Global Financial Stability Report

Global Financial Stability Report October 2018: A Decade after the Global Financial Crisis: Are We Safer?

October 2018

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Summary

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The October 2018 Global Financial Stability Report (GFSR) finds that global near-term risks to financial stability have increased somewhat, reflecting mounting pressures in emerging market economies and escalating trade tensions. These risks, while still moderate, could increase significantly. An intensification of concerns about emerging markets, a broader rise in trade tensions, the realization of political and policy uncertainty, or a faster-than-expected tightening in monetary normalization could all lead to a sharp tightening in financial conditions. Medium-term financial stability risks remain elevated, driven by high non–financial sector leverage in advanced economies and rising external borrowing in emerging markets. Although the global banking system is stronger than before the crisis, it is exposed to highly indebted borrowers as well as to opaque and illiquid assets and foreign currency rollover risks. This all raises the urgency for policymakers to step up efforts to boost the financial system’s resilience by completing the financial regulatory reform agenda as well as developing and deploying macroprudential policy tools. This GFSR also takes stock of global regulatory reform 10 years after the global financial crisis. It reviews the main precrisis failings in financial sector oversight and assesses the progress in implementation of the reform agenda designed to address these failings. It also looks at whether shifts in market structure and risks in the global financial system since the crisis have been in the direction the new regulatory agenda intended, that is, toward greater safety. It finds that the broad agenda set by the international community has given rise to new standards that have contributed to a more resilient financial system—one that is less leveraged, more liquid, and better and more intensively supervised, especially at large banks. The forms of shadow banking more closely related to the global financial crisis have been curtailed, and most countries now have macroprudential authorities and some tools with which to oversee and contain risks to the whole financial system. The chapter also identifies areas in which consolidation or further progress is needed and warns against rolling back reforms, which might make the global financial system less safe.

 

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Chapter 1: A Decade after the Global Financial Crisis: Are We Safer?

The October 2018 Global Financial Stability Report (GFSR) finds that global near-term risks to financial stability have increased somewhat, reflecting mounting pressures in emerging market economies and escalating trade tensions. Near-term risks to the global financial system, while still moderate, could increase significantly. An intensification of concerns about emerging markets, a broader rise in trade tensions, the realization of political and policy uncertainty, or a faster-than-expected tightening in monetary normalization could all lead to a sharp tightening in financial conditions. Medium-term financial stability risks remain elevated, driven by high nonfinancial sector leverage in advanced economies and rising external borrowing in emerging market economies. Although the global banking system is stronger than before the global financial crisis, it is exposed to these highly indebted borrowers, as well as to opaque and illiquid assets and foreign currency rollover risks. These factors all raise the urgency for policymakers to step up efforts to boost the financial system’s resilience by completing the financial regulatory reform agenda as well as developing and deploying macroprudential policy tools.     

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Table of Contents and Data

Global Financial Stability Assessment

Fragilities in Emerging and Frontier Markets

Banks—Stronger, but Not Yet Out of the Woods

Policies to Safeguard Financial Stability

Special Feature: International Banking Groups—Centralized versus Decentralized Business Models


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1.1. Recent Market Developments

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Data

1.2. The Global Financial Conditions

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Data 1.3. Growth-at-Risk Approach
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Data 1.4. The Growth-at-Risk Estimates
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1.5. Impact of U.S.-China Trade Tensions on Asset Prices
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1.6. Balance Sheet Vulnerabilities
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1.7. Balance-Sheet Leverage Metrics by Sector and Region
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Data 1.8. China: Deleveraging and De-risking Progress
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Data 1.9. Asset Valuations
Chart Data  1.10. Emerging Markets: Portfolio Flows and Asset Market Performance   
Chart  Data  1.11. Emerging Market and Developing Economies: Financial Conditions and GDP Growth   
Chart  Data  1.12. Investor Differentiation among Emerging Markets   
Chart    1.13. Frontier Markets: Bond Issuance and Redemptions   
Chart    1.14. Emerging Markets: Key Risks and Vulnerabilities   
Chart  Data  1.15. Emerging Market Vulnerabilities to Portfolio Flow Reversals   
Chart  Data  1.16. Emerging Market Vulnerabilities   
Chart  Data  1.17. Reserve Buffers and Potential Foreign Exchange Liquidity Needs   
Chart  Data  1.18. The Investor Base for Emerging Market Sovereign and Corporate Debt   
Chart  Data  1.19. Market Size and Domestic Investor Base   
Chart  Data  1.20. Banking Sector Resilience   
Chart  Data  1.21. Banking System Exposures to the Nonfinancial Sector   
Chart  Data  1.22. Bank Exposures to Opaque and Illiquid Assets, Interconnectedness, and Funding   
Chart    1.23. Availability of Macroprudential Tools for Addressing Key Vulnerabilities   
Special Features 
Chart  Data  1.SF.1. Indicators of the Importance of Foreign Banking Offices   
Chart  Data  1.SF.2. Foreign Bank Branches and Subsidiaries: Balance Sheet Structures (End-2017)   
Chart  Data  1.SF.3. Liquidity, Lending, and Intragroup Positions of Foreign Bank Branches   
Boxes
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Box 1.1. Implications of the U.S. Yield Curve Slope for the GDP Growth Distribution
Chart Data Box 1.2. Escalating Trade Tensions and Growth at Risk
 

  Box 1.3. Brexit—Financial Stability Considerations
 
Chart  Data  Box 1.4. Jumps and Liquidity in the U.S. Stock Market   
Chart    Box 1.5. Trading Activity in China’s Bond Market   
Chart  Data  Box 1.6. Correspondent Banking Relationships   
Online Annex
Text    1.1. Technical Note  

Chapter 2: Regulatory Reform 10 Years after the Global Financial Crisis: Looking Back, Looking Forward

Chapter 2 takes stock of global regulatory reform 10 years after the global financial crisis. It reviews the main precrisis failings in financial sector oversight and assesses the progress in implementation of the reform agenda designed to address them. It also looks at whether shifts in market structure and risks in the global financial system since the crisis have been in the direction the new regulatory agenda intended, that is, toward greater safety. It finds that the broad agenda set by the international community has given rise to new standards that have contributed to a more resilient financial system—less leveraged, more liquid, and better and more intensively supervised, especially at large banks. The forms of shadow banking more closely related to the global financial crisis have been curtailed, and most countries now have macroprudential authorities and some tools with which to oversee and contain risks to the whole financial system. The chapter also identifies areas in which consolidation or further progress is needed, such as completing implementation of the leverage ratio and ensuring adequate toolkits for containing systemic risk. Although evaluation of the impact of reforms is advisable, the chapter warns against a rollback that might make the global financial system less safe. Finally, regulators and supervisors must remain attentive to new risks, including fintech and cybersecurity, but also must continue their vigilance on the perimeter of prudential regulation. 

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Table of Contents and Data

Summary
Introduction
What Went Wrong before the Global Financial Crisis?

Assessing the Regulatory Agenda

Regulatory Efforts Going Forward: Where to Focus?

Conclusion
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2.1.Developments in Housing, Credit, and Securitization
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2.2. Bank Capital Requirements and the Evolution of Buffers
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Data 2.3. Procyclicality: Regulatory Tools, Outcomes, and IMF Technical Assistance
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Data 2.4. Overview of Postcrisis Regulatory Progress in Liquidity
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2.5. Liquidity Buffers and Reliance on Wholesale Funding
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2.6. Banking Concentration and Competition and Capital Buffers of G-SIBs
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2.7. Macroprudential Policy Frameworks
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2.8. Perceptions of Likelihood of Bailout of Systemic Institutions
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2.9. New Sources of Risk and Vulnerabilities
Boxes


2.1. The IMF's Role in the Global Regulatory Reform Agenda

2.2. The Data Gaps Initiative: Better Data as a Foundation for the Financial System Reform Agenda
 

  2.3. Resolution Reforms in Selected Countries
 
Online Annex  
Text    2.1. Analysis of Selected Banking Sector Indicators  

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