Global Financial Stability Report

Transition Challenges to Stability

October 2013

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.

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The October 2013 Global Financial Stability Report examines current risks facing the global financial system as it undergoes a series of transitions along the path toward greater financial stability. The United States may soon move to less accommodative monetary policies and higher long-term interest rates as its recovery gains ground. Emerging markets face a transition to more volatile external conditions and higher risk premiums. Japan is moving toward the new “Abenomics” policy regime, and the euro area is moving toward a more robust and safer financial sector. Finally, the global banking system is phasing in stronger regulatory standards.



Front Matter

Chapter 1. Making the Transition to Stability

Data 1.1 Mortgage Real Estate Investment Trusts: Business Model Risks
Data 1.2 First-Time Issuers: New Opportunities and Emerging Risks
1.3 Financial Regulatory Reform Update
1.4 Recent Financial Sector Assessment Program Mission Findings
1.4 The GFSR Analysis of Corporate Credit Quality versus Bank Stress Tests References
Data 1.1 Market-Implied Interest Rate Pricing versus Historical Cycles
Data 1.2 Bond Portfolio Interest Rate Sensitivities
Data 1.3 Structure of the Japanese Government Bond Market
Data 1.4 Foreign Assets Held by Japanese Investor Groups, end-2012
Data 1.5 Japan Scenarios: Complete, Incomplete, and Disorderly
Data 1.6 European Union Bank Deleveraging
1.7 Policy Recommendations
1.8 Determinants of Bank Interest Rates on New Small Loans
1.9 Amadeus Database, 2011
Data 1.10 Mapping of Corporate Vulnerability Indicators to Probabilities of Default
Data 1.11 Comparison of GFSR Analysis with Oliver Wyman’s Stress Tests for Spain
Chart Data 1.1 Global Financial Stability Map
Chart Data 1.2 Global Financial Stability Map: Assessment of Risks and Conditions
Chart Data 1.3 Market Volatility Shock
Chart Data 1.4 Global Financial Conditions
Chart Data 1.5 Market Dashboard
Chart Data 1.6 U.S. Nonfinancial Firms’ Credit Fundamentals
Chart Data 1.7 Decomposition of Term Premium: Change since Late 2008
Chart Data 1.8 Simulated Shock to 10-Year U.S. Treasury Term Premium
Chart Data 1.9 U.S. Mutual Fund Cumulative Flows
Chart Data 1.10 Global Bond Portfolio Duration
Chart Data 1.11 Nongovernment Bond Inventories, Total Trading Volumes, and Outstanding Stock
Chart 1.12 Fire Sale “Risk Spiral”
Chart Data 1.13 Estimated Average Change in Mortgage Real Estate Investment Trust Portfolio Value for Parallel Interest Rate Shifts
Chart Data 1.14 Leveraged Mortgage Real Estate Investment Trusts Are More Vulnerable to Interest Rate Increases
Chart Data 1.15 Above-Trend Bond Flows from Advanced to Emerging Market Economies
Chart Data 1.16 Net Portfolio Flows into Fixed-Income Equity by Country, 2009-12
Chart Data 1.17 Impact of Flows on Local Currency Bond Yields
Chart Data 1.18 Allocation of Major Bond Funds to Emerging Markets
Chart Data 1.19 Duration of Emerging Market Fixed-Income Indices
Chart Data 1.20 Share of Nonresident Holdings of Local Currency Government Debt and Market Liquidity
Chart Data 1.21 Composition of the Holders of Local Currency Government Debt
Chart Data 1.22 Net New Issuance of Emerging Market Bonds
Chart 1.23 Credit Ratings of Emerging Market Corporate Bond Issues
Chart Data 1.24 Corporate Rating Changes in Emerging Markets
Chart Data 1.25 Nonfinancial Corporate Balance Sheet Metrics
Chart Data 1.26 Sharp Increase in Corporate Debt Defaults
Chart Data 1.27 China: Corporate Sector Fundamentals
Chart Data 1.28 External and Domestic Vulnerabilities
Chart Data 1.29 China: Credit Developments
Chart Data 1.30 Recent Stress in Emerging Markets
Chart Data 1.31 May 2013 Sell-Off of Emerging Market Bonds versus the Lehman Brothers Episode
Chart Data 1.32 Estimated Impact on Bond Yields from a Reversal of Capital Flows and Other Factors
Chart Data 1.33 Japanese Flows into Currency Overlay Funds
Chart Data 1.34 Japanese Banks’ Sensitivity to an Interest Rate Shock
Chart Data 1.35 Value-at-Risk in the Disorderly Scenario
Chart Data 1.36 Projected Flows to Selected Emerging Markets in Disorderly Scenario
Chart 1.37 Bank-Corporate-Sovereign Nexus
Chart Data 1.38 Stressed Euro Area Economy Bank Credit
Chart Data 1.39 Bank Buffers and Interest Rates on Corporate Loans
Chart Data 1.40 Individual Bank Buffers and Lending in Stressed Economies, 2013:Q1
Chart 1.41 Euro Area Sovereign Spreads, April–August 2013
Chart Data 1.42 Leverage Ratios
Chart Data 1.43 Leverage Ratios by Firm Size
Chart Data 1.44 Share of Debt at Firms with Various Debt-to-Assets Ratios, 2011
Chart Data 1.45 Share of Debt at Firms with Various Interest Coverage Ratios, 2011
Chart Data 1.46 Nonperforming Corporate Loans
Chart Data 1.47 Distribution of Estimated Corporate Expected Default Frequencies and Bank Loan Interest Rates
Chart Data 1.48 Listed Firms: Changes in Debt, Capital Expenditures, and Dividends
Chart 1.49 Factors Affecting Bank Interest Rates on Corporate Loans
Chart Data 1.50 Model-Based Interest Rates on Bank Loans and Factor Decomposition
Chart Data 1.51 Corporate Debt Overhang
Chart 1.52 Distribution of Estimated Corporate Sector Probabilities of Default
Chart Data 1.53 Potential Losses on Corporate Loans and Banking System Buffers
Chart Data 1.54 Large Bank Tier 1 Ratios
Chart Data 1.55 Large Bank Tangible Leverage Ratios, 2012:Q4
Chart Data 1.56 Large Bank Tier 1 Capital and Tangible Leverage Ratios
Chart Data 1.57 Bank Profitability Comparison
Chart Data 1.58 Bank Profitability and Market Valuation of Assets
Chart 1.59 Large Bank Capitalization
Chart Data 1.60 Normalization of Monetary Policy: Smooth or Turbulent?
Chart Data 1.61 France: Deviations from Cointegrating Equilibrium
Chart Data 1.62 Spain and Italy: Deviations from the Cointegrating Equilibrium
Chart Data 1.63 Leverage, Profitability, and Debt at Risk
Chart Data 1.64 Bank Lending Rates to Small and Medium Enterprises
Chart Data 1.65 Projected Corporate Debt Overhang in Italy, Portugal, and Spain
Chart Data 1.66 Probabilities of Default in the Corporate Sector

Chapter 2. Assessing Policies to Revive Credit Markets

2.1 Policies to Diversify Credit Options for Small and Medium Enterprises in Europe
2.2 Challenges in the Structural Estimation of Credit Supply and Demand
Chart Data 2.3 The Effect of the Liquidity Crisis on Mortgage Lending
Data 2.4 Policy Measures to Finance Small and Medium Enterprises during Crises: The Case of Korea
Data 2.5 Lessons from the Nordic Banking Crises
2.1 Identifying Countries with Weak Credit Growth, BIS Data
2.2 Identifying Countries with Weak Credit, Other Data Sources
2.3 Credit Policies Implemented since 2007
2.4 Determinants of Credit Growth
2.5 Structural Determinants of the Supply and Demand of Bank Lending to Firms in Selected Countries
2.6 Firm-Level Regressions of Changes in Debt-to-Asset Ratio for Manufacturing Firms
2.7 Previous Findings in the Literature
2.8 Euro Area: Determinants of Bank Lending Standards
2.9 United States: Determinants of Bank Lending Standards
Chart Data 2.1 Real Credit Growth
Chart 2.2 Perceived Obstacles in Access to Finance
Chart Data 2.3 Interest Rate Spread between Loans to SMEs and to Larger Firms
Chart Data 2.4 Corporate and Household Debt Outstanding
Chart Data 2.5 Stock Price Index
Chart Data 2.6 Real House Price Index
Chart 2.7 Relative Number of Credit Supply and Demand Policies Currently in Place
Chart 2.8 Decomposing Credit Growth: Corporate Loans
Chart 2.9 Decomposing Credit Growth: Mortgage Loans
Chart 2.10 Decomposition of Change in Debt-to-Asset Ratios for Firms
Chart Data 2.11 Real Total Credit Growth, by Borrowing Sector
Chart 2.12 Decomposing Lending Standards: Corporate Loans
Chart 2.13 Decomposing Lending Standards: Mortgage Loans
Chart 2.14 Effects of a Tightening of Lending Supply and a Drop in Lending Demand
Chart 2.15 Fitted Supply and Demand Curves for Bank Loans to Firms

Chapter 3. Changes in Bank Funding Patterns and Financial Stability Issues

Chart 3.1 Typology of Bank Funding
3.2 What the Crisis Taught Us about Bank Funding
Data 3.3 Changes in Cross-Border Bank Funding Sources
3.4 Bank Funding in Emerging Market Economies and the Impact of Regulatory Reforms
3.5 Investor Base for Bail-in Debt and Bank Bond Ratings
3.1 Characteristics of Four G-SIBs in Simulation Exercise
3.2 Country and Bank Coverage Statistics
3.3 List of Variables Used in the Panel Data Analysis
3.4 Illustration of Creditor Hierarchy and Loss Sharing under Alternative Resolution Tools
3.5 Cross-Country Comparison of Covered Deposits, End-2010
Chart 3.1 Banks’ Funding Structures across Major Economies and Regions
Chart 3.2 Banks’ Long-Term Wholesale Funding across Major Economies and Regions: Outstanding as of End-July 2013
Chart 3.3 Evolution of Bank Funding Structures, Global and Systemically Important Banks
Chart 3.4 Evolution of Bank Funding Structures, Advanced and Emerging Market Economies
Chart 3.5 Determinants of Bank Funding
Chart 3.6 Wholesale Bank Funding
Chart 3.7 Regulatory Capital Ratios across Major Economies and Regions
Chart 3.8 Asset Encumbrance: December 2007 and June 2013
Chart 3.9 Share of Retained Bank-Covered Bonds in Europe
Chart 3.10 Contribution of Funding Characteristics to Bank Distress
Chart 3.11 Evolution of Bank Funding Characteristics
Chart 3.12 Priority of Claims of Bank Liabilities
Chart 3.13 Bank Bond Yield to Maturity at Issuance: Selected Advanced Economies
Chart 3.14 Debt Pricing under Depositor Preference and Asset Encumbrance
Chart 3.15 Debt Pricing under Bail-in Power
Chart 3.16 Simulation Results for Specific Banks
Chart 3.17 Equity Value for Original Shareholders under Bail-in Regime Converting Debt to Equity
Chart 3.18 Contribution of Specific Variables to Bank Distress in Probit Models
Chart 3.19 Basel III Minimum Capital Requirements and Buffers
Chart 3.20 Pricing of Senior and Subordinated Debt and Equity
Chart 3.21 Pricing of Liabilities with Depositor Preference and Asset Encumbrance
Chart 3.22 Pricing of Liabilities under Bail-in Power

Statistical Appendix

Chart Data 1. Major Net Exporters and Importers of Capital in 2012
Chart 2. Sovereign Credit Default Swap Spreads
Chart 3. Selected Credit Default Swap Spreads
Chart Data 4. Selected Spreads
Chart Data 5. Implied Volatility Indices
Chart Data 6. United States: Corporate Bond Market
Chart Data 7. Euro Area: Corporate Bond Market
Chart Data 8. United States: 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: Equities
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.