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Business and Economics > Finance: General

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Cover Departmental Papers
Corporate Sector Vulnerabilities and High Levels of Interest Rates
Bruno Albuquerque
,
Nassira Abbas
,
José M. Garrido
,
Deepali Gautam
,
Benjamin Mosk
,
Thomas Piontek
,
Anjum Rosha
,
Thierry Tressel
, and
Aki Yokoyama
This paper provides a comprehensive overview of corporate sector vulnerabilities that have emerged post-pandemic. The main focus in on the financial stability implications from corporate sector vulnerabilities in a new environment of high interest rates. Although several central banks have recently started cutting interest rates, the expectation is that high interest rates, above pre-pandemic levels, are here to stay. It is then especially important to design and deploy appropriate policies that may prevent and mitigate risks from the corporate sector. The main findings of the paper are as follows. First, the paper finds that interest rate increases may transmit more strongly to the real economy in the current environment since the global share of financially distressed firms has been trending upwards, especially in emerging markets (EMs). Moreover, the lagged effects of past monetary policy tightening may have adverse effects on firms’ capacity to invest. Second, an adverse macroeconomic scenario of negative demand shocks coupled with higher interest rates would lead to a fast and large increase in corporate defaults. Financial stability risks would increase materially, especially for EMs and less-developed banking systems, as bank capital buffers would fall considerably in this scenario. Third, the increasing role of nonbanks in corporate credit intermediation in advanced economies may amplify overall financial stability risks. This paper closes some of the data gaps and shows that since the GFC, nonbanks have been increasing their exposure to riskier firms and to the less productive segment of the economy, including zombie firms and nontradable firms. The migration of credit to the unregulated sector raises concerns about the propagation of risks to the rest of the financial system from a potential corporate default cycle. It is paramount to continue closing data gaps in this sector, while extending the regulatory perimeter to nonbanks to improve the overall resilience of the financial sector. Finally, the paper documents some progress on insolvency and restructuring regimes to deal with corporate distress since the pandemic. Nevertheless, several shortcomings persist that prevent countries from resolving firms quickly in a potential scenario of an intensification of corporate distress.
Keywords:
corporate vulnerabilities; insolvency frameworks; financial stability; monetary policy; nonbanks; corporate stress tests; crisis preparedness indicator; monetary policy shock; IMF Library; nonbank financials; differential effect; nonfinancial corporates default probability; Corporate sector; Solvency; Credit; Business enterprises; COVID-19; Global
Cover Departmental Papers
Navigating External Shocks in Southeast Asia's Emerging Markets: Key Lessons and Challenges in Applying the IMF’s Integrated Policy Framework
Corinne C Delechat
,
Umang Rawat
, and
Ara Stepanyan
As relatively small open economies, South-East Asian emerging markets (Indonesia, Malaysia, Philippines and Thailand or ASEAN-4) are highly susceptible to external shocks—both financial and real—that could induce large capital flows and exchange rate volatility that could lead to foreign exchange market dysfunction. With the exception of Bank Negara Malaysia, ASEAN-4 central banks mostly have flexible inflation-targeting frameworks for monetary policy implementation. Their main policy objectives include medium-term price stability, sustainable economic growth, and financial stability. Central Banks in ASEAN-4 economies have been early pilots in the operationalization of the IMF’s Integrated Policy Framework (IPF) in 2022-23, given their experience in using multiple policy tools besides the monetary policy rate, including macroprudential measures, foreign exchange intervention (FXI), and capital flow management measures, to achieve their multiple objectives. They have welcomed the IPF as a systematic, frictions-based approach to analyze the use of these multiple tools to manage trade-offs across policy objectives. This paper takes stock of the experience from these pilots, both from the perspective of country authorities and of IMF country teams. It aims at distilling key lessons, which could be used to inform broader IPF operationalization. The IPF conceptual framework and a related quantitative model were used to assess policy trade-offs in ASEAN-4 in the event of adverse external shocks. These applications reaffirmed the importance of using monetary policy to address persistent inflationary pressures stemming from real shocks and allowing the exchange rate to act as a shock absorber. However, a complementary use of FXI could improve trade-offs between price, financial, and output stability when economies are faced with large and financial shocks that result in abrupt spikes in uncovered interest rate parity premia resulting in inefficiently tight financial conditions that could hurt growth or risking to de-anchor inflation expectations. The IPF pilots also highlighted some challenges faced when operationalizing IPF principles, notably regarding the assessment of frictions and shocks that might justify the use of FXI. In particular, country teams at times lacked sufficient information to adequately assess the extent of frictions. Moreover, the time-varying nature of IPF frictions and the non-linear effects of shocks make it difficult to assess situations when benefits of a complementary use of FXI would overweigh its costs.
Keywords:
ASEAN; foreign- exchange intervention; Inflation targeting; Integrated policy framework; capital flows; IPF pilot; market dysfunction; IMF country team; IPF model; Policy mix; IMF seminar participant; Currency markets; Exchange rates; Inflation; Southeast Asia; Global
Cover Departmental Papers
Central Bank Digital Currencies in the Middle East and Central Asia
Serpil Bouza
,
Bashar Hlayhel
,
Thomas Kroen
,
Marcello Miccoli
,
Borislava Mircheva
,
Greta Polo
,
Sahra Sakha
, and
Yang Yang
Against the backdrop of a rapidly digitalizing world, there is a growing interest in central bank digital currencies (CBDCs) among central banks, including in the Middle East and Central Asia (ME&CA) region. This paper aims to support ME&CA policymakers in examining key questions when considering the adoption of a CBDC while underscoring the importance of country-specific analyses. This paper does not provide recommendations on CBDC issuance. Instead, it frames the discussion around the following key questions: What is a CBDC? What objectives do policymakers aim to achieve with the issuance of a CBDC? Which inefficiencies in payment systems can CBDCs address? What are the implications of CBDC issuance for financial stability and central bank operational risk? How can CBDC design help achieve policy objectives and mitigate these risks? The paper provides preliminary answers to these questions at the regional level. A survey of IMF teams and public statements from ME&CA policymakers confirm that promoting financial inclusion and making payment systems more efficient (domestic and cross-border) are the top priorities in the region. Payment services through CBDCs, if offered at a lower cost than existing alternatives, could spur competition in the payment market and help increase access to bank accounts, improve financial inclusion, and update legacy technology platforms. CBDCs may also help improve the efficiency of cross-border payment services, especially if designed to address frictions arising from a lack of payment system interoperability, complex processing of compliance checks, long transaction chains, and weak competition. At the same time, CBDCs could negatively impact bank profitability while introducing a substantial operational burden for central banks. However, the exact economic and financial impacts of CBDCs need further study and would depend on estimates of CBDC demand, which are uncertain and country- dependent. CBDC issuance and adoption is a long journey that policymakers should approach with care. Policymakers need to analyze carefully whether a CBDC serves their country’s objectives and whether the expected benefits outweigh the potential costs, in addition to risks for the financial system and operational risks for the central bank.
Keywords:
central; bank; digital; currency; CBDC implementation; CBDC design; CBDC uptake; monetary policy pass-through; market power; CBDC issuance; Central Bank digital currencies; Payment systems; Financial inclusion; Digital financial services; Commercial banks; Middle East and Central Asia; Middle East; North Africa; Central Asia and the Caucasus; Global
Cover Departmental Papers
Macroprudential Policy Effects: Evidence and Open Questions
Nina Biljanovska
,
Sophia Chen
,
Mr. R. G Gelos
,
Ms. Deniz O Igan
,
Mr. Maria Soledad Martinez Peria
,
Erlend Nier
, and
Mr. Fabian Valencia
The global financial crisis (GFC) underscored the need for additional policy tools to safeguard financial stability and ultimately macroeconomic stability. Systemic financial vulnerabilities had developed under a seemingly tranquil macroeconomic surface of low inflation and small output gaps. This challenged the precrisis view that achieving these traditional policy targets was a sufficient condition for macroeconomic stability. Thus, new tools had to be deployed to target specific financial vulnerabilities and to build buffers to cushion adverse aggregate shocks, while allowing traditional policy levers, including monetary and microprudential policies to focus on their traditional roles. Macroprudential policy measures emerged as the solution to this gap. Some of these measures had been used before the GFC (mostly in emerging markets). But it was only after the crisis that they were more widely adopted, and the toolkit expanded. This spurred a growing body of empirical research on the effects and potential shortfalls of these measures, with a further deepening of this knowledge gaining importance as policymakers confront increased financial stability risks in the post-pandemic world. Recognizing that there still is much to learn, this paper takes stock of our expanding understanding about the effects (and side effects) of macroprudential measures by focusing on these questions: What have we learned about the effects of macroprudential policy in containing the buildup of vulnerabilities? What do we know about the effects on economic activity and resilience? How do policy effects vary with conditions and over time? How important are leakages and circumvention? How do the effects on credit depend on other policies?
Keywords:
macroprudential policy financial stability; policy effect; IMF Library; Macroprudential effect; Macroprudential buffer; Macroprudential Policy database; Macroprudential policy; Macroprudential policy instruments; Credit; Countercyclical capital buffers; Bank credit; Global
Cover Departmental Papers
Strengthening Capital Markets--National Progress and Gaps
Cristina Cuervo
,
Jennifer Long
, and
Richard Stobo
This paper discusses progress on post-global financial crisis (GFC) reforms and the emerging challenges in the area of capital markets regulation and supervision, drawing on the analysis and insights from the IMF’s Financial Sector Assessment Program (FSAP). FSAP analyses sheds light on the implementation of post-GFC reforms to strengthen prudential and conduct supervision of capital markets and highlights new regulatory and supervisory challenges arising from several factors such as the growth of bond markets, benchmark transition, digitalization, and climate change. Key takeaways regarding implementation of post-GFC reform include significant progress with respect to oversight of market intermediaries and infrastructures and a case for further regulatory and supervisory action to address vulnerabilities arising from the high and rising interconnectedness of the asset management sector with the global economy, especially to foster stronger liquidity risk management. Emerging priority areas underscore the importance of ensuring the adequacy of issuer disclosures and quality of auditing; of examining and appropriately calibrating the regulatory perimeter in light of market developments; and of proactively safeguarding the operational independence of supervisory authorities and adequacy of their resources for implementation of regulatory frameworks that are fit-for-purpose in light of market developments and evolution.
Keywords:
Capital markets regulation supervision; capital markets regulation; derivatives regulator; securities regulator; OTC derivative; reform agenda; Securities markets; Financial Sector Assessment Program; Derivative markets; Financial sector stability; Global
Cover Departmental Papers
Regulating, Supervising, and Handling Distress in Public Banks
Mark Adams
,
Hanife Yesim Aydin
,
Hee Kyong Chon
,
Anastasiia Morozova
, and
Ebru S Iskender
This paper highlights the distinct challenges and suggests practical solutions to the effective regulation, supervision, and crisis management for public banks. It acknowledges that public banks exist for variety of reasons (legacy, ideology, public policy) and will likely remain a feature of financial systems in a number of countries. On this basis, it provides advice on how to best incorporate public banks in the regulatory paradigm commensurate with their risk profiles.
Keywords:
Public banks; development banks; regulation; supervision; resolution; crisis management; corporate governance; development bank; State supervision; policy lending; privileged access; arm's-length governance structure; State-owned banks; Commercial banks; Corporate governance; Bank resolution framework; Public enterprises; Global
Cover Departmental Papers
The Global Bank Stress Test
Xiaodan Ding
,
Mr. Marco Gross
,
Mr. Ivo Krznar
,
Mr. Dimitrios Laliotis
,
Mr. Fabian Lipinsky
,
Pavel Lukyantsau
, and
Mr. Thierry Tressel
This paper presents the framework underlying the Global Bank Stress Test (GST) and applies it to recent data and global scenarios to illustrate the usefulness of the framework in assessing the potential impact of global shocks on banks around the world. The results of this latest update of the GST continue to point to relatively lower levels of resilience of banks in emerging market economies (EMs) than in advanced economies (AEs).
Keywords:
Covid-19 pandemic; bank stress test; financial sector vulnerabilities; stress testing; bank stress tests; IMF Library; Global Bank stress test; GST methodology; bilateral work; Stress testing; Value-added tax; COVID-19; Capital adequacy requirements; Commercial banks; Global
Cover Departmental Papers
Managing Financial Sector Risks from the COVID-19 Crisis in the Caucasus and Central Asia
Iulia Ruxandra Teodoru
and
Klakow Akepanidtaworn
The COVID-19 crisis raises the risk of renewed financial sector pressures in the Caucasus and Central Asia (CCA) region in the period ahead. Bank distress and its economic and fiscal fallout have been recurring features of many CCA countries, as seen after the global financial crisis and the 2014–15 oil price shock. Strong policy responses have delayed the full impact of the COVID crisis so far, but financial sector risks will increase once public support is phased out. If these risks are not preemptively addressed, banks’ ability to lend during the recovery phase could be impaired and there may be a need for costly public interventions, as in the past.
Keywords:
Financial risks; stress tests; financial supervision and regulation; CCA country; CCA banking systems; FX risk; CCA bank's capital adequacy ratios; FX-induced credit risk; Financial sector risk; Commercial banks; Credit risk; Nonperforming loans; Central Asia and the Caucasus
Cover Departmental Papers
Macroprudential Policies to Enhance Financial Stability in the Caucasus and Central Asia
Padamja Khandelwal
,
Ezequiel Cabezon
,
Mr. Sanan Mirzayev
, and
Rayah Al-Farah
Limited economic diversification has made the economies of the Caucasus and Central Asia particularly vulnerable to external shocks. The economies in the region are heavily reliant on oil and mining exports as well as remittances. In some countries, tourism and capital flows also play a prominent role in aggregate economic activity.
Keywords:
Financial risks; financial supervision and regulation; macroprudential policy; credit cycles; CCA country; CCA economy; CCA contribution; economies of the Caucasus and Central Asia; credit downturn; banking sector crisis; credit cycle analysis methodology; Macroprudential policy; Credit; Credit gaps; Countercyclical capital buffers; Macroprudential policy instruments; Central Asia and the Caucasus
Cover Departmental Papers
Policy Options for Supporting and Restructuring Firms Hit by the COVID-19 Crisis
Ms. Juliana Dutra Araujo
,
Jose M Garrido
,
Emanuel Kopp
,
Mr. Richard Varghese
, and
Weijia Yao
This paper presents principles that could guide the design of more targeted policy support and facilitate the restructuring of firms adversely impacted by the COVID-19 pandemic. To this end, the paper takes stock of vulnerabilities and risks in the enterprise sector and assesses countries’ preparedness to handle a large-scale restructuring of businesses. Crisis preparedness of insolvency systems is measured according to a newly designed indicator that includes five dimensions of the insolvency and restructuring regime (out-of-court restructuring, hybrid restructuring, reorganization, liquidation, and the institutional framework). Vulnerabilities tend to be more pronounced in jurisdictions with shortcomings in crisis preparedness, and those countries need to step up efforts to improve their insolvency systems.
Keywords:
Corporate Debt; Solvency Support to Enterprises; Insolvency; Reorganization; Liquidation; Restructuring; COVID-19; policy support scheme; policy option; restructuring firm; nonfinancial firm; solvency support; untargeted support; Solvency; Debt restructuring; Crisis prevention; Corporate sector; Global