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Business and Economics > Banks and Banking

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Cover Global Financial Stability Notes
Pension Funds and Financial Stability
This Global Financial Stability Note examines the growth of the pension fund sector and the potential financial stability implications. Historically, pension funds have been seen as a contributor to financial stability because of their long-term and well-diversified liabilities. However, the sector has undergone significant structural shifts accelerated by a prolonged period of low interest rates, increasing its exposure to traditional risks while introducing emerging risks; this is reflected in growing intra-financial sector interconnectedness and exposure to long-term sovereign bonds. The recent transition to higher interest rates should be positive for the pension sector, albeit its pace and abruptness has been associated with liquidity stress and contagion risks in some countries.
Keywords:
Pension Funds; Financial Stability; Assets; Risks; Pension Plans; major pension fund sector; IMF Library; major pension savings market; structural liquidity; asset-liability duration mismatch; risk analysis; Pension spending; Pensions; Financial sector stability; Liquidity risk; Global
Cover IMF Working Papers
Monetary Policy and Inflation Scares
Christopher J. Erceg
,
Jesper Lindé
, and
Mathias Trabandt
A salient feature of the post-COVID inflation surge is that economic activity has remained resilient despite unfavorable supply-side developments. We develop a macroeconomic model with nonlinear price and wage Phillips curves, endogenous intrinsic indexation and an unobserved components representation of a cost-push shock that is consistent with these observations. In our model, a persistent large adverse supply shock can lead to a persistent inflation surge while output expands if the central bank follows an inflation forecast-based policy rule and thus abstains from hiking policy rates for some time as it (erroneously) expects inflationary pressures to dissipate quickly. A standard linearized formulation of our model cannot account for these observations under identical assumptions. Our nonlinear framework implies that the standard prescription of "looking through" supply shocks is a good policy for small shocks when inflation is near the central bank's target, but that such a policy may be quite risky when economic activity is strong and large shocks drive inflation well above target. Moreover, our model implies that the economic costs of "going the last mile" – i.e. a tight stance aimed at returning inflation quickly to target – can be substantial.
Keywords:
Inflation Dynamics; New Keynesian Model; Inflation Risk; Monetary Policy; Linearized Model; Nonlinear Model; State-Dependent Pricing; cost-push shock; policy rule; COVID inflation surge; Inflation; Inflation targeting; Supply shocks; Central bank policy rate; Labor markets
Cover IMF Working Papers
Implementing Risk-Based Solvency for Insurers—Lessons from Kenya, Mexico, and South Africa
Peter Windsor
,
Suzette J Vogelsang
,
Christiaan Henning
,
Kerwin Martin
,
Elias Omondi
,
Gerardo Rubio
, and
Jooste Steynberg
International standards and best practice supports the implementation of a risk-based solvency regime in the regulation and supervision of insurers. Several emerging market and developing economies are transitioning to such a solvency regime or planning to do so. This paper discusses Kenya, Mexico, and South Africa’s journey to putting in place a risk-based solvency regime which had several common elements notwithstanding significantly different insurance sectors. The transition was a multi-year project requiring dedicated additional resources; restructuring of the regulator, including redesigning supervisory processes and tools and upgrading information technology systems; and significantly greater coordination between the regulator and the insurance industry.
Keywords:
Insurance; Risk-based Solvency; Risk-based supervision; solvency regime; Penetration rate; RBS project; solvency assessment; RBS implementation; supervision of insurer; Insurance companies; Solvency; Financial statements; Africa; Global
Cover Global Financial Stability Report, October 2024
Global Financial Stability Report, October 2024
Steadying the Course: Uncertainty, Artificial Intelligence, and Financial Stability
International Monetary Fund. Monetary and Capital Markets Department

Abstract

Chapter 1 shows that although near-term financial stability risks have remained contained, mounting vulnerabilities could worsen future downside risks by amplifying shocks, which have become more probable because of the widening disconnect between elevated economic uncertainty and low financial volatility. Chapter 2 presents evidence that high macroeconomic uncertainty can threaten macrofinancial stability by exacerbating downside tail risks to markets, credit supply, and GDP growth. These relationships are stronger when debt vulnerabilities are elevated, or financial market volatility is low (during episodes of a macro-market disconnect). Chapter 3 assesses recent developments in AI and Generative AI and their implications for capital markets. It presents new analytical work and results from a global outreach to market participants and regulators, delineates potential benefits and risks that may arise from the widespread adoption of these new technologies, and makes suggestions for policy responses.

Keywords:
financial stability; vulnerabilities; uncertainty; risk; artificial intelligence; capital markets; tail risk; uncertainty index; monetary policy; mortgage rate; market liquidity risk; fiscal policy uncertainty; Emerging and frontier financial markets; Financial sector stability; Sovereign bonds; Credit; Global; Middle East; Europe; Central and Eastern Europe; South America
Cover IMF Working Papers
Fiscal R-Star: Fiscal-Monetary Tensions and Implications for Policy
Marijn A. Bolhuis
,
Jakree Koosakul
, and
Neil Shenai
Since the Global Financial Crisis, fiscal policy in advanced economies has become more “active” – that is, increasingly unresponsive to rising debt levels. This paper explores tensions between active fiscal and monetary policies by introducing the concept of “fiscal r-star,” which is the real interest rate required to stabilize debt levels when the primary balance is set exogenously, output is growing at potential, and inflation is at target. It is proposed that the difference between monetary r-star and fiscal r-star—referred to as the “fiscal monetary gap”—is a proxy for fiscal-monetary policy tensions. An analysis of over 140 years of data from 16 advanced economies shows that larger fiscal-monetary gaps are associated with rising debt levels, higher inflation, financial repression, lower real returns on bonds and cash, with elevated risks of future debt, inflation, currency, housing, and systemic crises. Current estimates indicate that fiscal-monetary tensions are at historic highs. Given the tepid growth outlook, growth-enhancing reforms and fiscal consolidation, among other policy adjustments, may be needed to attenuate fiscal-monetary tensions over time.
Keywords:
Fiscal r-star; fiscal-monetary gap; fiscal-monetary interactions; fiscal dominance; inflation; fiscal consolidation; monetary policy; fiscal policy; policy space; financial repression; debt liquidation; fiscal-monetary policy tension; debt level; fiscal policy to debt; IMF working paper 24/174; Fiscal stance; Real interest rates; Inflation targeting; Global
Cover IMF Staff Country Reports
Spain: Financial Sector Assessment Program-Technical Note on Financial Safety Net and Crisis Management
International Monetary Fund. Monetary and Capital Markets Department
This paper examines a technical note on financial safety net and crisis management as part of Financial Sector Assessment Program in Spain. Spanish authorities have made good progress in establishing an effective crisis management and resolution regime. The Spanish authorities should integrate bank resolution authority for planning and execution in one institution. Integration would ensure that the national resolution authority responsible for implementing orderly resolution actions has control over the primary levers necessary to achieve its objectives. The Spanish authorities need to establish a framework for addressing liquidity needs in resolution. Spanish authorities should continue to enhance cross-authority crisis coordination arrangements. This should include formalizing its existing crisis management practices and prioritizing by agreeing a cross-authority crisis simulation exercise strategy. Spain’s Executive Resolution Authority should also have the flexibility, where possible, under national procurement legislation to depart from procurement rules in a crisis scenario to appoint external advisory support including independent valuers at short notice.
Keywords:
bank Resolution planning; Banco de España; IMF STX staff; resolution execution; directorate General insurance; authority crisis coordination; Bank resolution; Crisis management; Bank resolution framework; Crisis resolution; Financial sector stability; Global
Cover IMF Staff Country Reports
Spain: Financial Sector Assessment Program-Technical Note on Systemic Risk Analysis
International Monetary Fund. Monetary and Capital Markets Department
This paper focuses on a technical note on systemic risk analysis as part of Financial Sector Assessment Program (FSAP) in Spain. Spain’s economy and its well-developed, bank-dominated financial system have shown resilience through the pandemic, rising global geo-political tensions and tighter financial conditions. The Spanish banking sector has a global imprint, operates a traditional business model, and is strongly profitable. Downside risks are prominent and existing vulnerabilities could amplify the impact of exogenous shocks on financial stability. The Spanish banking and real sectors’ resilience was assessed against a severe but plausible adverse scenario that reflects these risks. The FSAP analysis suggests a moderate rise in the debt-at-risk of the nonfinancial corporates sector in the adverse scenario. Liquidity stress tests show that Significant banking institutions can cope comfortably with market valuation shocks and would face cash flow challenges under large withdrawals of retail deposits. Interconnectedness analysis does not reveal significant vulnerabilities of Spanish banks to of cross-border contagion of foreign banking distress.
Keywords:
solvency stress test result; NFC liquidity; D. liquidity-solvency interaction; banking sector asset quality; banking sector asset composition; IMF approach; Stress testing; Loans; Credit; Liquidity requirements; Income; Global; Caribbean
Cover Selected Issues Papers
Monetary Policy Issues in the UK: United Kingdom
Agnese Carella
,
Ruo Chen
,
Katherine Dai
,
Gloria Li
,
Ruy Lama
, and
Roland Meeks
After hiking rates 14 consecutive times between December 2021 and August 2023 to arrest above-target inflation, the Bank of England (BoE) has held rates at 5.25 percent since then. As the BoE prepares for easing, this paper examines three concurrent monetary policy questions: (a) how have the macroeconomic and financial effects of BoE monetary tightening during the current cycle compared with experiences in other major advanced economies (AEs), and with previous UK tightening cycles; (b) what is the impact of US Fed decisions on UK monetary transmission, and the attendant implications thereof for BoE communications; and (c) how do model-based predictions of UK monetary policy paths (which seek to stabilize inflation and the output gap) compare with staff’s recommended path in the 2024 Article IV consultation. We find that (a) monetary transmission has largely mirrored previous episodes (and experiences in other major AEs), with the most notable exception of the mortgage channel, which has been slower due to a higher share of fixed-rate mortgages; (b) an outsized impact of Fed announcements on UK financial markets places a premium on BoE communications in a context where the BoE may diverge from the Fed; and (c) optimal rate path predictions are close to staff’s recommended path, although if the BoE attached a high weight to concerns about a prolonged period of above-target inflation leading to de-anchoring of inflation expectations, a slower pace of cuts would be warranted. A technical assistance mission from the IMF's Statistics Department visited Cambodia during April 10-21, 2023, to support the authorities in continuing to improve the compilation and dissemination of government finance statistics (GFS) and public sector debt statistics (PSDS).
Keywords:
Monetary policy; monetary transmission; central bank communications; BoE communications; monetary policy issue; path prediction; issues in the UK; Fed announcement; Inflation; Central bank policy rate; Output gap; Spillovers; Global
Cover IMF Working Papers
Deciphering Delphic Guidance: The Bank of England and Brexit
Jagjit Chadha
,
Corrado Macchiarelli
,
Satyam Goel
,
Arno Hantzsche
, and
Sathya Mellina
In response to the 2016 referendum on EU Membership and the ensuing uncertainty as to the eventual consequences of Brexit, the Bank of England (BoE) adopted various methods of influencing market rates, including conventional, unconventional monetary policy measures and communications on forward guidance. To investigate the effectiveness of BoE’s communication, we first decompose long-dated yields into a risk neutral and term premium component. Text-based analysis of Monetary Policy Committee minutes is then used to measure the stance of policy, attitudes to QE and Brexit. We show that the Bank’s communication strategy acted to complement the stance of monetary policy, which had responded by lowering Bank rate and expanding QE, and acted to lower the term premium that might otherwise have risen in response to Brexit uncertainty.
Keywords:
UK referendum; Brexit; risk premium; monetary policy; central bank communication; text mining; BoE action; BoE strategy; Bank of England MPC communication; BoE's monetary policy; Brexit referendum; Yield curve; Unconventional monetary policies; Central bank policy rate; Sovereign bonds; Global
Cover IMF Staff Country Reports
United Kingdom: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper analyses monetary policy issues in the UK. It examines key macro and financial indicators and assesses the effects of the tightening thus far. The paper finds that monetary transmission has largely mirrored previous episodes, with the most notable exception of the mortgage channel, which has been slower due to a higher share of fixed-rate mortgages. Additionally, it reveals an outsized impact of federal announcements on UK financial markets and argues that this will place a premium on Bank of England (BoE) communications in a context where the BoE may diverge. Monetary transmission in the UK during the current cycle has mostly worked as expected and has been similar to the experiences in other advanced economies. The paper identifies identify monetary policy surprises through changes in high-frequency market indicators within a narrow window around monetary policy announcement. The results indicate that Federal Open Market Committee spillovers do have a sizable effect on monetary transmission in the UK.
Keywords:
UK construction; UK workforce; spending scenario; Fed Policy spillover; MPC decision; visa regime; Housing; Education spending; Inflation; Global