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International Monetary Fund. Monetary and Capital Markets Department

Abstract

The global financial system has yet again gathered strength and resilience. As before, this trend has been fueled by continued balance sheet improvements in the financial and corporate sectors in most countries. The continuing global economic expansion, together with determined efforts to restructure and cut costs, has enabled many financial institutions and corporations to generate substantial, or even record, profits over the past three years. As a result, their balance sheets have strengthened to the extent that the financial and corporate sectors can absorb a significant degree of financial shock before coming under systemic stress. With global growth most likely to continue, inflation under control, and financial markets generally benign, we expect the resilience of the global financial system to improve even further. This improvement provides an important cushion in the event that any of the more medium-term risks discussed below were to materialize. This cushion against risks and vulnerabilities in the medium term may have expanded, but risks have not disappeared altogether.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Global financial vulnerabilities have subsided further since the September 2003 Global Financial Stability Report (GFSR). International financial markets have continued to improve, strengthening the balance sheets of financial institutions and other market participants. At present, financial markets seem to be enjoying a “sweet spot:” economic activity and corporate earnings have made a strong recovery, most noticeably in the United States but also in other parts of the world. At the same time, inflation remains quiescent, enabling the monetary authorities to maintain very low policy interest rates.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

The economic recovery that began during the first quarter of 2002 has brought improvements in financial market conditions. Mature equity and bond markets have further stabilized. Most emerging market countries continue to have access to international capital markets, and their bond spreads have declined. The near-term outlook thus appears largely free of imminent threats to global financial stability.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Exceptionally low short-term interest rates in the major financial centers contributed to resurgent economic growth and rising corporate earnings and to progress in strengthening corporate balance sheets, thus improving the fundamental economic outlook.1 Policies pursued to stimulate economic growth also created powerful incentives for investors to venture further out along the risk spectrum and contributed to a recovery of asset valuations.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

In the April 2005 Global Financial Stability Report (GFSR), we noted that financial conditions were quite positive, leading risks to be skewed on the down side. Financial market developments since then have reduced risks somewhat, at least for the near term. However, the same forces that have supported buoyant financial markets have also created larger global imbalances and higher levels of debt, thus storing up potential vulnerabilities for the future.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Shifting-but generally positive-prospects for a global economic recovery have brought improved financial market conditions in the first quarter of 2002 (Figure 2.1). However, concerns over the level and quality of reported corporate profits, and high equity valuations continue to weigh on mature stock markets. U.S. and European private debt levels remain high, and the U.S. continues to be reliant on strong capital inflows from abroad. Persistent significant strains in the Japanese financial system raise questions about the scope for international spillovers.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

The factors that determine changes in asset allocation and, hence, capital flows across national borders and sectors have important implications for the conduct of surveillance of global financial markets. The fast growing importance of institutional investors, mostly in mature markets but increasingly in a number of emerging market economies, has two major consequences that are closely interrelated. On the one hand, these nonbank asset gatherers assume sizable market and credit risks, not the least through modern financial engineering, in the form of swaps, derivatives, and so on. Previous issues of the Global Financial Stability Report (GFSR) have examined the driving forces behind that development, potential vulnerabilities, and policies that could mitigate adverse consequences. On the other hand, institutional investors are not only exposed to market and credit risks emanating from financial markets, but their investment decisions increasingly “make markets.”

International Monetary Fund. Monetary and Capital Markets Department

Abstract

The transfer of risk from banks to nonbank institutions, such as mutual funds, pension funds, insurers, and hedge funds, has been taking place for many years. Banks have generally tried to distribute the risk that they have originated—particularly concentrations of credit risk—in order to optimize the use of their balance sheets and as an integral part of their risk management practice.1 Some nonbanks, in certain markets, have demonstrated a strong or growing appetite for credit risk exposure in various forms. These include insurers, which increasingly view credit instruments as a relatively stable investment to meet their liabilities. The development of new credit instruments, particularly derivatives, has facilitated this process.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Insurance and reinsurance companies are an important and growing class of financial market participants. They insure a wide variety of business and household risks, thereby facilitating economic and financial activity. In addition, amid a drive to raise profitability they have become increasingly important investors and intermediaries in a broad range of financial markets around the globe. They bring innovative insurance approaches to capital markets, providing insurance cover for financial risks, intermediating their own insurance risks in the markets, and in the process developing new instruments that help to bridge the gap between banking and insurance products. Insurers and reinsurers have broadened the range of available instruments, increased the diversity of market participants, created new opportunities for corporations and financial institutions to fund their activities and hedge risks, and contributed to liquidity and price discovery in primary and secondary markets.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

The macroeconomic and financial dislocations experienced following the crises in emerging markets (EMs) in the late 1990s have led to increased efforts in these countries to develop local bond markets as an alternative source of debt financing for corporates. A well-functioning bond market can strengthen corporate and bank restructuring and thus accelerate the resolution of a crisis. At the same time, local bond issues facilitate the reduction of currency and maturity mismatches on their balance sheets and thus reduce the vulnerability of the corporate sector. Recent work by the IMF on the use of the balance sheet approach to detect vulnerabilities in EMs has highlighted the importance of corporate sector vulnerabilities and their linkages to other sectors and markets. In this context, the April 2005 Global Financial Stability Report (GFSR) demonstrated the importance of having alternative sources of funding for the corporate sector, both to finance growth and to strengthen balance sheets. In this chapter, we continue this line of work and focus on ways to further develop corporate bond markets in EMs.