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International Monetary Fund. Monetary and Capital Markets Department

Abstract

Prepared by staff from the Monetary and Capital Markets Department (in consultation with other departments): The authors of this chapter are Anna Ilyina (Division Chief), Evan Papageorgiou (Deputy Division Chief), Sergei Antoshin, Yingyuan Chen, Fabio Cortes, Rohit Goel, Phakawa Jeasakul, Sanjay Hazarika, Kelly Eckhold, Frank Hespeler, Henry Hoyle, Piyusha Khot, Sheheryar Malik, Thomas Piontek, Akihiko Yokoyama, and Xingmi Zheng, under the guidance of Fabio Natalucci (Deputy Director). Magally Bernal and Andre Vasquez were responsible for word processing and the production of this report.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Prepared by staff from the Monetary and Capital Markets Department (in consultation with other departments): The authors of this chapter are Dimitris Drakopoulos, Rohit Goel, Evan Papageorgiou (team leader), Dmitri Petrov, Patrick Schneider, Can Sever, and Jef Williams, under the guidance of Fabio Natalucci and Anna Ilyina. Magally Bernal and Andre Vasquez were responsible for word processing and the production of this report.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

The authors of this chapter are Andrea Deghi, Ken Zhi Gan, Tom Piontek, Dulani Seneviratne, Tomohiro Tsuruga, and Jérôme Vandenbussche (team leader), with contributions from Germán Villegas Bauer, under the guidance of Fabio Natalucci and Mahvash Qureshi. Jeremy Stein served as an expert advisor.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Prepared by staff from the Monetary and Capital Markets Department (in consultation with other departments): The authors of this chapter are John Caparusso and Claudio Raddatz (lead authors), Yingyuan Chen, Dan Cheng, Xiaodan Ding, Ibrahim Ergen, Marco Gross, Ivo Krznar, Dimitrios Laliotis, Fabian Lipinsky, Pavel Lukyantsau, Elizabeth Mahoney, Nicola Pierri, and Tomohiro Tsuruga with contributions from Hee Kyong Chon, Caio Ferreira, Alejandro Lopez, and Luc Riedweg under the guidance of Fabio Natalucci (Deputy Director). Magally Bernal was responsible for word processing and the production of this report.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

The authors of this chapter are Zhi Ken Gan, Pierpaolo Grippa, Pierre Guérin, Oksana Khadarina, Samuel Mann, Felix Suntheim (team lead), and Yizhi Xu, with contributions from Alan Feng, Germán Villegas Bauer, and Julia Xueliang Wang, under the guidance of Fabio Natalucci, Mahvash Qureshi, and Jérôme Vandenbussche. Harrison Hong served as an expert advisor.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Near-term global financial stability risks have been contained as an unprecedented policy response to the coronavirus (COVID-19) pandemic has helped avert a financial meltdown and maintain the flow of credit to the economy. For the first time, many emerging market central banks have launched asset purchase programs to support the smooth functioning of financial markets and the overall economy. But the outlook remains highly uncertain, and vulnerabilities are rising, representing potential headwinds to recovery. The report presents an assessment of the real-financial disconnect, as well as forward-looking analysis of nonfinancial firms, banks, and emerging market capital flows. After the outbreak, firms’ cash flows were adversely affected as economic activity declined sharply. More vulnerable firms—those with weaker solvency and liquidity positions and smaller size—experienced greater financial stress than their peers in the early stages of the crisis. As the crisis unfolds, corporate liquidity pressures may morph into insolvencies, especially if the recovery is delayed. Small and medium-sized enterprises (SMEs) are more vulnerable than large firms with access to capital markets. Although the global banking system is well capitalized, some banking systems may experience capital shortfalls in an adverse scenario, even with the currently deployed policy measures. The report also assesses the pandemic’s impact on firms’ environmental performance to gauge the extent to which the crisis may result in a reversal of the gains posted in recent years.

Mr. Alberto M. Ramos
This paper constructs a theoretical framework that rationalizes banks’ short- and long-run adjustment dynamics—in portfolio composition and in the capital structure—following a period of financial distress. The model captures stylized facts about banks’ behavior following a shock to the capital base—namely, the rush to liquidity and credit crunch. Bank panel data show that Argentine domestic retail banks underwent a period of adjustment of six quarters following the Mexican devaluation crisis, reducing their risk-exposure since, owing to bank capital scarcity, depositors became less prone to tolerate bank default risk. Foreign-owned banks suffered a milder shock and adjusted immediately.
Mr. Toshitaka Sekine
This paper investigates whether balance-sheet conditions of firms and their main banks matter for firm investment behavior using dynamic corporate panel data in Japan for the period 1985-95. It finds that smaller non-bond issuing firms were facing liquidity constraints; these firms’ balance-sheet conditions (the debt asset ratios) affected their investment from the midst of the bubble era by influencing main banks’ lending to them; and the deterioration of their main banks’ balance-sheet conditions constrained these firms’ investment from about 1993. These findings highlight the potential macroeconomic impact and importance of the credit channel of monetary policy, and support the case of a credit crunch facing small Japanese firms during this period.
Ms. Sofiya Avramova and Vanessa Le Leslé
In this paper, we provide an overview of the concerns surrounding the variations in the calculation of risk-weighted assets (RWAs) across banks and jurisdictions and how this might undermine the Basel III capital adequacy framework. We discuss the key drivers behind the differences in these calculations, drawing upon a sample of systemically important banks from Europe, North America, and Asia Pacific. We then discuss a range of policy options that could be explored to fix the actual and perceived problems with RWAs, and improve the use of risk-sensitive capital ratios.
Ms. Patricia A Reynolds

In the wake of the 1990s’ experience with economic and financial crises, there has been considerable debate about the reforms needed to make the global financial system more stable. A key area of contention is the role played by financial liberalization. In a February 23 seminar at the IMF Institute, Joshua Aizenman, professor of economics at the University of California at Santa Cruz, examined the complex trade-off between liberalization’s adverse intermediate effects and its more arguable long-run benefits. He cautioned that successful reforms will need to factor in market imperfections.