Global Financial Stability Report

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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. 

• Assumptions and Conventions
• Further Information
• Preface
• Foreword
• Executive Summary
• IMF Executive Board Summary

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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