Global Financial Stability Report
Global Financial Stability Report April 2018: A Bumpy Road Ahead
April 2018
Summary
The April 2018 Global Financial Stability Report (GFSR) finds that short-term risks to financial stability have increased somewhat since the previous GFSR. Medium-term risks are still elevated as financial vulnerabilities, which have built up during the years of accommodative policies, could mean a bumpy road ahead and put growth at risk. Higher inflation may lead central banks to respond more aggressively than currently expected, which could lead to a sharp tightening of financial conditions. Valuations of risky assets are still stretched, and liquidity mismatches, leverage, and other factors could amplify asset price moves and their impact on the financial system. Emerging markets have generally improving fundamentals, but could be vulnerable to sudden tightening of global financial conditions. Banks have strengthened their balance sheets since the crisis, but parts of the system face a structural US dollar liquidity mismatch that could be a vulnerability. Crypto assets have features that may improve market efficiency, but they could also pose risks if used with leverage or without appropriate safeguards. Policymakers and investors must remain attuned to the risks of rising interest rates and higher market volatility. Central banks should continue to normalize policy gradually and communicate clearly, while policymakers should address vulnerabilities by deploying and developing macroprudential tools. This GFSR also examines the short- and medium-term implications for downside risks to growth and financial stability of the riskiness of corporate credit allocation. It documents the cyclical nature of the riskiness of corporate credit allocation at the global and country levels and its sensitivity to financial conditions, lending standards, and policy and institutional settings. Another chapter analyzes whether and how house prices move in tandem across countries and major cities around the world—that is, global house price synchronicity. The chapter finds a striking increase in house price synchronization across the countries and cities. It also finds that global financial conditions contribute to this synchronization, which suggests that policymakers should be alert to the possibility that shocks to house prices elsewhere may affect housing markets at home.
Chapter 1: A Bumpy Road Ahead
The April 2018 Global Financial Stability Report (GFSR) finds that short-term risks to financial stability have increased somewhat since the previous GFSR. Medium-term risks are still elevated as financial vulnerabilities, which have built up during the years of accommodative policies, could mean a bumpy road ahead and put growth at risk. Higher inflation may lead central banks to respond more aggressively than currently expected, which could lead to a sharp tightening of financial conditions. Valuations of risky assets are still stretched, and liquidity mismatches, leverage, and other factors could amplify asset price moves and their impact on the financial system. Emerging market have generally improving fundamentals, but could be vulnerable to sudden tightening of global financial conditions. Banks have strengthened their balance sheets since the crisis, but parts of the system face a structural US dollar liquidity mismatch that could be a vulnerability. Crypto assets have features that may improve market efficiency, but they could also pose risks if used with leverage or without appropriate safeguards. Policymakers and investors must remain attuned to the risks of rising interest rates and higher market volatility. Central banks should continue to normalize policy gradually and communicate clearly, and policymakers should address vulnerabilities by deploying and developing macroprudential tools.Full Text Summary Blog
| Outlook for Financial Stability |
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| Monetary Policy Normalization in
Advanced Economies |
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| Reach for Yield or Overreach in
Risky Assets? |
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| Crypto Assets: New Coin on the
Block, Reach for Yield, or Asset Price Bubble? |
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| Vulnerabilities in Emerging
Markets, Low-Income Countries, and China |
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Funding Challenges of
Internationally Active Banks
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Chapter 2: The Riskiness of Credit Allocation: A Source of Financial Vulnerability?
Chapter 2 takes a comprehensive look at the riskiness of corporate credit allocation—the extent to which riskier firms receive credit relative to less risky firms, its relationship to the size of credit expansions, and its relevance to financial stability analysis. It constructs four measures of the riskiness of credit allocation across a broad set of advanced and emerging market economies. The riskiness of credit allocation is cyclical at the global and country levels and rises when financial conditions and lending standards are looser. Taking it into account helps better predict full-blown banking crises, financial sector stress, and downside risks to growth at horizons up to three years. Because it is a source of vulnerability and may threaten financial stability, policymakers and supervisors should keep close watch on its evolution. This chapter also finds that a period of credit expansion is less likely to be associated with a riskier credit allocation if macroprudential policy has been tightened, the banking supervisor is more independent, the government has a smaller footprint in the nonfinancial corporate sector, and minority shareholder protection is greater.
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Chapter 3: House Price Synchronization: What Role for Financial Factors?
Chapter 3 analyzes whether and how house prices move in tandem across countries and major cities around the world—that is, the synchronicity of global house prices. The chapter finds an increase in house price synchronization, on balance, for 40 advanced and emerging market economies and 44 major cities. Countries’ and cities’ exposure to global financial conditions may explain rising house price synchronization. Moreover, cities in advanced economies may be particularly exposed to global financial conditions, perhaps because they are integrated with global financial markets or are attractive to global investors searching for yield or safe assets. Policymakers cannot ignore the possibility that shocks to house prices elsewhere will affect markets at home. House price synchronization in and of itself may not warrant policy intervention, but the chapter finds that heightened synchronicity can signal a downside tail risk to real economic activity. Macroprudential policies seem to have some ability to influence local house price developments, even in countries with highly synchronized housing markets, and these measures may also be able to reduce a country’s house price synchronization. Such unintended effects are worth considering when evaluating the trade-offs of implementing macroprudential and other policies.