Global Financial Stability Reports

Vulnerabilities in a Maturing Credit Cycle

April 2019

The April 2019 Global Financial Stability Report (GFSR) finds that despite significant variability over the past two quarters, financial conditions remain accommodative. As a result, financial vulnerabilities have continued to build in the sovereign, corporate, and nonbank financial sectors in several systemically important countries, leading to elevated medium-term risks. The report attempts to provide a comprehensive assessment of these vulnerabilities while focusing specifically on corporate sector debt in advanced economies, the sovereign–financial sector nexus in the euro area, China’s financial imbalances, volatile portfolio flows to emerging markets, and downside risks to the housing market. These vulnerabilities require action by policymakers, including through the clear communication of any changes in their monetary policy outlook, the deployment and expansion of macroprudential tools, the stepping up of measures to repair public and private sector balance sheets, and the strengthening of emerging market resilience to foreign portfolio outflows.

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Report Summary

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The April 2019 Global Financial Stability Report (GFSR) finds that despite significant variability over the past two quarters, financial conditions remain accommodative. As a result, financial vulnerabilities have continued to build in the sovereign, corporate, and nonbank financial sectors in several systemically important countries, leading to elevated medium-term risks. The report attempts to provide a comprehensive assessment of these vulnerabilities while focusing specifically on corporate sector debt in advanced economies, the sovereign–financial sector nexus in the euro area, China’s financial imbalances, volatile portfolio flows to emerging markets, and downside risks to the housing market. These vulnerabilities require action by policymakers, including through the clear communication of any changes in their monetary policy outlook, the deployment and expansion of macroprudential tools, the stepping up of measures to repair public and private sector balance sheets, and the strengthening of emerging market resilience to foreign portfolio outflows. This GFSR also takes an in depth look at house prices at risk, a measure of downside risks to future house price growth—using theory, insights from past analyses, and new statistical techniques applied to 32 advanced and emerging market economies and major cities. The chapter finds that lower house price momentum, overvaluation, excessive credit growth, and tighter financial conditions predict heightened downside risks to house prices up to three years ahead. The measure of house prices at risk helps forecast downside risks to GDP growth and adds to early-warning models for financial crises. Policymakers can use estimates of house prices at risk to complement other surveillance indicators of housing market vulnerabilities and guide macroprudential policy actions aimed at building buffers and reducing vulnerabilities. Downside risks to house prices could also be relevant for monetary policymakers when forming their views on the downside risks to the economic and inflation outlook. Authorities considering measures to manage capital flows might also find such information useful when a surge in capital inflows increases downside risks to house prices and when other policy options are limited.

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Chapter 1 : Vulnerabilities in a Maturing Credit Cycle

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The April 2019 Global Financial Stability Report (GFSR) finds that despite significant variability over the past two quarters, financial conditions remain accommodative. As a result, financial vulnerabilities have continued to build in the sovereign, corporate, and non bank financial sectors in several systemically important countries, leading to elevated medium-term risks. The report attempts to provide a comprehensive assessment of these vulnerabilities while focusing specifically on corporate sector debt in advanced economies, the sovereign–financial sector nexus in the euro area, China’s financial imbalances, volatile portfolio flows to emerging markets, and downside risks to the housing market. These vulnerabilities require action by policymakers, including through the clear communication of any changes in their monetary policy outlook, the deployment and expansion of macroprudential tools, the stepping up of measures to repair public and private sector balance sheets, and the strengthening of emerging market resilience to foreign portfolio out flows.

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Global Financial Stability Assessment
Late-Cycle Corporate Sector Risks in Advanced Economies
The Euro Area Sovereign–Financial Sector Nexus
Vulnerabilities in China, Emerging Markets, and Frontier Economies
Policy Priorities
Special Feature: Liquidity Risks in Capital Markets

Figures
Chart Data 1.1. Global Market Developments
Chart Data 1.2. Global Financial Conditions
Chart Data 1.3. Growth-at-Risk Estimates
Chart Data 1.4. Global Financial Vulnerabilities
Chart Data 1.5. Balance Sheet Vulnerabilities
Chart Data 1.6. Asset Price Misalignments
Chart Data 1.7. Credit Market Developments in the United States and Europe
Chart Data 1.8. The Unique Features of the Current Corporate Credit Cycle  
Chart Data 1.9. Tracking the Corporate Credit Cycle: United States versus Europe
Chart Data 1.10. Corporate Profitability Indicators in Advanced Economies
Chart Data 1.11. Corporate Credit Quality Indicators in Advanced Economies
Chart Data 1.12. Potential Fallout from the BBB Bond Downgrades on the US High-Yield Corporate Bond Market
Chart   1.13. Developments in the Leveraged Loan Market in the United States and Europe
Chart   1.14. Italian Sovereign and Banks: Recent Financial Developments
Chart Data 1.15. The Euro Area Sovereign–Financial Sector Nexus
Chart   1.16. Channels of Contagion in the Sovereign–Financial Sector Nexus
Chart Data 1.17. Euro Area Banks, Sovereign Shocks, and Nonperforming Loans
Chart   1.18. Selected Euro Area Countries: Insurers’ Exposures to Sovereign, Bank and Corporate Bonds
Chart Data 1.19. Euro Area Bank Profits and Funding
Chart Data 1.20. Recent Developments in Emerging and Frontier Markets
Chart Data 1.21. Recent Pressures and Outlook for Portfolio Flows to Emerging Markets
Chart Data 1.22. Emerging Market Benchmark-Driven versus Unconstrained Investors
Chart Data 1.23. Benchmark-Driven Portfolio Flows to Emerging Markets
Chart Data 1.24. Emerging Market and Frontier Debt Characteristics and the Impact of China’s Inclusion in Benchmark Indices
Chart Data 1.25. China: Impact of Regulatory Tightening on Credit Expansion
Chart Data 1.26. China: Bank Balance Sheet Weaknesses
Chart Data 1.27. China: Impact of Tightening Financial Conditions on Nonfinancial Firms
Chart Data 1.28. Frontier Debt Vulnerabilities
Chart
1.SF.1. Structural Changes in the Provision of and Demand for Market Liquidity
Chart   1.SF.2. Evolution in Market Liquidity
Chart Data 1.SF.3. Prevalence of Jumps and Liquidity Strain in Advanced and Emerging Markets
Chart Data 1.SF.4. Equity Volatility, High-Yield Spreads, and Days with Liquidity
Chart Data 1.SF.5. Proportion of Intraday Price Variation Due to Jumps: In Japanese Yen/US Dollar
Chart Data 1.SF.6. Brexit Event Study on Jumps and Market Liquidity
Boxes
Chart Data 1.1. China’s Share-Collateralized Lending and Its Financial Stability Implications 

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Chapter 2 : Downside Risks to House Prices

Full text     Summary    Blog

Chapter 2 studies and quantifies house prices at risk, a measure of downside risks to future house price growth—using theory, insights from past analyses, and new statistical techniques applied to 32 advanced and emerging market economies and major cities. The chapter finds that lower house price momentum, overvaluation, excessive credit growth, and tighter financial conditions predict heightened downside risks to house prices up to three years ahead. The measure of house prices at risk helps forecast downside risks to GDP growth and adds to early-warning models for financial crises. Policymakers can use estimates of house prices at risk to complement other surveillance indicators of housing market vulnerabilities and guide macroprudential policy actions aimed at building buffers and reducing vulnerabilities. Downside risks to house prices could also be relevant for monetary policymakers when forming their views on the downside risks to the economic and inflation outlook. Authorities considering measures to manage capital flows might also find such information useful when a surge in capital inflows increases downside risks to house prices and when other policy options are limited.

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Summary

Introduction

Conceptual Framework

An Overview of Developments in House Prices

Empirical Analysis: The Behavior of House Prices at Risk

House Prices at Risk and Financial Stability

Policies and House Prices at Risk

Conclusion and Policy Recommendations

Figures
Chart Data 2.1. Historical Developments in Real House Prices
Chart
2.2. House Prices and Financial Stability
Chart Data 2.3. Frequency Distribution of Real House Price Growth
Chart Data 2.4. Determinants of Real House Prices
Chart Data 2.5. House Prices and Fundamentals: Quantile Regression Results
Chart Data 2.6. Evolution of House Prices at Risk and Shifts in Riskiness
Chart Data 2.7. Predictive Distributions of House Price Risks
Chart Data 2.8. Factors Affecting House Prices at Risk in the United States and China
Chart Data 2.9. City- and Country-Level Comparisons of House Prices at Risk
Chart Data 2.10. Out-of-Sample Forecasting Accuracy
Chart Data 2.11. House Prices at Risk and Financial Stability
Chart Data 2.12. Effects of Macroprudential and Monetary Policy and Capital Flows on House Prices at Risk
Boxes
Chart Data 2.1. Synchronization of House Prices at Risk across Countries 
Chart Data 2.2. City-Level House Prices at Risk in the United States and Canada

Chart
Chart

Data 2.3. Province-Level House Prices at Risk in China 
Online Annexes
Text   2.1. Data and Empirical Methodology
Text   2.2. Theoretical Modeling Framework

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Videos: Watch the conversation with the authors