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Global Financial Stability Report
Global Financial Stability Report October 2017: Is Growth at Risk?
October 2017
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Global Financial Stability Report
October 2017
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The October 2017 Global Financial Stability Report (GFSR) finds that the global financial system continues to strengthen in response to extraordinary policy support, regulatory enhancements, and the cyclical upturn in growth. Global bank balance sheets are stronger because of improved capital and liquidity buffers, amid tighter regulation and heightened market scrutiny. However, some banks are still grappling with legacy issues and business model challenges, where progress has been uneven. The environment of continuing monetary accommodation—necessary to support activity and boost inflation—may lead to a continued search for yield where there is too much money chasing too few yielding assets, pushing investors beyond their traditional habitats. As the search for yield intensifies, vulnerabilities are shifting to the nonbank sector and market risks are rising. This may lead to a further compression of risk compensation in markets and higher leverage in the nonfinancial sector. These challenges must be managed carefully to avoid putting growth at risk. Policymakers at both the national and global level will have to strengthen the financial and macroeconomic policy mix. The October 2017 GFSR also includes a chapter that examines the short- and medium-term implications for economic growth and financial stability of the past decades’ rise in household debt. It documents large differences in household debt-to-GDP ratios across countries but a common increasing trajectory that was moderated but not reversed by the global financial crisis. Another chapter develops a new macroeconomic measure of financial stability by linking financial conditions to the probability distribution of future GDP growth and applies it to a set of 21 major advanced and emerging market economies. The chapter shows that changes in financial conditions shift the whole distribution of future GDP growth.
Chapter 1 finds that the global financial system continues to strengthen in response to extraordinary policy support, regulatory enhancements, and the cyclical upturn in growth. Global bank balance sheets are stronger because of improved capital and liquidity buffers, amid tighter regulation and heightened market scrutiny. However, some banks are still grappling with legacy issues and business model challenges, where progress has been uneven. The environment of continuing monetary accommodation—necessary to support activity and boost inflation—may lead to a continued search for yield where there is too much money chasing too few yielding assets, pushing investors beyond their traditional habitats. As the search for yield intensifies, vulnerabilities are shifting to the nonbank sector and market risks are rising. This may lead to a further compression of risk compensation in markets and higher leverage in the nonfinancial sector. These challenges must be managed carefully to avoid putting growth at risk. Policymakers at both the national and global level will have to strengthen the financial and macroeconomic policy mix.
| Financial Stability Overview |
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| Large Systemic Banks and Insurers: Adapting to the New Environment |
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| Monetary Policy Normalization: A Two-Sided Risk |
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| Has the Search for Yield Gone Too Far? |
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| The Rise in Leverage | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Could Rising Medium-Term Vulnerabilities Derail the Global Recovery? | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Chapter 2 examines the short- and medium-term implications for economic growth and financial stability of the past decades’ rise in household debt. The chapter documents large differences in household debt-to-GDP ratios across countries but a common increasing trajectory that was moderated but not reversed by the global financial crisis. Among advanced economies, the median household debt-to-GDP ratio rose to 63 percent in 2016 from 52 percent in 2008. Among emerging economies, it increased to 21 percent from 15 percent over the same period. The chapter finds a trade-off between a short-term boost to growth from higher household debt and a medium-term risk to macroeconomic and financial stability that may result in lower growth, consumption, and employment and a greater risk of banking crises. This trade-off is stronger when household debt is higher, but can be significantly attenuated by a combination of good policies, institutions, and regulations. These include appropriate macroprudential and financial sector policies, better financial supervision, less dependence on external financing, flexible exchange rates and lower income inequality.
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The global financial crisis showed policymakers that financial conditions can offer valuable information about risks to future growth and provide a basis for targeted preemptive action. Chapter 3 develops a new macroeconomic measure of financial stability by linking financial conditions to the probability distribution of future GDP growth and applies it to a set of 21 major advanced and emerging market economies. The chapter shows that changes in financial conditions shift the whole distribution of future GDP growth. Wider risk spreads, rising asset price volatility, and waning global risk appetite are significant predictors of increased downside risks to growth in the near term, and higher leverage and credit growth provide relevant signals of such risks in the medium term. A retrospective real-time analysis of the global financial crisis shows that forecasting models augmented with financial conditions would have assigned a considerably higher likelihood to the economic contraction that followed than those based on recent growth alone. This confirms that the analytical approach developed in the chapter can be a significant addition to policymakers’ macro-financial surveillance toolkit.
| Summary |
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| Introduction |
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| Financial Conditions and Risks
to Growth: Conceptual Issues |
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| How Do Changes in Financial
Conditions Indicate Risks to Growth? |
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| How Well Do Changes in Financial
Conditions Forecast Downside Risks To Growth? |
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Policy Implications
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