1 Long-Term Senior Debt Rating Symbols
  3.2 Rating Agency Statements on What Their Ratings Are Designed to Measure
  3.3 Key Factors in Sovereign Credit Rating Assessments
  3.4 Sovereign Rating “Failures” during 1997–98 Asian Crisis
  3.5 Sovereign Rating “Failures” during the 2008—10 Crisis

Figures


 Data 1.1 Global Financial Stability Map
Data 1.2 Global Financial Stability Map: Assessment of Risks and Conditions
Data 1.3 Markets Heat Map
Data 1.4 Short-Term Uncertainty Has Fallen, but Uncertainty Remains High in the Medium Term
1.5 Spillovers from the Sovereign to the Banks and Banks to Sovereigns
Data 1.6 Ten-Year Sovereign Swap Spreads
Data 1.7 Impact of a –1 Percent Growth Shock from Wiorld Economic Outlook Baseline, 2010–15
Data 1.8 Sovereign Gross Funding Requirements
1.9 Custodial Bond Flows, 2007–June 2010
Data 1.10 Exports and Fiscal Balance
Data 1.11 Developments in Sovereign Credit Default Swap Spreads
Data 1.12 Bank Writedowns or Loss Provisions by Region
Data 1.13 Capital Raised by Banks and Tier 1 Ratios
Data 1.14 Banking Sector Credit Default Swap Spreads
1.15 U.S. Dollar Th ree-Month Forward–Overnight Index Swap Spreads and Basis Swaps
1.16 Bank Bond Maturity Profile
1.17 Bank Debt Maturing as a Percentage of Total Outstanding
Data 1.18 Euro Area: Bank Cumulative Net Issuance
Data 1.19 Reliance on Wholesale Funding
Data 1.20 European Central Bank Lending to Euro Area Monetary Financial Institutions
1.21 Mature Market Credit Default Swap Spreads
Data 1.22a. Lending Conditions
Data 1.22b. Bank Lending to Private Sector
Data 1.23 Bank for International Settlements Cross-Border Bank Flows by Region
Data 1.24 Bank for International Settlements Cumulative Cross-Border Bank Flows by Country
Data 1.25 Cross-Border Bank Flows and Local Credit
Data 1.26 Emerging and Advanced Economies, Equity Returns
1.27a. Sovereign Ratings
1.27b. Government Debt and Growth Diff erential
1.28 Cumulative Net Foreign Flows to Emerging Market Bond and Equity Funds
Data 1.29a. Emerging Market Equities Market Capitalization and Investor Allocations
Data 1.29b. Portfolio Flows to Emerging Markets and Developing Countries
Data 1.30 Equity and Debt Portfolio Inflows
Data 1.31 Nominal Eff ective Exchange Rate Performance
Data 1.32 Change in Official Reserves
Data 1.33 Sensitivity of Money Supply to Central Bank Foreign Assets
Data 1.34 Public Debt, Advanced Countries: Impact of Adverse Growth Shock
1.35 Brazilian and Korean Securities Flows
1.36 Correlation between Bank of New York Mellon iFlowSM and Balance of Payments Flows
1.37 Cumulative Bank of New York Mellon iFlowSM Infl ows to Advanced and Emerging Economies
1.38 Cumulative Bank of New York Mellon iFlowSM Infl ows to Emerging and Other Economies, by Region
1.39 Variance Ratios of Equity Flows to Selected Markets
1.40 Impulse Response Functions
Data 1.41 Outstanding Local Currency Corporate Bonds
Data 1.42 Local Currency Government and Corporate Bond Issuance
Data 1.43 Spread Between Prime Rate and Corporate Bond Yield Index
Chart Data 2.1 U.S. Private-Label Term Securitization Issuance by Type
Chart Data 2.2 United States: Outstanding Amount of Commercial Paper
Chart Data 2.3 Bank Bond Issuance
Chart Data 2.4 Aggregate Bank Credit Default Swap Rate and Selected Spreads
2.5 U.S. Dollar Currency Spread Implied by Three-Month Forex Swap Contracts
2.6 Selected Indicators of Short-Term Funding Rates
Chart Data 2.7 Share of Average Daily Turnover of Secured and Unsecured Lending and Borrowing for Euro Area Banks
2.8 Outstanding Amounts of Private Market Repo Operations
2.9 Central Bank Temporary Reserve-Providing Operations
Chart Data 2.10 Commercial Bank Funding Structure
Chart Data 2.11 United States: Funding Structure of Selected Largest Commercial and Investment Banks
Chart Data 2.12 Bank Deposits versus Money Market Mutual Funds
Chart Data 3.1 Ratings of AAA-Rated U.S. Mortgage-Related Securities
Chart Data 3.2 Sovereign Rating and Outlook Changes
Chart Data 3.3 Moody’s Sovereign Rating and Outlook Changes by Selected Regions, May 2007–June 2010
Chart Data 3.4 Rating Drivers, May 2007–June 2010
3.5 Average Credit Default Swap Spread and Ratings for Countries Rated by Moody’s, 2005–10
Chart Data 3.6 Impact of Change in Sovereign Ratings and Credit Warnings on Credit Default Swap Spread
Chart Data 3.7 Ratings One Year Prior to Sovereign Default, 1975–2009
3.8 Sovereign Rating Performance by Standard & Poor’s
3.9 Average Proportion of S&P Sovereign Ratings Unchanged Over One Year
3.10 Average Proportion of S&P Sovereign Ratings Downgraded More Than Two Notches Over One Year
3.11 Asian Crisis: Sovereigns Rated by Moody’s between July 31, 1997 and December 31, 1998
3.12 Current Crisis: Sovereigns Rated by Moody’s between July 31, 2007 and June 30, 2010


Statistical Appendix

Key Financial Centers

Figures

Data 1. Major Net Exporters and Importers of Capital in 2009
Data 2. Exchange Rates: Selected Major Industrial Countries
Data 3. United States: Yields on Corporate and Treasury Bonds
Data 4. Selected Spreads
Data 5. Nonfinancial Corporate Credit Spreads
Data 6. Equity Markets: Price Indices
Data 7. Implied and Historical Volatility in Equity Markets
Data 8. Historical Volatility of Government Bond Yields and Bond Returns for Selected Countries
Data 9. Twelve-Month Forward Price/Earnings Ratios
Data 10. Flows into U.S.-Based Equity Funds
Data 11. United States: Corporate Bond Market
Data 12. Europe: Corporate Bond Market
Data 13. United States: Commercial Paper Market
Data 14. United States: Asset-Backed Securities

Tables

Data 1. Global Capital Flows: Inflows and Outflows
Data 2. Global Capital Flows: Amounts Outstanding and Net Issues of International Debt Securities by Currency of Issue and Signed International Syndicated Credit Facilities by Nationality of Borrower
Data 3. Selected Indicators on the Size of the Capital Markets, 2009
Data 4. Global Over-the-Counter Derivatives Markets: Notional Amounts and Gross Market Values of Outstanding Contracts
Data 5. Global Over-the-Counter Derivatives Markets: Notional Amounts and Gross Market Values of Outstanding Contracts by Counterparty, Remaining Maturity, and Currency
Data 6. Exchange-Traded Derivative Financial Instruments: Notional Principal Amounts Outstanding and Annual Turnover
Data 7. United States: Sectoral Balance Sheets
Data 8. Japan: Sectoral Balance Sheets
Data 9. Europe: Sectoral Balance Sheets


Emerging and Other Markets

Figures

Data 15. Emerging Market Volatility Measures
Data 16. Emerging Market Debt Cross-Correlation Measures

Tables

Data 10. MSCI Equity Market Indices
11. Foreign Exchange Rates
Data 12. Emerging Market Bond Index: EMBI Global Total Returns Index
Data 13. Emerging Market Bond Index: EMBI Global Yield Spreads
Data 14. Emerging Market External Financing: Total Bonds, Equities, and Loans
Data 15. Emerging Market External Financing: Bond Issuance
Data 16. Emerging Market External Financing: Equity Issuance
Data 17. Emerging Market External Financing: Loan Syndication
Data 18. Equity Valuation Measures: Dividend-Yield Ratios
Data 19. Equity Valuation Measures: Price-to-Book Ratios
Data 20. Equity Valuation Measures: Price/Earnings Ratios
Data 21. Emerging Markets: Mutual Fund Flows


Financial Soundness Indicators

Tables

Data 22. Bank Regulatory Capital to Risk-Weighted Assets
Data 23. Bank Capital to Assets
Data 24. Bank Nonperforming Loans to Total Loans
Data 25. Bank Provisions to Nonperforming Loans
Data 26. Bank Return on Assets
Data 27. Bank Return on Equity

The following symbols have been used throughout this volume:

. . . 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 or months (for example, 1997-99 or January-June) to indicate the years or months covered, including the beginning and ending years or months;

/ between years (for example, 1998/99) 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 1/4 of 1 percentage point).

"n.a." means not applicable.

Minor discrepancies between constituent figures and totals are due to rounding.
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.
 
On this site, 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. Dependent territories of member countries are listed alphabetically followed by a description of the constitutional relationships with their member countries.



A. What Is the Outlook for Global Financial Stability?
  B. Sovereign Risks and Financial Fragilities
  C. Sovereign and Banking System Spillovers
  D. Managing Upside Risks to Emerging Markets
  E. Policy Priorities
  Annex 1.1. Impact of Adverse Growth Shock on Advanced Economy Debt Ratios
  Annex 1.2. Systemic Contingent Claims Analysis of Banking and Sovereign Risk
  Annex 1.3. Analyzing Portfolio Inflows to Emerging Markets and Other Advanced Markets
  Annex 1.4. Asia’s Local Currency Corporate Bond Market—A New Spare Tire
  Annex 1.5. Where Now for Fannie and Freddie? A Review of the Options
  References
A. What Is the Outlook for Global Financial Stability?
  B. Sovereign Risks and Financial Fragilities
  C. Sovereign and Banking System Spillovers
  D. Managing Upside Risks to Emerging Markets
  E. Policy Priorities
  Annex 1.1. Impact of Adverse Growth Shock on Advanced Economy Debt Ratios
  Annex 1.2. Systemic Contingent Claims Analysis of Banking and Sovereign Risk
  Annex 1.3. Analyzing Portfolio Inflows to Emerging Markets and Other Advanced Markets
  Annex 1.4. Asia’s Local Currency Corporate Bond Market—A New Spare Tire
  Annex 1.5. Where Now for Fannie and Freddie? A Review of the Options
  References
Summary
  Review of the Systemic Liquidity Shock through Various Short-Term Funding Markets
  Funding Markets as Propagation Channels of Systemic Liquidity Risk
  Policies to Strengthen the Resilience of Funding Markets
  Policies to Strengthen Prudential Liquidity Regulations for Institutions
  Outstanding Policy Issues in Addressing Systemic Liquidity Risk
  Conclusions and Policy Considerations
  References
Summary
  Review of the Systemic Liquidity Shock through Various Short-Term Funding Markets
  Funding Markets as Propagation Channels of Systemic Liquidity Risk
  Policies to Strengthen the Resilience of Funding Markets
  Policies to Strengthen Prudential Liquidity Regulations for Institutions
  Outstanding Policy Issues in Addressing Systemic Liquidity Risk
  Conclusions and Policy Considerations
  References
  Summary
  Review of the Systemic Liquidity Shock through Various Short-Term Funding Markets
  Funding Markets as Propagation Channels of Systemic Liquidity Risk
  Policies to Strengthen the Resilience of Funding Markets
  Policies to Strengthen Prudential Liquidity Regulations for Institutions
  Outstanding Policy Issues in Addressing Systemic Liquidity Risk
  Conclusions and Policy Considerations
  References
  1.1 Japan: Risk of Sovereign Interest Rate Shock
    1.2 Risk Transmission between Sovereigns and Banks in Europe
    1.3 Risks of a Double Dip in the U.S. Real Estate Markets
1.4 China’s Banking System: Managing Challenges after Credit Expansion
    1.5 Brazil's Tax on Capital Inflows, 2009–10
1.6 Macroeconomic Costs of Regulatory Measures
1.7 Key Findings of the U.S. Financial Sector Assessment Program
1.8 Calibrating a Sovereign Risk-Adjusted Contingent Claims Analysis Balance Sheet
    2.1 Role of Money Markets
2.2 Disruptions to Cross-Border Funding and Foreign Exchange Swaps
2.3 The Repo Markets: A Primer
2.4 What Went Wrong in Financial Firms' Liquidity Risk Management Practices?
2.5 Repo Infrastructure: Trading, Clearing, and Settlement
Chart Data 3.1 The Global Credit Rating Agency Landscape
3.2 Spillover Effects of Sovereign Rating Downgrades
    3.3 Developments in the Regulation of Credit Rating Agencies
    3.4 An Overview of the Factors Influencing Sovereign Credit Ratings
3.5 Empirical Studies of Rating Determinants
Chart Data 3.6 Greece: An Examination of the Evolution of Rating Actions
3.7 Empirical Tests of Rating Information Value
3.8 Point-in-Time versus Through-the-Cycle Credit Ratings
  1.1 Japan: Risk of Sovereign Interest Rate Shock
    1.2 Risk Transmission between Sovereigns and Banks in Europe
    1.3 Risks of a Double Dip in the U.S. Real Estate Markets
1.4 China’s Banking System: Managing Challenges after Credit Expansion
    1.5 Brazil's Tax on Capital Inflows, 2009–10
1.6 Macroeconomic Costs of Regulatory Measures
1.7 Key Findings of the U.S. Financial Sector Assessment Program
1.8 Calibrating a Sovereign Risk-Adjusted Contingent Claims Analysis Balance Sheet
    2.1 Role of Money Markets
2.2 Disruptions to Cross-Border Funding and Foreign Exchange Swaps
2.3 The Repo Markets: A Primer
2.4 What Went Wrong in Financial Firms' Liquidity Risk Management Practices?
2.5 Repo Infrastructure: Trading, Clearing, and Settlement
Chart Data 3.1 The Global Credit Rating Agency Landscape
3.2 Spillover Effects of Sovereign Rating Downgrades
    3.3 Developments in the Regulation of Credit Rating Agencies
    3.4 An Overview of the Factors Influencing Sovereign Credit Ratings
3.5 Empirical Studies of Rating Determinants
Chart Data 3.6 Greece: An Examination of the Evolution of Rating Actions
3.7 Empirical Tests of Rating Information Value
3.8 Point-in-Time versus Through-the-Cycle Credit Ratings
Data 1.1 Sovereign Market and Vulnerability Indicators
Data 1.2 Low-Growth Shock: Impact Analysis and Ranking
    2.1 Typical Haircut on Term Securities Financing Transactions
    3.1 Long-Term Senior Debt Rating Symbols
    3.2 Rating Agency Statements on What Their Ratings Are Designed to Measure
    3.3 Key Factors in Sovereign Credit Rating Assessments
    3.4 Sovereign Rating “Failures” during 1997–98 Asian Crisis
    3.5 Sovereign Rating “Failures” during the 2008—10 Crisis
Data 1.1 Sovereign Market and Vulnerability Indicators
Data 1.2 Low-Growth Shock: Impact Analysis and Ranking
    2.1 Typical Haircut on Term Securities Financing Transactions
    3.1 Long-Term Senior Debt Rating Symbols
    3.2 Rating Agency Statements on What Their Ratings Are Designed to Measure
    3.3 Key Factors in Sovereign Credit Rating Assessments
    3.4 Sovereign Rating “Failures” during 1997–98 Asian Crisis
    3.5 Sovereign Rating “Failures” during the 2008—10 Crisis