- International Monetary Fund. Monetary and Capital Markets Department
- Published Date:
- April 2018
World Economic and Financial Surveys
Global Financial Stability Report
A Bumpy Road Ahead
© 2018 International Monetary Fund
Cover and Design: Luisa Menjivar and Jorge Salazar
Composition: AGS, An RR Donnelley Company
Joint Bank-Fund Library
Names: International Monetary Fund.
Title: Global financial stability report.
Other titles: GFSR | World economic and financial surveys, 0258–7440
Description: Washington, DC : International Monetary Fund, 2002- | Semiannual | Some issues also have thematic titles. | Began with issue for March 2002.
Subjects: LCSH: Capital market—Statistics—Periodicals. | International finance—Forecasting—Periodicals. | Economic stabilization—Periodicals. Classification: LCC HG4523.G557
ISBN 978-1-48433-829-2 (Paper)
- 978-1-48434-876-5 (ePub)
- 978-1-48434-878-9 (Mobipocket)
- 978-1-48434-877-2 (PDF)
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 highlighted 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 April 2, 2018. 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. 2018. Global Financial Stability Report: A Bumpy Road Ahead. Washington, DC, April.
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- Assumptions and Conventions
- Further Information
- Executive Summary
- IMF Executive Board Discussion Summary
- Chapter 1 A Bumpy Road Ahead
- Outlook for Financial Stability
- Monetary Policy Normalization in Advanced Economies
- Reach for Yield or Overreach in Risky Assets?
- Crypto Assets: New Coin on the Block, Reach for Yield, or Asset Price Bubble?
- Vulnerabilities in Emerging Markets, Low-Income Countries, and China
- Funding Challenges of Internationally Active Banks
- Box 1.1. The VIX Tantrum
- Box 1.2. An Econometric Lens on What Drives Term Premiums
- Box 1.3. The Changing Investor Base in the US Leveraged Loan Market
- Box 1.4. Central Bank Digital Currencies
- Box 1.5. Regulatory Reform—Tying Up the Loose Ends
- Chapter 2 The Riskiness of Credit Allocation: A Source of Financial Vulnerability?
- The Riskiness of Credit Allocation: Conceptual Framework
- The Riskiness of Credit Allocation and Its Evolution across Countries
- The Riskiness of Credit Allocation and Macro-Financial Stability
- The Role of Policy and Structural Factors
- Conclusions and Policy Implications
- Box 2.1. Measuring the Riskiness of Credit Allocation
- Box 2.2. Credit Allocation in China: Is Credit Flowing to the Most Profitable Firms?
- Box 2.3. The Joint Dynamics of the Riskiness of Credit Allocation, Financial Conditions, Credit Expansions, and GDP Growth
- Box 2.4. The High-Yield Share during a Credit Boom and Output Growth
- Annex 2.1. Description and Definition of Variables
- Annex 2.2. The Determinants of the Riskiness of Credit Allocation
- Annex 2.3. The Riskiness of Credit Allocation and Macro-Financial Outcomes
- Chapter 3 House Price Synchronization: What Role for Financial Factors?
- House Price Synchronicity: A Conceptual Framework
- House Price Synchronization in Countries and Cities
- Analyzing Contributors to House Price Synchronization
- House Price Synchronization and Risks to Growth
- Policy Discussion
- Box 3.1. Global Investors, House Price Dispersion, and Synchronicity
- Box 3.2. Housing as a Financial Asset
- Box 3.3. The Globalization of Farmland
- Box 3.4. House Price Gap Synchronicity and Macroprudential Policies
- Annex 3.1. Data Sources and Country Coverage
- Annex 3.2. Measuring Synchronization and Country-Pair Analysis
- Annex 3.3. Technical Annex
- Table 1.1. Correlation of Bitcoin with Key Asset Classes and within Crypto Assets
- Annex Table 2.1.1. Riskiness of Credit Allocation: Economies Included in the Analysis
- Annex Table 2.1.2. Country-Level Data Sources and Transformations
- Annex Table 2.2.1. Cyclicality of the Riskiness of Credit Allocation
- Annex Table 2.2.2. Impact of Financial Conditions and Lending Standards on the Riskiness of Credit Allocation
- Annex Table 2.2.3. Impact of Policy and Institutional Settings on the Riskiness of Credit Allocation
- Annex Table 2.3.1. Panel Logit Analysis: Probability of the Occurrence of a Systemic Banking Crisis
- Annex Table 2.3.2. Panel Logit Analysis: Banking Sector Equity Stress Risk
- Annex Table 2.3.3. Impact of the Riskiness of Credit Allocation on Downside Risks to Growth
- Annex Table 3.1.1. Data Sources
- Annex Table 3.1.2. Economies and Cities Included in the Analyses
- Annex Table 3.2.1. House Price Gap Synchronization at Country Level and Bilateral Linkages
- Annex Table 3.2.2. House Price Gap Synchronization at Country Level and Global Factors
- Annex Table 3.3.1. Capital Account Openness and Synchronicity
- Annex Table 3.3.2. Global Investors, House Price Dispersion, and Synchronicity: Regression Results
- Figure 1.1. Global Financial Conditions
- Figure 1.2. Growth-at-Risk
- Figure 1.3. Nonfinancial Private Sector Debt
- Figure 1.4. Market Interest Rates, Central Bank Balance Sheets, and US Financial Indicators
- Figure 1.5. US Inflation Expectations and Term Premium
- Figure 1.6. Term Premium Correlations, Spillovers, and Exchange Rate Relationships
- Figure 1.7. Valuations of Global Equities
- Figure 1.8. Valuations of Corporate Bonds
- Figure 1.9. Leveraged Loan Issuance, Quality, and Developments after Regulatory Guidance
- Figure 1.10. Correlations and Interconnectedness
- Figure 1.11. Measures of Leverage and Investment Funds with Derivatives-Embedded Leverage
- Figure 1.12. Strong Inflows into Exchange-Traded Funds Pose Challenges for the Less Liquid Fixed-Income Markets
- Figure 1.13. Crypto Assets: Size, Price Appreciation, Realized Volatility, and Sharpe Ratio
- Figure 1.14. Share of Trading Volumes across Exchanges, Crypto Assets, and Fiat Currencies
- Figure 1.15. Improving Fundamentals, Increased Foreign Currency Issuance
- Figure 1.16. Creditor Base and External Financing Vulnerabilities
- Figure 1.17. Rising Vulnerabilities and More Complex Creditor Composition
- Figure 1.18. Stylized Map of Linkages within China’s Financial System
- Figure 1.19. Chinese Banking System and Financial Market Developments and Liabilities
- Figure 1.20. Risks and Adjustment Challenges in Chinese Investment Products
- Figure 1.21. Chinese Insurers
- Figure 1.22. Advanced Economy Bank Health
- Figure 1.23. US Dollar Credit Aggregates and Bank Intragroup Funding Structures
- Figure 1.24. Non-US Banks’ International Dollar Balance Sheets
- Figure 1.25. Non-US Banks’ International US Dollar Liquidity Ratios
- Figure 1.26. Foreign Exchange Swap and Short-Term Bank Funding Markets
- Figure 1.1.1. US Asset Prices
- Figure 1.2.1. Estimated Term Premiums
- Figure 1.3.1. Nonbanks Have Increased Their Credit Exposure in the US Leveraged Loan Market
- Figure 2.1. Financial Conditions Have Been Loose in Recent Years
- Figure 2.2. Low-Rated Nonfinancial Corporate Bond Issuance Has Been High in Some Advanced Economies
- Figure 2.3. Key Drivers of the Riskiness of Credit Allocation
- Figure 2.4. The Riskiness of Credit Allocation Is Cyclical at the Global Level
- Figure 2.5. Selected Economies: Riskiness of Credit Allocation, 1995–2016
- Figure 2.6. The Riskiness of Credit Allocation Rises When a Credit Expansion Is Stronger
- Figure 2.7. The Association between the Size of a Credit Expansion and the Riskiness of Credit Allocation Is Greater When Lending Standards and Financial Conditions Are Looser
- Figure 2.8. The Riskiness of Credit Allocation Rises to a High Level before a Financial Crisis, and Falls to a Low Level Thereafter
- Figure 2.9. Higher Riskiness of Credit Allocation Signals Greater Risk of a Systemic Banking Crisis
- Figure 2.10. Higher Riskiness of Credit Allocation Signals Greater Risk of Banking Sector Stress
- Figure 2.11. Higher Riskiness of Credit Allocation Signals Higher Downside Risks to GDP Growth
- Figure 2.12. The Association of the Riskiness of Credit Allocation with Downside Risks to GDP Growth Depends on the Size of Credit Expansion
- Figure 2.13. The Association of a Credit Expansion with the Riskiness of Credit Allocation Depends on Policy and Institutional Settings
- Figure 2.1.1. Measuring the Riskiness of Credit Allocation
- Figure 2.1.2. Histograms of Measures of the Riskiness of Credit Allocation
- Figure 2.2.1. China: Profitability of Credit Allocation, 1997–2016
- Figure 2.2.2. China: Profitability of Credit Allocation, by Ownership and Sector
- Figure 2.3.1. The Riskiness of Credit Allocation and Financial Conditions
- Figure 2.4.1. Impulse Response of Cumulative Real GDP Growth to a High-Yield Share Shock Given a Credit Boom
- Figure 3.1. House Price Gains in Selected Cities and Countries Have Been Widespread
- Figure 3.2. Widespread House Price Gains Have Accompanied Accommodative Financial Conditions
- Figure 3.3. Institutional Investor Participation Has Been on the Rise
- Figure 3.4. Global Financial Conditions, Portfolio Channels, and Expectations Contribute to House Price Synchronization, as Do Supply Constraints and Local Policy
- Figure 3.5. Synchronization Has Steadily Increased across Countries and Cities
- Figure 3.6. The Relative Contribution of the Global Factor Has Grown
- Figure 3.7. Instantaneous Quasi Correlation of House Price Gaps Shows Financial Cycle Properties
- Figure 3.8. Relative Contribution of the Global Factor Varies across Regions
- Figure 3.9. Economies Differ in Their House Price Interconnectedness
- Figure 3.10. Interconnectedness among Cities’ House Prices Varies
- Figure 3.11. Average Country-Level Housing Market Spillovers Have Increased
- Figure 3.12. Bilateral Links between Countries Are Associated with House Price Synchronization
- Figure 3.13. Greater Financial Openness Is Associated with Higher House Price Synchronization
- Figure 3.14. On Average, the Global Factor for House Prices Has Increased along with Tat for Equities
- Figure 3.15. Global Financial Conditions, as Proxied by Global Liquidity, Have Different Associations with House Price Synchronization across Countries and Cities
- Figure 3.16. House Price Synchronization Predicts a Downside Risk to Economic Growth at Short Horizons
- Figure 3.1.1. Real House Prices in 40 Largest US Cities by Population
- Figure 3.2.1. Housing Return Predictability
- Figure 3.2.2. Predictability of Returns on Housing and Capital Account Openness
- Figure 3.3.1. Large-Scale Land Acquisitions over Time by Target Region
- Figure 3.4.1. Macroprudential Tools Indirectly Reduce House Price Synchronicity
- Online Annexes
- Annex 1.1. Option-Implied Volatility: The Quantity and Price of Risk for Stocks and Bonds
- Annex 1.2. Bank International Dollar Funding Methodology
- Editor’s Note (May 11, 2018)
- This online version of the GFSR has been updated to reflect the following changes to the print version:
- - On page 6 (Figure 1.4), the data for Germany in panel 3 have been corrected and a note was added.
- - On page 31 (Figure 1.17), the data in panel 3 have been corrected.
- - On page 37 (Figure 1.21), the x-axis labels in panel 4 have been corrected.
- - On page 49 (Figure 1.2.1), the second and third sentences in the note were added.
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, 2016–17 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years or months (for example, 2016/17) to indicate a fiscal or financial year.
“Billion” means a thousand million.
“Trillion” means a thousand billion.
“Basis points” refers 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.
The boundaries, colors, denominations, and any other information shown on the maps do not imply, on the part of the International Monetary Fund, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries.
Corrections and Revisions
The data and analysis appearing in the Global Financial Stability Report are compiled by the IMF staff at the time of publication. Every effort is made to ensure their timeliness, accuracy, and completeness. When errors are discovered, corrections and revisions are incorporated into the digital editions available from the IMF website and on the IMF eLibrary (see below). All substantive changes are listed in the online tables of contents.
Print and Digital Editions
Print copies of this Global Financial Stability Report can be ordered at https://www.bookstore.imf.org/books/title/global-financial-stability-report-april-2018.
The Global Financial Stability Report is featured on the IMF website at http://www.imf.org/publications/gfsr. This site includes a PDF of the report and data sets for each of the charts therein.
The IMF eLibrary hosts multiple digital editions of the Global Financial Stability Report, including ePub, enhanced PDF, Mobi, and HTML: http://elibrary.imf.org/Apr18GFSR.
Copyright and Reuse
Information on the terms and conditions for reusing the contents of this publication are at http://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 analysis in this report has been coordinated by the Monetary and Capital Markets (MCM) Department under the general direction of Tobias Adrian, Director. The project has been directed by Fabio Natalucci and Dong He, both Deputy Directors, as well as by Claudio Raddatz and Anna Ilyina, 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, Sergei Antoshin, Anil Ari, Magally Bernal, Christian Bogmans, Luis Brandão-Marques, Peter Breuer, Jeroen Brinkhoff, John Caparusso, Qianying Chen, Sally Chen, Yingyuan Chen, Kevin Chow, Fabio Cortes, Jane Dokko, Dimitris Drakopoulos, J. Benson Durham, Martin Edmonds, Alan Xiaochen Feng, Rohit Goel, Tryggvi Gudmundsson, Hideo Hashimoto, Sanjay Hazarika, Frank Hespeler, Henry Hoyle, Mohamed Jaber, David Jones, Mitsuru Katagiri, Will Kerry, Oksana Khadarina, Ashraf Khan, Divya Kirti, Robin Koepke, Romain Lafarguette, Jiaqi Li, Yang Li, Sheheryar Malik, Rebecca McCaughrin, Aditya Narain, Tomas Piontek, Jochen Schmittmann, Dulani Seneviratne, Juan Solé, Ilan Solot, Nour Tawk, Jérôme Vandenbussche, Jeffrey Williams, Peichu Xie, and Akihiko Yokoyama. Magally Bernal, Claudia Cohen, Breanne Rajkumar, and Han Zaw were responsible for word processing.
Gemma Diaz from the Communications Department led the editorial team and managed the report’s production with support from Linda Kean and editorial assistance from Sherrie Brown, Lucy Scott Morales, Nancy Morrison, Katy Whipple, AGS, and Vector Talent Resources.
This particular issue of the GFSR draws in part on a series of discussions with banks, securities firms, asset management companies, hedge funds, standard setters, financial consultants, pension funds, central banks, national treasuries, and academic researchers.
This GFSR reflects information available as of March 30, 2018. 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 April 2, 2018. However, the analysis and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or their national authorities.
Starting with this report, Chapter 1 of the Global Financial Stability Report (GFSR) will regularly provide a quantitative assessment of the degree to which future GDP growth faces downside risks from financial vulnerabilities, using a Growth-at-Risk (GaR) framework. The GaR approach links financial conditions to the distribution of future GDP growth outcomes and provides a framework for assessing the trade-off between supporting growth in the short term and putting financial stability and future growth at risk over the medium term. Our current assessment through the prism of GaR is that, over the past six months, short-term downside risks to global financial stability have increased somewhat, reflecting somewhat tighter financial conditions amid investors’ concerns about newly announced trade measures. Even so, still-accommodative financial conditions continue to be supportive of economic growth. Taking a longer view, downside risks, as measured by GaR, remain large: easy financial conditions continue to fuel financial vulnerabilities, leaving the global economy exposed to the risk of a sharp tightening in financial conditions. Policymakers thus face the twin challenges of continuing to support growth in the short term by keeping monetary policy accommodative as well as reining in rising financial stability risks in the medium term by deploying micro- and macroprudential policy tools.
Managing the gradual process of monetary policy normalization will be tricky against this backdrop of elevated medium-term risks, and will require careful communication from central banks and policymakers to reduce the risks from a sharp tightening of financial conditions. The spike in volatility in global equity markets in early February has brought into focus the risk of abrupt, adverse feedback loops in a period of asset price adjustments. The recently increased trade tensions have led to investors’ jitters, and a wider escalation of protectionist measures could ultimately take a toll on the global economy and on global financial stability. Many markets still have stretched valuations, and may experience bouts of volatility in the period ahead, in the context of continued monetary policy normalization in some advanced countries. Investors and policymakers should be cognizant of the risks associated with rising interest rates after years of very easy financial conditions and take active steps to reduce these risks. Asset price spillovers have important implications for the housing market. As explained in Chapter 3, house price correlations across countries and across major cities have been trending up during the past 30 years, suggesting that spillovers via the housing sector may play a prominent role in a future crisis.
A variety of indicators point to vulnerabilities from financial leverage, a deterioration in underwriting standards, and ever more pronounced reaching for yield behavior by investors in corporate and sovereign debt markets around the world. Chapter 2 presents an innovative gauge of the riskiness of credit allocation. The new metric computes the difference in vulnerability between the firms with the largest and smallest expansions in debt. This indicator exhibits strong forecasting power for downside risks to GDP growth, and is currently at medium to elevated levels in several countries. A host of more conventional metrics of corporate debt vulnerability around the world, including a deterioration in nonprice terms and underwriting standards in debt deals, suggest that market risks are rising, as easy financial conditions support high issuance and strong global capital flows. In low-income countries, the share of private and non–Paris Club creditors is increasing, and greater use of collateralized debt exposes borrowing countries to potentially costly debt restructurings in the future.
Over the past year, crypto assets trading has emerged as a new potential vulnerability. Price volatility of crypto assets has been much higher than that of commodities, currencies, or stocks. Financial stability risks could arise from leveraged positions taken by investors in this new asset class, infrastructure weaknesses of cryptocurrency exchanges, and fraud, in addition to elevated volatility. Regulators around the world are responding to the growing use of crypto assets through various measures, including enforcement actions, indirect interventions via the banking system, and outright bans. While crypto assets may generate new vulnerabilities, they also create opportunities and, indeed, a number of central banks around the world are considering the issuance of central bank digital currency.