Global Financial Stability Report

Executive Summary and Preface

Chapter 1: Potent Policies for a Successful Normalization

Chapter 1 finds that risks to global financial stability have increased since the October 2015 Global Financial Stability Report. In advanced economies, the outlook has deteriorated because of heightened uncertainty and setbacks to growth and confidence. Disruptions to global asset markets have added to these pressures. Declines in oil and commodity prices have kept risks elevated in emerging market economies, while greater uncertainty about China’s growth transition has increased spillovers to global markets. These developments tightened financial conditions, reduced risk appetite, raised credit risks, and stymied balance sheet repair, undermining financial stability. A broad-based policy response is needed to secure financial stability.

Chapter 2: The Growing Importance of Financial Spillovers from Emerging Market Economies

Chapter 2 finds that spillovers from emerging equity and foreign exchange markets have risen substantially, and now explain more than a third of the variation in asset returns in other countries. This underscores the importance for policymakers of taking account of economic and policy developments in emerging market economies when assessing domestic macrofinancial conditions. More than economic size and trade integration, the degree of financial integration matters for a country’s importance as receiver and emitter of financial spillovers. The level of integration explains, for example, why purely financial contagion from China remains less significant even as the impact of Chinese growth shocks is increasingly important for equity returns in both emerging market and advanced economies. As China’s role in the global financial system continues to grow, clear and timely communication of its policy decisions and transparency about its policy goals and strategies consistent with their achievement will be ever more important. Given the evident relevance of corporate leverage and mutual fund flows in amplifying spillovers of shocks, it will also be important to shape macroprudential surveillance and policies to contain systemic risks arising from these channels.

Chapter 3: The Insurance Sector—Trends and Systemic Risk Implications

Chapter 3 shows that across advanced economies, the contribution of the insurance sector, particularly of life insurers, to systemic risk has increased, although it is not yet to the level of the banking sector. This increase is largely a result of growing common exposures to aggregate risk, partly because insurers’ interest rate sensitivity has risen and partly because of higher correlations across asset classes. In the event of an adverse shock, therefore, insurers are unlikely to fulfill their role as financial intermediaries at a time when other parts of the financial system are also struggling to do so. These findings suggest that a more macroprudential approach to supervision and regulation of insurance companies should be taken. Measures could include regular macroprudential stress testing or the adoption of countercyclical capital buffers. Steps that would complement a push for stronger macroprudential policies include the international adoption of capital and transparency standards for the sector. In addition, the different behavior of smaller and weaker insurers warrants attention by supervisors.