© 1997 International Monetary Fund
ISBN 9781557756862
ISSN 0258-7440
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Contents
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Preface
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List of Abbreviations
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I. Introduction
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II. Developments and Trends in the Mature Markets
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Foreign Exchange Markets: Capital Flows and the Rise of the Dollar
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Credit Markets: Spread Compression and Increased Volumes
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Risks in Foreign Exchange and Credit Markets
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Equity Markets
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Expanding and Maturing Derivative Markets
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Appendix: Market Surprised by Yen’s Appreciation in May 1997
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III. EMU: Systemic Implications and Challenges
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Global Financial Adjustments After Introduction of the Euro
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EMU and the Potential Benefits of Europe-Wide Securities Markets
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Consolidation and Restructuring of European Banking Systems
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Systemic Risk Management in EMU
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IV. Developments and Prospects in Emerging Markets
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Capital Flows to Emerging Markets
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Performance of Emerging Debt and Equity Markets
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Sustainability of Capital Flows and Speculative Attacks
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Appendix 1: Sovereign Ratings and Fundamentals
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Appendix 2: Mechanics of Speculative Attacks
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V. External Liability Management
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VI. Developments in International Banking
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Industrial Countries
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Banking System Developments in Emerging Markets
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VII. Emerging Market Currency Crises of July 1997
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VIII. Conclusions
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Mature Markets
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Structural Aspects of EMU
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Emerging Markets
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External Liability Management
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Developments in International Banking
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Background Material—Part I Recent Developments and Trends in Capital Markets and Banking Systems
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Annexes
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I. Recent Developments in Emerging Capital Markets
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Capital Flows, Reserves, and Foreign Exchange Markets
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Bond Markets
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Equity Markets
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Mutual Funds
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International Bank Lending
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II. Developments and Trends in the Mature Capital Markets
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Exchange Rates
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Bond Markets
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International Syndicated Loan Markets
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Equity Markets
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Derivative Markets
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Developments in Systemic Risk Management
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Appendix 1: Extracting Information from Options Prices
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Appendix 2: Have Securities Markets Become More Volatile?
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Appendix 3: Current U.S. Equity Prices Compared with the 1987 U.S. and 1989 Japanese Bubbles
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III. Developments in International Banking
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Restructuring and Consolidation of International Banking Systems
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Supervisory and Regulatory Developments
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Developments in Profitability and Asset Quality in Selected Industrial Countries
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Banking System Developments in Selected Emerging Markets
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Appendix 1: Credit Derivatives
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Appendix 2: Accounting for Nonperforming Loans
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Background Material—Part II Selected Issues
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IV. European Monetary Union: Institutional Framework for Financial Policies and Structural Implications
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Potential Size of EMU Financial Markets
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Institutional Framework for Financial Markets
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Euro as a Catalyst: Incentives for Continued Structural Change
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Structural Implications for Securities Markets: Further Securitization of European Finance
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Structural Implications for Banking Systems
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Appendix: Remaining Impediments to Cross-Border Competition
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V. Risk Management of Sovereign Liabilities
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Foreign Currency Exposure of Sovereign Liabilities
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Institutional Framework
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Strategic Management of Sovereign Liabilities
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Deviations from the Benchmark Portfolio
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Conclusion
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VI. Capital Flows to Emerging Markets—A Historical Perspective
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Earlier Periods of High Capital Mobility
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International Capital Flows After the First Oil Shock
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Factors Stimulating Capital Flows and Renewed Market Access in the 1990s
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Appendix 1: Determinants of Balance of Payments and Banking Crises
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Appendix 2: Speculative Attacks in the 1990s: Have Economic Models Got It Right Yet?
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Statistical Appendix
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References
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Boxes
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Chapter
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IV. 1. Building a Resilient Financial System in Hong Kong, China
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Annexes
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I. 2. The Brady Bond Market Comes of Age
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3. Repackaged Brady Bonds
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4. Emerging Market Currency Eurobonds: The Euror and Market
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II. 5. Trends in Fund Management
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6. Circuit Breakers
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IV. 7. ERM 2
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8. Volatility and Correlation of Asset Returns in EMU
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VI. 9. Liberalization of Capital Controls in Emerging Markets
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Tables
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Chapters
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II. 1. Net Foreign Purchases of U.S. Bonds
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2. Net Purchases of Domestic Bonds by Nonresidents
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3. United States: International Transactions
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4. One-Year Interest Differentials with Germany, February 28, 1995, January 30, 1997, and May 31, 1997
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5. Domestic and International Debt Securities: Amounts Outstanding and Net Issues
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6. Announced International Syndicated Credit Facilities by Nationality of Borrowers
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7. Average Spreads and Maturities on Eurocredits
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8. Major Industrial Countries: Equity Market Risk-Adjusted Returns in Local Currency (Sharpe Ratios)
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9. Markets for Selected Derivative Financial Instruments: Notional Principal Amounts Outstanding
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10. Notional Principal Value of Outstanding Interest Rate and Currency Swaps
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III. 11. Total Foreign Exchange Reserves Minus Gold in Selected Countries and Regions
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12. European Union (EU), North America, and Japan: Selected Indicators of the Size of the Capital Markets, 1995
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IV. 13. Private Capital Flows to Emerging Markets
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14. Emerging Market Total Return Equity and Debt Indices
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Annexes
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I. 15. Secondary Market Transactions in Debt Instruments of Emerging Markets
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16. Emerging Market Bond Issues, Equity Issues, and Syndicated Loan Commitments
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17. Emerging Market Bond Issues: Fixed-Rate, Floating-Rate, and Call Options
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18. Emerging Market International Bond Issues by Currency of Denomination
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19. Stock Market Turnover Ratio and Value of New Equity Issues in Selected Countries and Regions
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20. Emerging Market Medium- and Long-Term Syndicated Loan Commitments: Interest Margins and Refinancings
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21. Changes in Net Assets of BIS-Reporting Banks vis-à-vis Banks in Selected Countries and Regions
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II. 22. United States: Selected External Account Variables
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23. Major Industrial Countries: Bond and Equity Index Returns
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24. One-Year and Seven-Year Interest Differentials with Germany, February 28, 1995, January 1, 1996, January 30, 1997, and May 31, 1997
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25. Outstanding Amounts of International Debt Securities
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26. Outstanding Amounts and Net Issues of International Debt Securities by Currency of Issue
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27. Changes in Net Assets of BIS-Reporting Banks vis-à-vis Banks in Selected Countries and Regions
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28. United States: Outstanding Repurchase Agreements (Repos)
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29. U.S. Mutual Funds: Net New Cash Flow and Total Assets
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III. 30. Bank Financial Strength Ratings for Selected Countries, June 2, 1997
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31. Disintermediation in Selected Industrial Countries
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32. Japan and the United States: Summary of Prompt Corrective Action Provisions
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33. Major Industrial Countries: Commercial Bank Profitability
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34. Selected Asian Property Markets: Vacancy Rates and Changes in Rents
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35. Loan Classification in Selected Emerging Markets
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IV. 36. Amounts Outstanding of International Debt Securities by Currency and Country of Nationality, March 1997
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37. Use of Selected Currencies on One Side of Foreign Exchange Transaction, April 1989, April 1992, and April 1995
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38. Notional Principal Value of Outstanding and New Interest Rate and Currency Swaps, 1995
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39. European System of Central Banks: Open Market Operations and Standing Facilities
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40. European System of Central Banks: Eligible Assets
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41. Key Monetary Policy Operating Procedures in Industrial Countries and in the European Central Bank
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42. Monetary and Supervisory Agencies
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43. Deposit Insurance Schemes for Commercial Banks in the European Union and G-10 Countries, 1995
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44. Permissible Banking Activities and Bank Ownership in the European Union and G-10 Countries, 1995
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45. List of Bank Activities Subject to Mutual Recognition in the European Union
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46. Components of Capital for Meeting the Capital Standards or Requirements in the European Union and G-10 Countries
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47. Commercial Bank Supervisory Practices in the European Union and G-10 Countries, 1995
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48. Mutual Funds, June 1996
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49. European Union: Cross-Border Interbank Assets
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50. European Union: Ratings of Foreign and Local Currency Debt of Sovereign Governments, May 29, 1997
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51. European Union Countries, North America, and Japan: Foreign Currency Debt, 1996
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52. Estimates of Credit Spreads of EU Sovereigns, September 1996 and June 1997
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53. Interest Rate Spreads of Canadian Provinces
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54. Euro Benchmark Yield Curve: Germany vs. France
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55. Funds Raised in Capital Markets by Nonfinancial Enterprises in Selected Industrial Countries, 1990–95
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56. European Union Countries, United States, and Japan: Equity Markets, 1996
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57. Bank Restructuring: Number of Institutions and Size Concentration
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58. European Union Countries, North America, and Japan: Population per Bank Branch
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59. Mergers and Acquisition Activity in Banking
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60. European Union: Net Interest Margins
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61. European Union: Bank Profitability
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62. Implementation of the European Union Capital Adequacy and Investment Services Directives
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63. Regulatory Constraints on Portfolio Investment of Institutional Investors in Selected Industrial Countries
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V. 64. Long-Term Public and Publicly Guaranteed External Debt Outstanding and Reserves Excluding Gold in Selected Developing Countries, 1995
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65. External Debt Profile of Selected Asian Countries, 1995
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66. Institutional Structure of Debt Offices in OECD Countries: Debt Offices Within the Treasury
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67. Institutional Structure of Debt Offices in OECD Countries: Autonomous Debt Offices
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68. Institutional Structure of Debt Offices in OECD Countries: Debt Offices Within the Central Bank
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69. Institutional Structure of Debt Offices in OECD Countries: Debt Offices Within the Ministry of Finance
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VI. 70. Selected Crises, 1870–1914
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71. External Financial Resources to Developing Countries
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72. Moody’s Initial Ratings of Emerging Markets Countries
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73. Performance of Crises Indicators
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Statistical Appendix
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A1. Merrill Lynch Global Investor Survey
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A2. Net Foreign Purchases of U.S. Bonds
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A3. Net Purchases of Securities in Major Industrial Countries
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A4. External Positions of Banks in Individual Reporting Countries
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A5. Annual Turnover in Derivative Financial Instruments Traded on Organized Exchanges Worldwide
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A6. New Interest Rate and Currency Swaps
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A7. Currency Composition of Notional Principal Value of Outstanding Interest Rate and Currency Swaps
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Figures
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Chapters
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II. 1. Spot Exchange Rates
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2. United States, Japan, and Germany: Interest Rate Differentials
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3. Major European Countries: Exchange Rates vs. Deutsche Mark
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4. Implied Volatility: Japanese Yen and Deutsche Mark Three-Month Forwards
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5. Selected European Long-Term Interest Rate Differentials with Germany
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6. United States: Yield Spreads of Corporate Bonds over U.S. Treasuries
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7. Australia, Canada, and New Zealand: Yield Differentials on 10-Year Government Bonds
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8. Stock Market Indices: Major Industrial Countries
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9. Stock Market Indices: Smaller European Countries
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10. United States: Equity Market Performance
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IV. 11. Distribution for Yen-Dollar Exchange Rate in Early September 1997 Implied by Options Prices on May 5, 9, and 19, 1997
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12. Private Market Financing for Emerging Markets
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V. 13. Yield Spreads: Emerging Market and High-Yield U.S. Corporate Bonds
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14. Emerging Markets: Sovereign Ratings and Fundamentals
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15. Bank Receipts and Payments Arising from Forward Contract Operations
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16. External Long-Term Public and Publicly Guaranteed Debt Outstanding
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VII. 17. Thailand: Selected Financial Indicators
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18. Financial Market Developments in Selected Asian Countries, 1997
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19. Financial Market Developments in Selected Latin American Countries, 1997
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20. Yield Curves in Selected Emerging Markets, July 1997
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Annexes
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I. 21. Net Private Capital Flows to Emerging Markets
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22. Total Reserves Minus Gold of Selected Emerging Markets, January 1990–May 1997
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23. Exchange Rates of Selected Emerging Markets, January 1990–May 1997
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24. Bond Markets: Selected Returns, Yields, and Spreads
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25. Yield Spreads for Selected Brady Bonds and U.S. Dollar-Denominated Eurobonds
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26. Emerging Market Debt: Volatility and Correlation of Returns with Mature Markets
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27. Brady and Eurobond Spreads
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28. Spreads and Maturities for Sovereign Borrowers
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29. Emerging Equity Markets: Selected Returns, Price-Earnings Ratios, and Expected Returns
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30. Emerging Equity Markets: Selected Volatilities, Return-Volatility Comparisons, and Correlations
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31. Emerging Market Mutual Funds
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II. 32. Major Industrial Countries: Exchange Rates, January 1994–May 1997
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33. Major European Countries: Local Currency vs. Deutsche Mark, January 1994–May 1997
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34. Major Industrial Countries: Real Growth in Broad Money Supply and Claims on Private Sector
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35. Major Industrial Countries: Short-Term Interest Rates
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36. Major Industrial Countries: Long-Term Interest Rates
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37. Bilateral Exchange Rates and Short-Term and Long-Term Interest Differentials vis-à-vis the U.S. Dollar
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38. Foreign and International Holdings of U.S. Public Debt
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39. RiskMetrics Daily Price Volatility for U.S. Dollar Spot Exchange Rates, January 19, 1995–May 30, 1997
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40. Implied Volatility: Yen and Deutsche Mark Three-Month Forwards
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41. Selected European Long-Term Interest Rate Differentials with Germany
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42. Yield Differential for the 10-Year Government Bonds of Australia, Canada, and New Zealand
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43. United States: Yield Spreads of Corporate Bonds over U.S. Treasuries
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44. RiskMetrics Daily Price Volatility for 10-Year Government Bonds, January 19, 1995–May 30, 1997
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45. Spreads on Eurocredits
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46. Major Industrial Countries: Stock Market Indices
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47. United States: Corporate Profits and Market Capitalization
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48. United States: Corporate Profits Volatility
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49. Implied Volatility: S&P 500, Nikkei 225, and DAX Indices
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50. Distribution for Yen/Dollar Exchange Rate in Early September 1997 Implied by Options Prices on May 20, 1997
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51. Historical Stock and Bond Price Volatility in the United States, Japan, and Germany
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52. United States and Japan: Developments in Equity, Bond, and Money Markets Surrounding Significant Stock Market Increases
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III. 53. Major Industrial Countries: Intemediation Spreads
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IV. 54. Cross-Border TARGET Payment
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55. Labor Costs and Productivity in Banking, 1994
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V. 56. External Long-Term Public and Publicly Guaranteed Debt Outstanding
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VI. 57. Capital Mobility Index
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58. Net Capital Outflows, 1880–1913
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59. Net Capital Inflows, 1880–1913
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60. Contributions of Capital Flows to Investment, 1870–1914 versus 1980–90s
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Box
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9. Capital Controls in and Flows to Emerging Markets
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The following symbols have been used throughout this volume:
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… to indicate that data are not available:
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— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
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– between years or months (for example, 1995–96 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
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/ between years (for example, 1995/96) to indicate a fiscal or financial year.
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“Billion” means a thousand million: “trillion” means a thousand billion.
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“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
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“n.a.” means not applicable.
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Minor discrepancies between constituent figures and totals are due to rounding.
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As used in this volume the term “country” does not in all cases refer to a territorial entity that is a slate 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.
Preface
The International Capital Markets report is an integral element of the IMF’s surveillance of developments in international financial markets. The IMF has published the International Capital Markets report annually since 1980. The report draws, in part, on a series of informal discussions with commercial and investment banks, securities firms, stock and futures exchanges, regulatory and monetary authorities, and the staffs of the Bank for International Settlements, the Commission of the European Union, the International Swaps and Derivatives Association, the Japan Center for International Finance, and the Organization for Economic Cooperation and Development. The discussions leading up to the present report look place in Belgium. France, Germany. Indonesia, Italy. Japan, Korea, Singapore, South Africa, Switzerland, Turkey, the United Kingdom, the United States, and Hong Kong, China, between January and April 1997. The report reflects information available up to the end of May 1997: a special chapter provides an update of exchange market developments in the emerging markets through July 1997.
The International Capital Markets report is prepared in the Research Department. The International Capital Markets project is directed by David Folkerts-Landau, Assistant Director, together with Donald Mathieson, Chief of the Emerging Markets Studies Division, and Garry Schinasi, Chief of the Capital Markets and Financial Studies Division. Coauthors of the report from the Capital Markets and Financial Studies Division of the Research Department are Robert Flood, Senior Economist; Marcel Cassard, Peter Christoffersen, Laura Kodres. Alessandro Prati, and Todd Smith, all Economists; Charles Thomas, Visiting Scholar: and Subramanian Sriram, Senior Research Officer. Coauthors of the report from the Emerging Markets Studies Division of the Research Department are Bankim Chadha, Deputy Division Chief; Sunil Sharma, Senior Economist; Ilan Goldfajn, Jorge Roldos, and Michael Spencer, all Economists; and Anne Jansen, Senior Research Officer, and Peter Tran, Research Assistant. Sheila Kinsella, Adriana Vohden, Tammi Shear, and Ramanjeet Singh provided expert word processing assistance. J.R. Morrison of the External Affairs Department edited the manuscript and coordinated production of the publication.
This study has benefited from comments and suggestions from staff in other IMF departments, as well as from Executive Directors following their discussions of the International Capital Markets report on July 30, 1997. However, the analysis and policy considerations are those of the contributing staff and should not be attributed to Executive Directors, their national authorities, or the IMF.
List of Abbreviations
| ABS |
asset-backed securities |
| ADR |
American Depository Receipt |
| ASB |
Accounting Standards Board (U.K.) |
| ASEAN |
Association of South-East Asian Nations |
| BAP |
Bankers Association of the Philippines |
| BCCI |
Bank of Credit and Commerce International |
| BIS |
Bank for International Settlements |
| BOT |
Bank of Thailand |
| BSP |
Bangko Sentral ng Pilipinas |
| CAD |
Capital Adequacy Directive |
| CBOE |
Chicago Board Options Exchange |
| CBOT |
Chicago Board of Trade |
| CCPC |
Cooperative Credit Purchasing Company (Japan) |
| CFTC |
Commodity Futures Trading Commission |
| CHAPS |
Clearing House Association Payments System |
| CHIPS |
Clearing House Interbank Payments System |
| CMBS |
commercial-mortgage-backed securities |
| CME |
Chicago Mercantile Exchange |
| CME-IMM |
Chicago Mercantile Exchange—International Money Market |
| CSD |
central securities depository |
| DTB |
Deutsche Terminbörse |
| ECB |
European Central Bank |
| ECU |
European currency unit |
| EEA |
European Economic Area |
| EFFAS |
European Federation of Financial Analyst Societies |
| EMBI |
Emerging Market Bond Index (J.P. Morgan) |
| EMI |
European Monetary Institute |
| EMS |
European Monetary System |
| EMU |
Economic and Monetary Union |
| ERM |
exchange rate mechanism |
| ESCB |
European System of Central Banks |
| EU |
European Union |
| FASB |
Financial Accounting Standards Board (U.S.) |
| FCDU |
Foreign Currency Deposit Unit (The Philippines) |
| FDI |
foreign direct investment |
| FDIC |
Federal Deposit Insurance Corporation (U.S.) |
| FOBAPROA |
Fondo Bancario de Protectión al Ahorro (Mexico) |
| FOGADE |
Fondo de Garantiá de Depósitos y Prótection Bancaria (Brazil) |
| G-7 |
Group of Seven (Canada, France, Germany, Italy, Japan, United Kingdom, United States) |
| G-10 |
Group of Ten (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, United Kingdom, United States, Switzerland as honorary member) |
| GBI |
Government Bond Index (J.P. Morgan) |
| GDP |
gross domestic product |
| GDR |
Global Depository Receipt |
| HKMA |
Hong Kong Monetary Authority |
| HKSAR |
Hong Kong Special Administrative Region |
| IASC |
International Accounting Standards Committee |
| IFC |
International Finance Corporation |
| IFCI |
International Finance Corporation Investable index |
| IOSCO |
International Organization of Securities Commissions |
| ISD |
Investment Services Directive |
| ISDA |
International Swaps and Derivatives Association |
| LIBOR |
London interbank offered rate |
| LIFFE |
London International Financial Futures Exchange |
| MAS |
Monetary Authority of Singapore |
| MATIF |
Marché à Terme International de France |
| MIDAM |
Mid-America Commodity Exchange |
| MLHY |
Merrill Lynch High-Yield |
| NASD |
National Association of Securities Dealers (U.S.) |
| NASDAQ |
National Association of Securities Dealers Automated Quotation (U.S.) |
| NBH |
National Bank of Hungary |
| NDF |
nondeliverable forward |
| NTMA |
National Treasury Management Agency (Ireland) |
| NYFE |
New York Futures Exchange |
| NYSE |
New York Stock Exchange |
| NZDMO |
New Zealand Debt Management Office |
| OECD |
Organization for Economic Cooperation and Development |
| OTC |
over the counter |
| PCA |
prompt corrective action |
| PLMO |
Property Loan Management Organization (Thailand) |
| RTGS |
real-time gross settlement |
| SEC |
Securities and Exchange Commission (U.S.) |
| SET |
Stock Exchange of Thailand |
| SFE |
Sydney Futures Exchange |
| SIMEX |
Singapore International Monetary Exchange |
| SNDO |
Swedish National Debt Office |
| S&P |
Standard & Poor’s |
| TARGET |
Trans-European Automated Real-Time Gross Settlement Express Transfer System |
| TIFFE |
Tokyo International Financial Futures Exchange |
| TSE |
Tokyo Stock Exchange |
| VAR |
value at risk |
| VVA |
Valuación y Venta de Activos (Mexico) |