- International Monetary Fund. Monetary and Financial Systems Dept.
- Published Date:
- April 2019
INTERNATIONAL MONETARY FUND
GLOBAL FINANCIAL STABILITY REPORT
Vulnerabilities in a Maturing Credit Cycle
INTERNATIONAL MONETARY FUND
GLOBAL FINANCIAL STABILITY REPORT
Vulnerabilities in a Maturing Credit Cycle
©2019 International Monetary Fund
Cover and Design: IMF CSF Creative Solutions Division
Composition: AGS, An RR Donnelley Company
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 978-1-49830-210-4 (Paper)
- 978-1-49830-213-5 (ePub)
- 978-1-49830-215-9 (Mobi)
- 978-1-49830-217-3 (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 March 21, 2019. 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. 2019. Global Financial Stability Report: Vulnerabilities in a Maturing Credit Cycle. Washington, DC, April.
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Editor’s Note (April 8, 2019)
This online version of the GFSR has been updated to reflect the following changes to the print version:
- Assumptions and Conventions
- Further Information
- Executive Summary
- IMF Executive Board Discussion Summary
- Chapter 1 Vulnerabilities in a Maturing Credit Cycle
- Global Financial Stability Assessment
- Late-Cycle Corporate Sector Risks in Advanced Economies
- The Euro Area Sovereign–Financial Sector Nexus
- Vulnerabilities in China, Emerging Markets, and Frontier Economies
- Policy Priorities
- Box 1.1. China’s Share-Collateralized Lending and Its Financial Stability Implications
- Special Feature: Liquidity Risks in Capital Markets
- Online Annex 1.1. Technical Note
- Chapter 2 Downside Risks to House Prices
- Conceptual Framework
- An Overview of Developments in House Prices
- Empirical Analysis: The Behavior of House Prices at Risk
- House Prices at Risk and Financial Stability
- Policies and House Prices at Risk
- Conclusion and Policy Recommendations
- Box 2.1. Synchronization of House Prices at Risk across Countries
- Box 2.2. City-Level House Prices at Risk in the United States and Canada
- Box 2.3. Province-Level House Prices at Risk in China
- Online Annex 2.1. Data and Empirical Methodology
- Online Annex 2.2. Theoretical Modeling Framework
- Table 1.1. How Is the Current Corporate Credit Cycle Different from Past Cycles?
- Table 1.2. Scenario Assumptions
- Table 1.3. Availability/Use of Prudential Tools for Different Types of Vulnerabilities
- Table 1.1.1. Share-Collateralized Lending Exposures by Lender Type, as of October 2018
- Table 1.SF.1. Penetration of Electronic, Automated, and High-Frequency Trading
- Figure 1.1. Global Market Developments
- Figure 1.2. Global Financial Conditions
- Figure 1.3. Growth-at-Risk Estimates
- Figure 1.4. Global Financial Vulnerabilities
- Figure 1.5. Balance Sheet Vulnerabilities
- Figure 1.6. Asset Price Misalignments
- Figure 1.7. Credit Market Developments in the United States and Europe
- Figure 1.8. The Key Features of the Current Corporate Credit Cycle
- Figure 1.9. Tracking the Corporate Credit Cycle: United States versus Europe
- Figure 1.10. Corporate Profitability Indicators in Advanced Economies
- Figure 1.11. Corporate Credit Quality Indicators in Advanced Economies
- Figure 1.12. Potential Fallout from the BBB Bond Downgrades on the US High-Yield Corporate Bond Market
- Figure 1.13. Developments in the Leveraged Loan Market in the United States and Europe
- Figure 1.14. Italian Sovereign and Banks: Recent Financial Developments
- Figure 1.15. The Euro Area Sovereign–Financial Sector Nexus
- Figure 1.16. Channels of Contagion in the Sovereign–Financial Sector Nexus
- Figure 1.17. Euro Area Banks, Sovereign Shocks, and Nonperforming Loans
- Figure 1.18. Selected Euro Area Countries: Insurers’ Exposures to Sovereign, Bank, and Corporate Bonds
- Figure 1.19. Euro Area Bank Profits and Funding
- Figure 1.20. Recent Developments in Emerging and Frontier Markets
- Figure 1.21. Recent Pressures and Outlook for Portfolio Flows to Emerging Markets
- Figure 1.22. Emerging Market Benchmark-Driven versus Unconstrained Investors
- Figure 1.23. Benchmark-Driven Portfolio Flows to Emerging Markets
- Figure 1.24. Emerging Market and Frontier Debt Characteristics and the Impact of China’s Inclusion in Benchmark Indices
- Figure 1.25. China: Impact of Regulatory Tightening on Credit Expansion
- Figure 1.26. Bank Balance Sheet Weaknesses
- Figure 1.27. China: Impact of Tightening Financial Conditions on Nonfinancial Firms
- Figure 1.28. Frontier Debt Vulnerabilities
- Figure 1.1.1. China: Market Share and Debt-Servicing Capacity of Firms Reliant on Share-Collateralized Lending
- Figure 1.SF.1. Structural Changes in the Provision of and Demand for Market Liquidity
- Figure 1.SF.2. Evolution in Market Liquidity
- Figure 1.SF.3. Prevalence of Jumps and Liquidity Strain in Advanced and Emerging Markets
- Figure 1.SF.4. Equity Volatility, High-Yield Spreads, and Days with Liquidity Strain
- Figure 1.SF.5. Proportion of Intraday Price Variation Due to Jumps: In Japanese Yen/US Dollar
- Figure 1.SF.6. Brexit Event Study on Jumps and Market Liquidity
- Figure 2.1. Historical Developments in Real House Prices
- Figure 2.2. House Prices and Financial Stability
- Figure 2.3. Frequency Distribution of Real House Price Growth
- Figure 2.4. Determinants of Real House Prices
- Figure 2.5. House Prices and Fundamentals: Quantile Regression Results
- Figure 2.6. Evolution of House Prices at Risk and Shifts in Riskiness
- Figure 2.7. Predictive Distributions of House Price Risks
- Figure 2.8. Factors Affecting House Prices at Risk in the United States and China
- Figure 2.9. City- and Country-Level Comparisons of House Prices at Risk
- Figure 2.10. Out-of-Sample Forecasting Accuracy
- Figure 2.11. House Prices at Risk and Financial Stability
- Figure 2.12. Effects of Macroprudential and Monetary Policy and Capital Flows on House Prices at Risk
- Figure 2.1.1. Instantaneous Quasi-Correlation of Downside Risks in House Prices
- Figure 2.2.1. Downside Risks to House Prices in the United States and Canada
- Figure 2.3.1. Impact of a One Standard Deviation Factor Shock on House Prices at Risk across China’s Provinces
- Figure 2.3.2. Tree-Year-Ahead House Prices at Risk and Valuation across Regions in China
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, 2017–18 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years or months (for example, 2017/18) 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 table of contents.
Print and Digital Editions
Print copies of this Global Financial Stability Report can be ordered from the IMF bookstore at imfbk.st/25728
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Download a free PDF of the report and data sets for each of the charts therein from the IMF website at www.imf.org/publications/gfsr or scan the QR code below to access the Global Financial Stability Report web page directly:
Copyright and Reuse
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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 was coordinated by the Monetary and Capital Markets (MCM) Department under the general direction of Tobias Adrian, Director. The project was directed by Fabio Natalucci, Deputy Director, as well as by Claudio Raddatz and Anna Ilyina, both Division Chiefs. It benefited from comments and suggestions from the senior staff in the MCM Department.
Individual contributors to the report were Adrian Alter, Prasad Ananthakrishnan, Sergei Antoshin, Magally Bernal, Peter Breuer, John Caparusso, Sally Chen, Shiyuan Chen, Yingyuan Chen, Kevin Chow, Fabio Cortes, Andrea Deghi, Dimitris Drakopoulos, Martin Edmonds, Rohit Goel, Alexei Goumilevski, Tryggvi Gudmundsson, Frank Hespeler, Henry Hoyle, Mohamed Jaber, David Jones, Mitsuru Katagiri, Will Kerry, Oksana Khadarina, Piyusha Khot, Robin Koepke, Elizabeth Mahoney, Sheheryar Malik, Rebecca McCaughrin, Aditya Narain, Evan Papageorgiou, Thomas Piontek, Jochen Schmittmann, Sohaib Shahid, Juan Solé, Ilan Solot, Nico Valckx, Constant Verkoren, Jeffrey Williams, Peichu Xie, Janice Yi Xue, Akihiko Yokoyama, and Xingmi Zheng. Magally Bernal, Monica Devi, and Breanne Rajkumar were responsible for word processing.
Gemma Diaz from the Communications Department led the editorial team and managed the report’s production with editorial assistance from Sherrie Brown, Christine Ebrahimzadeh, Lucy Scott Morales, Nancy Morrison, Katy Whipple of The Grauel Group, AGS, and Vector Talent Resources.
This 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 21, 2019. 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 March 21, 2019. 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.
Markets sold off sharply late last year, broadly across asset classes, amid growing signs of a slowing global economy and rising concerns about US-China trade tensions. Against a backdrop of rising downside risks, policymakers across the globe took steps to prevent a sharper deceleration of the economy. Such a forceful response supported market sentiment and triggered a sharp rebound in risk assets. Despite this recent improvement, financial markets remain susceptible to a sudden tightening in financial conditions. Potential triggers include a sharp repricing of risk, an intensification of trade tensions, a further slowdown in global economic activity, or political shocks.
An abrupt deterioration in financial conditions could unmask financial fragilities that have built during the period of very low interest rates. In this issue of the Global Financial Stability Report we are introducing a more structured, systematic approach aimed at monitoring financial vulnerabilities. Using data back to 2000 for 29 systemically important economies that account for a significant share of the global economy, we assess the level of vulnerability across regions and sectors (banks, nonbank financial institutions, sovereigns, firms, and households).
This new framework detects elevated financial vulnerability in several sectors around the world, including sovereigns, firms, and nonbank financial institutions. These vulnerabilities could turn into powerful amplification mechanisms if adverse shocks materialize. For example, the level of corporate debt has been rising around the world, and there is a weak tail of companies with high leverage and weak earnings prospects. There are growing signs that this credit cycle may be maturing, and risks of an economic slowdown are rising. The most highly indebted companies could be vulnerable to such a shock. While fundamentals in emerging markets are stronger and policy frameworks generally more resilient than in the past, some countries have low reserves, high leverage, or high foreign currency exposures that could make them more vulnerable to capital flow pressures. Furthermore, in Europe, fiscal challenges in some countries have reignited worries about the sovereign-bank nexus as a potentially powerful amplification mechanism in economies with more indebted sovereigns. Finally, housing markets in many advanced and emerging markets are at risk.
In sum, these rising financial vulnerabilities point to elevated medium-term risks to financial stability. Policymakers should act now to reduce these vulnerabilities while they can. Countercyclical capital buffers should be activated in countries with rising vulnerabilities, and macroprudential tools should be developed to contain corporate vulnerabilities. Monetary policies should remain data dependent and well communicated to avoid market overreaction and prevent further growth deceleration.