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International Monetary Fund. Monetary and Capital Markets Department

Abstract

Global financial stability has improved since the October 2012 report. Policy actions have eased monetary and financial conditions and reduced tail risks, leading to a sharp increase in risk appetite and a rally in asset prices. But if progress on addressing medium-term challenges falters, the rally in financial markets may prove unsustainable, risks could reappear, and the global financial crisis could morph into a more chronic phase.

Ms. Marialuz Moreno Badia

Abstract

The global gross debt of the nonfinancial sector has more than doubled in nominal terms since the turn of the century, reaching $152 trillion in 2015.1 About two-thirds of this debt consists of liabilities of the private sector. Although there is no consensus about how much is too much, current debt levels, at 225 percent of world GDP (Figure 1.1), are at an all-time high. The negative implications of excessive private debt (or what is often termed a “debt overhang”) for growth and financial stability are well documented in the literature, underscoring the need for private sector deleveraging in some countries. The current low-nominal-growth environment, however, is making the adjustment very difficult, setting the stage for a vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown (Buttiglione and others 2014; McKinsey Global Institute 2015; Gaspar, Obstfeld, and Sahay 2016). The dynamics at play resemble that of a debt deflation episode in which falling prices increase the real burden of debt, leading to further deflation. Weak bank balance sheets in some countries have further contributed to dampening economic activity, as private credit has been curtailed beyond what would be desirable.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

The debate about the usefulness of sovereign credit default swaps (SCDS) intensified with the outbreak of sovereign debt stress in the euro area. SCDS can be used to protect investors against losses on sovereign debt arising from so-called credit events such as default or debt restructuring. SCDS have become important tools in the management of credit risk, and the premiums paid for the protection offered by SCDS are commonly used as market indicators of credit risk. Although CDS that reference sovereign credits are only a small part of the sovereign debt market ($3 trillion notional SCDS outstanding at end-June 2012, compared with $50 trillion of total government debt outstanding at end-2011), their importance has been growing rapidly since 2008, especially in advanced economies.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Major central banks have taken unprecedented policy actions following the financial crisis. In addition to keeping interest rates low for a prolonged period, they have taken a host of unconventional measures, including long-term liquidity provision to banks in support of lending, as well as asset purchases to lower long-term interest rates and to stabilize specific markets, such as those for mortgages.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Previous issues of the Global Financial Stability Report (GFSR) have analyzed and assessed how the global financial system recovered from various shocks, including the bursting of the equity bubble in 2000–01 and the debt crises in a few emerging market (EM) countries. They spelled out in detail how cyclically favorable conditions and structural changes have made financial intermediaries much stronger. The positive assessment contained in the September 2005 GFSR that “the global financial system has yet again gathered strength and resilience” has been validated by recent developments. However, a number of cyclical challenges appear to be gathering on the horizon, which necessitate a more nuanced view of the financial outlook for the remainder of 2006 and beyond.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

There is growing recognition that the dispersion of credit risk by banks to a broader and more diverse group of investors, rather than warehousing such risk on their balance sheets, has helped to make the banking and overall financial system more resilient.1 Over the last decade, new investors have entered the credit markets, including the credit risk transfer markets. These new participants, with differing risk management and investment objectives (including other banks seeking portfolio diversification), help to mitigate and absorb shocks to the financial system, which in the past affected primarily a few systemically important financial intermediaries. The improved resilience may be seen in fewer bank failures and more consistent credit provision. Consequently, the commercial banks, a core segment of the financial system, may be less vulnerable today to credit or economic shocks. At the same time, the transition from bank-dominated to more market-based financial systems presents new challenges and vulnerabilities. These new vulnerabilities need to be understood and considered in order to form a balanced assessment of the influence of credit derivative markets.