Global Financial Stability Report

Global Financial Stability Report Update: Financial Conditions Have Eased, but Insolvencies Loom Large

June 25, 2020

Global Financial Stability Report: Markets in the Time of COVID-19

April 14, 2020

Description: The coronavirus (COVID-19) pandemic poses unprecedented health, economic, and financial stability challenges. Following the COVID-19 outbreak, the prices of risk assets collapsed and market volatility spiked, while expectations of widespread defaults led to a surge in borrowing costs. Several factors amplified asset price moves: previously overstretched asset valuations, pressures to unwind leveraged trades, dealers’ balance-sheet constraints, and a deterioration in market liquidity. Emerging market economies experienced the sharpest reversal of portfolio flows on record. As a result, financial conditions tightened at an unprecedented speed. Decisive monetary, financial, and fiscal policy actions—aimed at containing the fallout from the pandemic—managed to stabilize investor sentiment in late March–early April, with markets paring back some of their losses.

Global Financial Stability Report, October 2019: Lower for Longer

October 16, 2019

Description: The October 2019 Global Financial Stability Report (GFSR) identifies the current key vulnerabilities in the global financial system as the rise in corporate debt burdens, increasing holdings of riskier and more illiquid assets by institutional investors, and growing reliance on external borrowing by emerging and frontier market economies. The report proposes that policymakers mitigate these risks through stricter supervisory and macroprudential oversight of firms, strengthened oversight and disclosure for institutional investors, and the implementation of prudent sovereign debt management practices and frameworks for emerging and frontier market economies.

Vulnerabilities in a Maturing Credit Cycle

April 10, 2019

Description: 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.

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

October 3, 2018

Description: 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.

Global Financial Stability Report April 2018: A Bumpy Road Ahead

April 10, 2018

Description: 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.

Global Financial Stability Report October 2017: Is Growth at Risk?

October 3, 2017

Description:

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 20 major advanced and emerging market economies. The chapter shows that changes in financial conditions shift the whole distribution of future GDP growth.

Global Financial Stability Report: Getting the Policy Mix Right

April 6, 2017

Description: The April 2017 Global Financial Stability Report (GFSR) finds that financial stability has continued to improve since last October. Economic activity has gained momentum and longer-term interest rates have risen, helping to boost the earnings of banks and insurance companies. Despite these improvements, however, threats to financial stability are emerging from elevated political and policy uncertainty around the globe. If policy developments in advanced economies make the path for growth and debt less benign than expected, risk premiums and volatility could rise sharply. In addition, a shift toward protectionism in advanced economies could reduce global growth and trade, impede capital flows, and dampen market sentiment. Getting the policy mix right is crucial. In the United States, policymakers should provide incentives for economic risk taking while guarding against excessive financial risk taking. Emerging market economies should address domestic imbalances to enhance their resilience to external shocks. In Europe, domestic banking systems continue to face significant structural challenges. Furthermore, there should be no rollback of the postcrisis reforms that have strengthened oversight of the financial system. The April 2017 GFSR also includes a chapter that examines how a prolonged low-growth, low-interest rate environment can fundamentally change the nature of financial intermediation. In such an environment, yield curves would likely flatten. Combined with low credit demand, this would lower bank earnings, particularly for smaller, deposit-funded, and less diversified institutions, and presenting long-lasting challenges for life insurers and defined-benefit pension funds. Another chapter assesses the ability of country authorities to influence domestic financial conditions in a financially integrated world. It finds that, despite the significant impact on domestic financial conditions of global shocks, countries retain influence to achieve domestic objectives—specifically, through monetary policy.

IMF Global Financial Stability Report: October 2016: Fostering Stability in a Low-Growth, Low-Rate Era

October 31, 2016

Description: The October 2016 Global Financial Stability Report (GFSR): The current report finds that short-term risks to global financial stability have abated since April 2016, but that medium-term risks continue to build. Financial institutions in advanced economies face a number of cyclical and structural challenges and need to adapt to low growth and low interest rates, as well as to an evolving market and regulatory environment. Weak profitability could erode banks’ buffers over time and undermine their ability to support growth. A cyclical recovery will not resolve the problem of low profitability. More deep-rooted reforms and systemic management are needed, especially for European banks. The solvency of many life insurance companies and pension funds is threatened by a prolonged period of low interest rates. Corporate leverage in emerging market economies remains elevated in some countries, but the current favorable external environment presents an opportunity for overly indebted firms to restructure their balance sheets. The political climate is unsettled in many countries. A lack of income growth and a rise in inequality have opened the door for populist, inward-looking policies. These factors make it even harder to tackle legacy problems and further expose economies and markets to shocks. A potent and more balanced policy mix is needed to deliver a stronger path for growth and financial stability, and avoid slipping into a state of financial and economic stagnation. The report also examines how the rise of nonbank financing has altered the impact of monetary policy and finds that fears of a decline in the effectiveness of monetary policy are unfounded. It appears that the transmission of monetary policy is, if anything, stronger in economies with larger nonbank financial sectors. Finally, the report examines the link between corporate governance, investor protection, and financial stability in emerging market economies. It finds that the improvements over the past two decades have helped bolster the resilience of their financial systems. These benefits strengthen the case for further reform.

IMF Global Financial Stability Report: Potent Policies for a Successful Normalization

April 13, 2016

Description: The April 2016 Global Financial Stability Report (GFSR)