- International Monetary Fund. Monetary and Capital Markets Department
- Published Date:
- October 2015
World Economic and Financial Surveys
Global Financial Stability Report
Vulnerabilities, Legacies, and Policy Challenges
Risks Rotating to Emerging Markets
© 2015 International Monetary Fund
Cover and Design: Luisa Menjivar and Jorge Salazar
Joint Bank-Fund Library
Global financial stability report – Washington, DC : International Monetary Fund, 2002–
v.; cm. – (World economic and financial surveys, 0258-7440)
Some issues also have thematic titles.
1. Capital market—Development countries—Periodicals.
2. International finance—Periodicals. 3. Economic stabilization—Periodicals. I. International Monetary Fund. II. Series: World economic and financial surveys. HG4523.G563
ISBN 978-1-51358-204-7 (paper)
Disclaimer: The Global Financial Stability Report (GFSR) is a survey by the IMF staff published twice a year, in the spring and fall. The report draws out the financial ramifications of economic issues high-lighted in the IMF’s World Economic Outlook (WEO). The report was prepared by IMF staff and has benefited from comments and suggestions from Executive Directors following their discussion of the report on September 21, 2015. The views expressed in this publication are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Directors or their national authorities.
Recommended citation: International Monetary Fund, Global Financial Stability Report—Vulnerabilities, Legacies, and Policy Challenges: Risks Rotating to Emerging Markets (Washington, October 2015).
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- Assumptions and Conventions
- Further Information and Data
- Executive Summary
- IMF Executive Board Discussion Summary
- Chapter 1 Three Scenarios for Financial Stability
- Financial Stability Overview
- Global Policy Challenges
- Box 1.1. China’s Equity Market
- Box 1.2. Compression of Global Risk Premiums and Market Abnormalities
- Policies for Successful Normalization
- Box 1.3. Banking in Europe: The Impact of Nonperforming Loans
- Annex 1.1. Progress on the Financial Regulatory Reform Agenda
- Annex 1.2. Simulating the Global Macrofinancial Scenarios
- Chapter 2 Market Liquidity—Resilient or Fleeting?
- Box 2.1. How Can Market Liquidity Be Low despite Abundant Central Bank Liquidity?
- Market Liquidity—Concepts and Drivers
- Market Liquidity—Trends
- Box 2.2. Electronic Trading and Market Liquidity
- Changes in Drivers of Market Liquidity—Empirical Evidence on Their Impact
- Box 2.3. Structural Drivers of the Resilience of Market Liquidity
- Liquidity Resilience, Liquidity Freezes, and Spillovers
- Policy Discussion
- Box 2.4. Market Liquidity and Bank Stress Testing
- Annex 2.1. Data and Liquidity Measures
- Annex 2.2. Event Studies of Market Liquidity
- Annex 2.3. Markov Regime-Switching Models for Market Liquidity and the Liquidity Premium
- Chapter 3 Corporate Leverage in Emerging Markets—A Concern?
- The Evolving Nature of Emerging Market Corporate Leverage
- Emerging Market Corporate Bond Finance
- Emerging Market Corporate Spreads
- Policy Implications
- Box 3.1. Shadow Rates
- Box 3.2. Corporate Foreign Exchange Rate Exposures
- Box 3.3. Corporate Leverage in China
- Box 3.4. Firm Capital Structure, the Business Cycle, and Monetary Policy
- Box 3.5. The Shift from Bank to Bond Financing of Emerging Market Corporate Debt
- Box 3.6. Taper Tantrum: Did Firm-Level Factors Matter?
- Annex 3.1. Emerging Market Corporate Leverage: Data and Empirics
- Annex 3.2. Bond Issuance Analysis
- Annex 3.3. Regression Analysis of Determinants of Emerging Market Corporate Spreads
- 1.1. Three Scenarios for Financial Stability
- 1.2. Why Is Resilient Liquidity Important?
- Annex 1.2.1. Global Asset Market Disruption Scenario: Assumptions
- Annex 1.2.2. Successful Normalization Scenario: Assumptions
- Annex 1.2.3. Global Asset Market Disruption Scenario: Shock Transmission Mechanisms
- Annex 1.2.4. Successful Normalization Scenario: Shock Transmission Mechanisms
- 2.1. Liquidity Measures
- 2.2. Determinants of Low-Liquidity Regime Probability in the U.S. Corporate Bond Market
- 2.3. Determinants of Low-Liquidity Regime in the Foreign Exchange and European Sovereign Bond Markets
- 2.4. Bond Returns and Liquidity Risk
- 2.5. Summary of Findings and Policy Implications
- 3.1 Worsening Emerging Market Firm-Level and Macroeconomic Fundamentals
- Annex 3.1.1. Definition of Variables
- 1.1. Global Financial Stability Map: Risks and Conditions
- 1.2. Global Financial Stability Map: Components of Risks and Conditions
- 1.3. Inflation, Monetary Policy, and Policy Rate Normalization
- 1.4. Economic Risk Taking Remains Weak in Advanced Economies
- 1.5. Locus of Risks Shifting toward Emerging Markets
- 1.6. Triad of Global Policy Challenges
- 1.7. The Credit Cycle
- 1.8. Credit Growth, Corporate Leverage, and New Nonperforming Bank Loans
- 1.9. Emerging Market Companies: Exposure to Dollar Strength and Commodity Prices
- 1.10. Banking System Average Regulatory Tier 1 Ratio
- 1.11. Bank Capital and Asset Changes
- 1.12. Chinese Banks: Asset Quality Challenges
- 1.13. Evolution of Bank Funding
- 1.14. Chinese Exchange Rate Movements and Effect on Emerging Market Currencies
- 1.15. Greece: Developments
- 1.1.1. Chinese Equity Market
- 1.16. Bank Profitability and Balance Sheet Strength
- 1.17. Potential Amplifiers of Market Stress
- 1.18. Large U.S. and European Regulated Bond Investment Funds with Derivatives Embedded Leverage
- 1.2.1. Policies Have Led to Compressed Term Premiums and Market Abnormalities
- 1.19. Systemic Implications of a Liquidity Shock
- 1.20. Effect of a Global Asset Market Disruption
- 1.21. Emerging Market Local Currency Bond Yields
- 1.22. Corporate Debt Burden Market Disruption Scenario
- 1.23. Lower Ratings Would Lock in Higher Borrowing Costs
- 1.24. Selected Quasi-Sovereign Company Ownership and Debt
- 1.3.1. Euro Area Capital Relief from Nonperforming Loans
- 1.3.2. Euro Area Foreclosure Time and Lending Capacity from Foreclosure Time Reduction
- Annex 1.2.1. Global Asset Market Disruption Scenario: Simulated Peak Effects
- Annex 1.2.2. Global Asset Market Disruption Scenario: Aggregated Simulated Paths
- Annex 1.2.3. Successful Normalization Scenario: Aggregated Simulated Paths
- Annex 1.2.4. Successful Normalization Scenario: Simulated Peak Effects
- 2.1. Drivers of Liquidity and Liquidity Resilience
- 2.2.1. Trade Volume in U.S. Credit Default Swaps
- 2.3.1. Liquidity during the Taper Tantrum
- 2.3.2. Ownership and Market Liquidity
- 2.2. Trends in Bond Markets—Market Liquidity Level
- 2.3. Bond Market Liquidity—Bifurcation and Price Impact of Large Transactions
- 2.4. Trends in Market Making
- 2.5. Dealers’ Balance Sheet Space
- 2.6. Central Bank Collateral Policies
- 2.7. Regulation and Market Liquidity: Two Examples
- 2.8. Fed Purchases and Mortgage-Backed Securities Liquidity
- 2.9. Main Drivers of Market Liquidity
- 2.10. Financial Sector Bond Holdings
- 2.11. Probability of Liquidity Regimes
- 2.12. Liquidity Spillovers and Market Stress
- 2.4.1. Stress Test of the Financial System and the Real Economy
- 3.1. Emerging Market Economies: Evolving Capital Structure
- 3.2. Emerging Market Economies: Selected Leverage Ratios
- 3.3. Emerging Market Economies: Changing Composition of Corporate Debt
- 3.4. Domestic Banks: Ratio of Total Corporate Loans to Total Loans in 2014
- 3.1.1. Shadow Rates
- 3.5. Emerging Market Economies: Corporate Leverage by Selected Regions and Sectors
- 3.6. Foreign Exchange Exposures in Emerging Market Economies (Listed Firms)
- 3.7. Change in Foreign Exchange Exposures and Corporate Leverage, by Sector
- 3.8. Corporate Liabilities and Solvency
- 3.9. Key Determinants of Emerging Market Economies’ Corporate Leverage
- 3.10. Leverage, Cash Holdings, and Corporate Investment
- 3.11. Bond Issuance by Regions and Sectors
- 3.12. Bond Issuance: Currency Composition
- 3.13. Deteriorating Firm-Specific Fundamentals for Bond-Issuing Firms
- 3.14. Bond Issuance: Yields and Maturity
- 3.15. Factors Influencing the Probability of Bond Issuance
- 3.16. Factors Influencing Bond Maturity
- 3.17. Emerging Market Economies: Secondary Market Corporate Spreads
- 3.18. Emerging Market Economies: Effects of Domestic and Global Factors on Corporate Spreads
- 3.3.1. China: Leverage Ratios
- 3.5.1. Changes in the Stock of Bonds by Initial Quartile
- 3.6.1. Effects of the Shock on Credit Default Swap Spreads
Assumptions and Conventions
The following conventions are used throughout the Global Financial Stability Report (GFSR):
… to indicate that data are not available or not applicable;
— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
– between years or months (for example, 2014–15 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years or months (for example, 2014/15) to indicate a fiscal or financial year.
“Billion” means a thousand million.
“Trillion” means a thousand billion.
“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
If no source is listed on tables and figures, data are based on IMF staff estimates or calculations.
Minor discrepancies between sums of constituent figures and totals shown reflect rounding.
As used in this report, the terms “country” and “economy” do not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
Further Information and Data
The data and analysis appearing in the GFSR are compiled by the IMF staff at the time of publication. Every effort is made to ensure, but not guarantee, their timeliness, accuracy, and completeness. When errors are discovered, there is a concerted effort to correct them as appropriate and feasible. Corrections and revisions made after publication are incorporated into the electronic editions available from the IMF eLibrary (www.elibrary.imf.org) and on the IMF website (www.imf.org). All substantive changes are listed in detail in the online tables of contents.
For details on the terms and conditions for usage of the contents of this publication, please refer to the IMF Copyright and Usage website, www.imf.org/external/terms.htm.
The Global Financial Stability Report (GFSR) assesses key risks facing the global financial system. In normal times, the report seeks to play a role in preventing crises by highlighting policies that may mitigate systemic risks, thereby contributing to global financial stability and the sustained economic growth of the IMF’s member countries.
The current report finds that, despite an improvement in financial stability in advanced economies, risks continue to rotate toward emerging markets. The global financial outlook is clouded by a triad of policy challenges: emerging market vulnerabilities, legacy issues from the crisis in advanced economies, and weak systemic market liquidity. With more vulnerable balance sheets in emerging market companies and banks, firms in these countries are more susceptible to financial stress, economic downturn, and capital outflows. Recent market developments such as slumping commodity prices, China’s bursting equity bubble, and pressure on exchange rates underscore these challenges. The prospect of the U.S. Federal Reserve gradually raising interest rates points to an unprecedented adjustment in the global financial system as financial conditions and risk premiums “normalize” from historically low levels alongside rising policy rates and a modest cyclical recovery. The report also examines the factors that influence levels of liquidity in securities markets, as well as the implications of low liquidity. Currently, market liquidity is being supported by benign cyclical conditions. Although it is too early to assess the impact of recent regulatory changes on market liquidity, changes in market structure, such as larger holdings of corporate bonds by mutual funds, appear to have increased the fragility of liquidity. Finally, the report studies the growing level of corporate debt in emerging markets, which quadrupled between 2004 and 2014. The report finds that global drivers have played an increasing role in leverage growth, issuance, and spreads. Moreover, higher leverage has been associated with, on average, rising foreign currency exposures. It also finds that despite weaker balance sheets, firms have managed to issue bonds at better terms as a result of favorable financial conditions.
The analysis in this report has been coordinated by the Monetary and Capital Markets (MCM) Department under the general direction of José Viñals, Financial Counsellor and Director. The project has been directed by Peter Dattels and Dong He, both Deputy Directors, as well as by Gaston Gelos and Matthew Jones, both Division Chiefs. It has benefited from comments and suggestions from the senior staff in the MCM Department.
Individual contributors to the report are Ali Al-Eyd, Adrian Alter, Nicolas Arregui, Serkan Arslanalp, Luis Brandão-Marques, Antoine Bouveret, Peter Breuer, John Caparusso, Yingyuan Chen, Martin Čihák, Fabio Cortes, Reinout De Bock, Martin Edmonds, Selim Elekdag, Jennifer Elliott, Michaela Erbenova, Brenda González-Hermosillo, Tryggvi Gudmundsson, Fei Han, Sanjay Hazarika, Geoffrey Heenan, Eija Holttinen, Hibiki Ichiue, Etibar Jafarov, Mustafa Jamal, Bradley Jones, David Jones, William Kerry, Oksana Khadarina, Ayumu Ken Kikkawa, John Kiff, Suchitra Kumarapathy, Raphael Lam, Frederic Lambert, Sheheryar Malik, Win Monroe, Machiko Narita, Evan Papageorgiou, Vladimir Pillonca, Jean Portier, Shaun Roache, Luigi Ruggerone, Christian Saborowski, Luca Sanfilippo, Tsuyoshi Sasaki, Kate Seal, Nobuyasu Sugimoto, Narayan Suryakumar, Shamir Tanna, Laura Valderrama, Constant Verkoren, Francis Vitek, Jeffrey Williams, Kai Yan, and Jinfan Zhang. Magally Bernal, Carol Franco, Juan Rigat, and Adriana Rota were responsible for word processing.
Joe Procopio from the Communications Department led the editorial team and managed the report’s production with support from from Michael Harrup and Linda Kean and editorial assistance from Lucy Scott Morales, Sherrie Brown, Gregg Forte, Linda Long, Lorraine Coffey, Shannon Mann, EEI Communications, and AGS.
This particular edition of the GFSR draws in part on a series of discussions with banks, securities firms, asset management companies, hedge funds, standards setters, financial consultants, pension funds, central banks, national treasuries, and academic researchers.
This GFSR reflects information available as of September 18, 2015. The report benefited from comments and suggestions from staff in other IMF departments, as well as from Executive Directors following their discussion of the GFSR on September 21, 2015. However, the analysis and policy considerations are those of the contributing staff and should not be attributed to the IMF, its Executive Directors, or their national authorities.