© 1999 International Monetary Fund
Production: IMF Graphics Section
Figures: Theodore F. Peters, Jr.
Typesetting: Choon Lee
ISBN 9781557758521
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 and Overview
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II. Developments, Trends, and Issues in the Mature Financial Markets
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The Mature Market Turbulence and Its Aftermath
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Developments in Money and Credit Markets Since the Turbulence
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Developments in the Major Foreign Exchange Markets Since the Turbulence
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Developments in the Major Equity Markets Since November 1998
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Developments in Derivatives Markets
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Developments in the Major Banking Systems
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Risks and Vulnerabilities
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References
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III. Emerging Markets: The Contraction in External Financing and Its Impact on Financial Systems
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Financial Market Developments
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Private Capital Flows to Emerging Markets and Developments in the Bond, Equity, and Syndicated Loan Markets
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Developments in Emerging Market Banking Systems
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References
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IV. Managing Global Finance: Private and Public Policy Challenges Raised by Last Fall’s Mature Market Turbulence
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Recurring Features of Turbulence and Crisis: Importance of Lines of Defense Against Systemic Problems
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Environment in Which Financial Excesses Accumulated and Created the Potential for Systemic Problems
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Private and Public Policy Issues and Challenges
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Proposals for Reform
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Remaining Challenges
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Overall Assessment and Conclusion
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Appendix 1. Off-Balance-Sheet Leverage
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Appendix 2. Impact of HLIs on Small and Medium-Sized Markets
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References
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V. Emerging Markets: Nonstandard Responses to External Pressure and the Role of the Major Credit Rating Agencies in Financial Markets
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Nonstandard Policy Interventions in Emerging Markets
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The Role of the Major Credit Rating Agencies in global Financial Markets
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References
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VI. Summary and Conclusions
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Mature Markets
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Emerging Markets
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Private and Public Policy Challenges Raised by Highly Leveraged Institutions and Activities
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Emerging Markets and the International Financial System
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Annexes
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I. Progress with European Monetary Integration
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Money Market Integration and EMU Financial Infrastructure
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Outlook for Pan-European Capital Markets
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Banking System Consolidation and Restructuring
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Financial Supervision, Regulation, and Crisis Management
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References
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II. Banking System Developments and Corporate Sector Restructuring in Japan
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Overview of Banking System Issues
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Main Policy Developments in Banking
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Remaining Challenges
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Financial Reorganization and Corporate Restructuring
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Approaching a Crossroad
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Directions for Change
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Prospects and Risks
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References
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III. Developments in Emerging Market Banking Systems
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Asia
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Latin America
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Central Europe
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References
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IV. Proposals for Improved Risk Management, Transparency, and Regulatory and Supervisory Reforms
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Proposals to Strengthen Risk Management and Internal Control Systems
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Disclosure and Market Discipline
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Highly Leveraged Institutions
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Supervision of Financial Conglomerates and International Accounting Standards
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References
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V. Credit Ratings and the Recent Crises
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Factors in Sovereign Ratings and Empirical Studies of Determinants
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Review of Ratings During the Crises
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Evaluating Rating Agencies: By What Criteria?
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Survey of Credit Rating Agencies
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References
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VI. Use of Ratings in the Regulatory Process
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References
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Boxes
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Chapters
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2.1. The April 1998 BIS Survey of Foreign Exchange and OTC Derivatives Markets
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2.2. Interest Rates and Implied Dividend Growth in G-7 Stock Markets
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2.3. Ongoing Reforms in the U.S. Equity Market Infrastructure
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2.4. Implications of the Y2K Problem for the Major Financial Systems
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3.1. Russia: The Feeding Frenzy
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3.2. The Activity of Highly Leveraged Institutions in Pacific Rim Currencies in 1998
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3.3. The Decline in Liquidity in Emerging Market Bonds and Foreign Exchange
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3.4. The Collapse of GITIC
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3.5. The Nondeliverable Forward Market
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3.6. Issues Involving the Possible Restructuring of Eurobonds
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3.7. Is the Bond Market Becoming More Discriminating?
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3.8. Private Contingent Credit Lines
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4.1. Proposed Revisions to the Basel Accord on Capital Adequacy
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5.1. The Mechanics of a “Double Play”
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Annexes
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A2.1. Stock Market Reaction to Recent Restructuring Announcements in Japan
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A3.1. Corporate Debt Restructuring in Asia
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A3.2. Hybrid Instruments in Asian Bank Recapitalization
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A3.3. Deposit Insurance: Issues for Emerging Markets
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A5.1. Standard & Poor’s Issuer Ratings
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A5.2. Moody’s Issuer Ratings
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A5.3. Criteria for Eligible External Credit Assessment Institutions
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Tables
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Chapters
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2.1. Major Industrial Countries: Outstanding Amounts of Private Sector Domestic Debt Securities
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2.2. Announced International Syndicated Credit Facilities by Nationality of Borrowers
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2.3. Outstanding Amounts of International Debt Securities
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2.4. Outstanding Amounts and Net Issues of International Debt Securities by Currency of Issue
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2.5. Currency Composition of Notional Principal Value of Outstanding Interest Rate and Currency Swaps
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2.6. Markets for Selected Derivative Financial Instruments: Notional Principal Amounts Outstanding
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2.7. Notional value of Outstanding Interest Rate and Currency Swaps of ISDA Members
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2.8. New Interest Rate and Currency Swaps
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2.9. Annual Turnover in Derivative Financial Instruments Traded on Organized Exchanges Worldwide
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2.10. Claims of Banks in BIS-Reporting Countries on selected Emerging Markets as of December 1998
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3.1. Net Private Capital Flows to Emerging Markets, 1990–98
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3.2. Changes in Bank Exposures to Emerging Markets
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3.3. Gross Private Market Financing to Emerging Markets, by Region, Financing Type, and Borrower Type
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3.4. Selected Emerging Markets: Banking System External and Domestic Liquidity Conditions
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4.1. Leverage Ratios in Basic Derivative Instruments
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4.2. Global Risk Positions and Approximate Gross Leverage Ratios in OTC Derivatives Markets by Type of Risk Instrument
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5.1. Local Credit Rating Agencies
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5.2. Rating Categories
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5.3. Sovereign Foreign Currency Ratings: Average One-Year Transition Rates by Rating Category
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Annexes
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A1.1. Distribution of Interbank Loans and Deposits Across EMU Countries Before and After EMU
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A1.2. Bid-Ask Spreads of Overnight Interbank Rates for Selected Countries, 1998–99
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A2.1. Japan: Estimates of Problem Loans for the Major Banks
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A2.2. Japan: Estimated Uncovered Loan Losses, September 1998
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A2.3. Japan: Financial Supervisory Agency’s Special Inspections of Major Banks
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A2.4. Japan: Major Banks’ Restructuring Plans, FY1998-FY2002
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A2.5. Japan: Public Capital Injections, March 1999
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A2.6. Japan: Legal Procedures for Insolvent Companies
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A2.7. Japan: Features of Reorganization Procedures in the United States and Germany and the Prospective Financial Rehabilitation Law in Japan
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A4.1. Key International Supervisory and Regulatory Reports and Guidance Notes
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A5.1. Variables Used in Sovereign Rating Analysis by Standard & Poor’s
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A5.2. Rating and Spread Trends
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A5.3. Market Ratings of Crisis Countries
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A5.4. Survey of Credit Rating Agencies
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A6.1. U.S. Regulations Making Use of Credit Ratings
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A6.2. Regulatory Use of Credit Ratings in Selected Countries
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Figures
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Chapters
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2.1. Major Industrial Countries: Stock Market Price Indices, January 1, 1997–June 25, 1999
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2.2. Major Industrial Countries: Nominal Interest Rates, January 1, 1997–June 30, 1999
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2.3. United States: Corporate Bond Market, January 1998–May 1999
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2.4. United States: Yields on Corporate and Treasury Bonds, January 5, 1962–June 25, 1999
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2.5. United States: Developments in Fixed-Income Securities Markets, January 1, 1998–June 30, 1999
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2.6. Major Industrial Countries: Effective Exchange Rates, January 1991–May 1999
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2.7. Selected Countries: Bilateral U.S. Dollar Exchange Rates, January 1, 1998–June 30, 1999
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2.8. Weighted Average Spreads for Announced Facilities in the International Syndicated Credit Market, First Quarter 1992–First Quarter 1999
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2.9. United States: Equity Market Performance, 1926–March 1999
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3.1. Yield Spreads on Emerging Market and U.S. High-Yield Bonds
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3.2. Secondary Market Yield Spreads on U.S. Dollar-Denominated Eurobonds by Selected Emerging Markets
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3.3. Total Return Equity Indices: IFC Global and S&P 500
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3.4. Forward Exchange Rates for the Hong Kong Dollar and Argentine Peso
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3.5. Emerging Market Sovereign Ratings Changes, May 1997–May 1999
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3.6. Brazil: Financial Market Indicators
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3.7. Emerging Market Bond Market Issuance Around Crises
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3.8. Volatility of Weekly Returns in Emerging Equity Markets
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3.9. Emerging Market Equity Mutual Funds: Estimated Net Flows
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3.10. Real Estate and Stock Prices: Selected Asian Countries
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4.1. United States: Top 25 Commercial Banks—National Amount of Derivatives, Equity Capital. and The Gross Off-Balance-Sheet Leverage Ratio, Fourth Quarters 1995—Fourth Quarter 1998
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5.1. Stock Market Indices: Hong Kong Hang Seng and Dow Jones Industrial Average
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5.2. Selected Stock Market Indices
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5.3. Malaysia: Portfolio Investment Flows
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5.4. Overnight Interest Rates, Foreign Exchange Rates, and Stock Market Indices
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5.5. Emerging Markets: Number of Sovereign Ratings by Category
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5.6. Moody’s-Rated Default Count by Industry and Trend
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5.7. Five-, Ten-, Fifteen-, and Twenty-Year Average Cumulative Default Rates, 1970–98
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5.8. Fifteen-Year Cumulative Default Rates and Volatilities, 1920–98
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5.9. Average Credit Ratings in Emerging Market Countries
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Annexes
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A1.1. ECB: Interest Rates and Standing Facilities, January 4–June 11, 1999
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A1.2. Distribution of Cross-Border Payments in EMU Between EBA and TARGET, January–May 1999
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A1.3. Overnight Rates on Unsecured Interbank Funds in the Euro Area, January 4–June 10, 1999
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A1.4. France and Spain: Overnight Repo Rates, January 4, June 11, 1999
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A2.1. Japan: Banking System Strains, 1997–99
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A2.2. Japan: Major Banks’ Profits, 1988–99
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A2.3. Japan: Postal Saving Deposits, 1987–98
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A5.1. Emerging Markets: Sovereign Ratings and Fundamentals
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A5.2. Rating Actions by Moody’s and Standard & Poor’s, and Changes in Yield Spreads: Argentina
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A5.3. Rating Actions by Moody’s and Standard & Poor’s, and Changes in Yield Spreads: Brazil
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A5.4. Rating Actions by Moody’s and Standard & Poor’s, and Changes in Yield Spreads: Hungary
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A5.5. Rating Actions by Moody’s and Standard & Poor’s, and Changes in Yield Spreads: Indonesia
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A5.6. Rating Actions by Moody’s and Standard & Poor’s, and Changes in Yield Spreads: Korea
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A5.7. Rating Actions by Moody’s and Standard & Poor’s, and Changes in Yield Spreads: Malaysia
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A5.8. Rating Actions by Moody’s and Standard & Poor’s, and Changes in Yield Spreads: Mexico
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A5.9. Rating Actions by Moody’s and Standard & Poor’s, and Changes in Yield Spreads: Poland
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A5.10. Rating Actions by Moody’s and Standard & Poor’s, and Changes in Yield Spreads: Russia
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A5.11. Rating Actions by Moody’s and Standard & Poor’s, and Changes in Yield Spread: Thailands
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A5.12. Rating Actions by Moody’s and Standard & Poor’s, and Changes in Yield Spreads: Turkey
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A5.13. Average Cumulative 15-Year Default Rates for Corporate Issuers
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A5.14. Rating Stability
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The following symbols have been used throughout this volume:
… to indicate that data are not available;
— 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, 1997–98 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years (for example, 1997/98) to indicate a fiscal or financial year.
“Billion” means a thousand million; “trillion” means a thousand billion.
“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
“n.a.” means not applicable.
Minor discrepancies between constituent figures and totals are due to rounding.
As used in this volume the term “country” does 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.
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, credit rating agencies, and the staffs of the Bank for International Settlements, the Commission of the European Union, and the International Swaps and Derivatives Association. The discussions leading up to the present report took place in Argentina, Belgium, China, France, Germany, Hong Kong SAR, Hungary, Italy, Japan, Malaysia, Mexico, Poland, Singapore, Switzerland, Turkey, the United Kingdom, and the United States, in early 1999. The report reflects information available up to the end of June 1999.
The International Capital Markets report is prepared in the Research Department. The International Capital Markets project is directed by Charles Adams, 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 Research Department are Peter Breuer, Bankim Chadha, Nada Choueiri, Burkhard Drees, Anne Jansen, Charles Kramer, Subir Lall, William Lee, Joaquim Levy, Alessandro Prati, Anthony Richards, Jorge Roldos, Todd Smith (Visiting Scholar), Subramanian Sriram, Amadou Sy, Peter Tran, and Caroline Van Rijckeghem. Contributors from other departments are Martin Cerisola, Western Hemisphere Department; Cem Karacadag, Monetary and Exchange Affairs Department; and James Morsink, Asia and Pacific Department. Celia Burns, Sheila Kinsella, Rosalind Oliver, Ramanjeet Singh, and Adriana Vohden provided expert word processing assistance. Marina Primorac of the External Relations Department edited the manuscript and coordinated production of the publication.
The 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 29, 1999. 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
| BIS |
Bank for International Settlements |
| BNL |
Banca Nazionale del Lavoro |
| CAPM |
Capital Asset Pricing Model |
| CAPS |
Capital Augmented Preferred Securities |
| CCBM |
correspondent central banking model |
| DJIA |
Dow Jones Industrial Average |
| DCR |
Duff & Phelps Credit Rating Agency |
| EAF |
Euro Access Frankfurt |
| EBA |
European Bankers’ Association |
| ECB |
European Central Bank |
| EFIL |
Exchange Fund Investment Limited |
| EMU |
Economic and Monetary Union |
| EONIA |
euro overnight index average |
| ERM |
exchange rate mechanism |
| EU |
European Union |
| FBA |
Federation of Bankers’ Associations |
| FESCO |
Forum of European Securities Commissions |
| FOBAPROA |
Fondo Bancario de Proteccion al Ahorro |
| FOMC |
Federal Open Market Committee |
| FRC |
Financial Reconstruction Committee |
| FSA |
Financial Supervisory Agency |
| G-7 |
Group of Seven |
| G-10 |
Group of Ten |
| GITIC |
Guangdong International Trust and Investment Corporation |
| HKMA |
Hong Kong Monetary Authority |
| HLI |
highly leveraged institution |
| IAS |
International Accounting Standard |
| IASC |
International Accounting Standards Committee |
| IFC |
International Finance Corporation |
| IIF |
Institute of International Finance |
| INDRA |
Indonesia Debt Restructuring Agency |
| IOSCO |
International Organization of Securities Commissions |
| IPAB |
Instituto de Proteccion del Ahorro Bancario |
| ISD |
Investment Services Directive |
| ISDA |
International Swaps and Derivatives Associatioi |
| ITIC |
international trust and investment corporation |
| JGB |
Japanese government bonds |
| KAMCO |
Korea Management Corporation |
| LIBOR |
London interbank offered rate |
| LTCM |
Long-Term Capital Management |
| MRO |
main refinancing operations |
| NCB |
national central bank |
| NDF |
nondeliverable forward |
| NRSRO |
Nationally Recognized Statistical Rating Organization |
| OCC |
Office of the Comptroller of the Currency |
| OTC |
over-the-counter |
| PCA |
prompt corrective action |
| PNS |
Paris Net Settlement |
| ROE |
return on equity |
| RTGS |
real-time gross settlement |
| S&P’s |
Standard & Poor’s |
| SAR |
Special Administrative Region |
| SDDS |
Special Data Dissemination Standard |
| SEC |
Securities and Exchange Commission |
| SLIPS |
Stapled Limited Interest Preferred Securities |
| TARGET |
Trans-European Automated Real-Time Gross Settlement Express Transfer |
| TIBOR |
Tokyo interbank borrowed rate |
| VaR |
value at risk |
| Y2K |
Year 2000 |