- International Monetary Fund. Monetary and Capital Markets Department
- Published Date:
- April 2011
© 2011 International Monetary Fund
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Global financial stability report - Washington, DC:
International Monetary Fund, 2002-
v.; cm. - (World economic and financial surveys, 0258-7440)
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- Executive Summary
- Chapter 1. Key Risks and Challenges for Sustaining Financial Stability
- A. What Are the Key Stability Risks and Challenges?
- B. Living Dangerously—The Legacy of High Debt Burdens in Advanced Economies
- C. Banking System—Not Enough Has Been Done
- D. Sovereign Funding Challenges
- E. Alleviating Pressures on Households and Firms
- F. Macro and Stability Implications of Capital Inflows into Emerging Markets
- G. Durable Financial Stability: Getting There from Here
- Annex 1.1. What Factors Are Driving U.S. Bond Yields Higher?
- Annex 1.2. Compilation of Investor Base Data for General Government Debt
- Annex 1.3. Dubai: From Debt Overhang to Restructuring, but Risks Remain
- Annex 1.4. Projecting Government Funding Costs through 2015
- Annex 1.5. Strategic Defaults and Housing Prices in the United States
- Annex 1.6. Recent Measures to Manage Capital Flows in Selected Economies
- Annex 1.7. Exchange-Traded Funds: Mechanics and Risks
- Chapter 2. How to Address the Systemic Part of Liquidity Risk
- What Is Systemic Liquidity Risk?
- Will Liquidity Rules under Basel III Lower Systemic Risk?
- Measures of Systemic Liquidity Risk and Potential Macroprudential Tools to Mitigate It
- Summary and Policy Considerations
- Annex 2.1. Methods Used to Compute a Systemic Liquidity Risk Index
- Annex 2.2. Technical Description of the Systemic Risk-Adjusted Liquidity Model
- Annex 2.3. Highlights of the Stress-Testing Framework
- Chapter 3. Housing Finance and Financial Stability—Back to Basics?
- Housing Booms and Busts—Theory and Stylized Facts
- Global Housing Finance Landscape
- Housing Finance and Financial Stability
- Conclusions and Policy Implications—Back to Basics
- Annex 3.1. The Impact of Housing Finance Modes on House Prices and Loan-Loss Growth during the Recent Crisis
- Annex 3.2. Evidence on House Prices, Credit, and Housing Finance Characteristics in Advanced Economies
- Annex: Summing Up by the Acting Chair
- Statistical Appendix
- [Available online at www.imf.org/external/pubs/ft/gfsr/2011/01/pdf/statappx.pdf]
- 1.1. The Middle East: Geopolitical Risk to the Financial Stability Outlook
- 1.2. Implications of Japan’s Earthquake for Financial Stability
- 1.3. Examining the Ability of U.S. Banks to Absorb Mortgage Principal Reductions
- 1.4. Are Debt Vulnerabilities Building in the Emerging Market Corporate Sector?
- 1.5. Emerging Market Banks: Fueling Growth or Frenzy?
- 1.6. Euro Area Crisis Management and Prevention
- 1.7. Regulatory Reforms: Are We There Yet?
- 2.1. How Well Does the Net Stable Funding Ratio Predict Banks’ Liquidity Problems?
- 2.2. How Well Does the Systemic Liquidity Risk Index Explain Banks’ Liquidity Problems?
- 3.1. The Danish “Balance Principle” Mortgage Model
- 3.2. Legal Prerequisites for Housing Finance Systems
- 3.3. Experience with Limits on Loan-to-Value Ratios for Residential Mortgages
- 3.4. Housing Finance and the U.S. Housing Crisis
- 3.5. Emerging Market Mortgage Securitization
- 3.6. Empirical Analyses of the Relationships among House Prices, Credit, and Housing Finance Characteristics
- 3.7. Mortgage Finance Unbundling and Incentive Misalignments
- 1.1. Indebtedness and Leverage in Selected Advanced Economies
- 1.2. Banking Vulnerability Indicators
- 1.3. Sovereign Market and Vulnerability Indicators
- 1.4. Different Scenarios for Return to “Equilibrium” Household Debt-to-GDP Ratios
- 1.5. Macro and Financial Indicators for Selected Emerging Economies
- 1.6. Selected Capital Flow Management Measures in Asian Economies
- 2.1. Factors Used in Calculations
- 2.2. Main Features of the Proposed Methodologies
- 2.3. Indicators for (Systemic) Liquidity Risk Monitoring
- 2.4. Joint Expected Losses from Systemic Liquidity Risk
- 2.5. Capital Charge for Individual Liquidity Risk and Individual Contribution to Systemic Liquidity Risk
- 2.6. Summary Statistics of Individual Contributions to Systemic Liquidity Risk and Associated Fair Value Insurance Premium
- 2.7. Selected Liquidity Stress-Testing Frameworks
- 2.8. Withdrawal Rate Assumptions
- 2.9. Probability of Banks Ending the Simulation with a Liquidity Shortage
- 2.10. Capital Surcharges
- 2.11. Selected Regulatory Proposals for Managing Systemic Liquidity Risk
- 3.1. Crisis Measures
- 3.2. Housing Finance Features in Advanced Economies, 2008
- 3.3. Housing Finance Systems in Emerging and Newly Industrialized Economies, 2008
- 3.4. Mortgage Market Characteristics in Emerging and Newly Industrialized Economies, 2008
- 3.5. Index of Government Participation in Housing Finance Markets, 2008
- 3.6. Which Housing Finance Features Help Explain Growth in House Prices, Mortgage Credit, and Nonperforming Loans?
- 3.7. Joint Determinants of Growth in Real House Prices, Mortgage Credit, and Loan Losses
- 3.8. Joint Determinants of Growth in Real House Prices and Mortgage Credit, Pre-Crisis Episode, 2004—07
- 3.9. House Prices and Household Bank Credit
- 3.10. House Prices, Household Bank Credit, and Macroeconomic Controls
- 3.11. House Prices and Housing Finance Characteristics
- 3.12. House Prices and Government Participation
- 1.1. Global Financial Stability Map
- 1.2. Global Financial Stability Map: Assessment of Risks and Conditions
- 1.3. Changes in Financial Conditions
- 1.4. Risk Appetite
- 1.5. Banking Sector Challenges
- 1.6. Banking System Capital and Reliance on Wholesale Funding
- 1.7. Global Bank Debt Maturity Profile
- 1.8. Bank Rollover Requirement, 2011—12
- 1.9. Bank Debt Yields
- 1.10. Increase in Bank Deposit Rates
- 1.11. Change in Bank Net Interest Margin, June 2010
- 1.12. Policy Solutions to Banking Sector Challenges
- 1.13. European Union Bank Core Tier 1 Ratios, 2010
- 1.14. Sovereign Credit Default Swap Spreads
- 1.15. Euro Area Treasury Bond Spreads over German Bunds, and Volatility
- 1.16. Risk-Adjusted Yields for Euro-Denominated Bonds
- 1.17. Change in General Government Debt Holdings
- 1.18. Average versus Marginal Government Funding Costs
- 1.19. Sovereign Funding Needs
- 1.20. Government Funding Costs in 2015
- 1.21. Funding Cost Thresholds, Debt, and Revenue
- 1.22. Leverage Ratios: Household Debt as a Percent of GDP
- 1.23. Various Measures of U.S. Household Leverage
- 1.24. Shadow Inventory of Houses Potentially for Sale
- 1.25. Household Balance Sheets
- 1.26. Federal Reserve Assets and Flows into U.S. Risky Assets
- 1.27. Nonfinancial Corporate Credit Default Swap Spreads
- 1.28. Nonfinancial Corporates’ Debt-to-Equity Ratios
- 1.29. Lending Conditions for Small and Medium-Sized Enterprises
- 1.30. Debt Maturity Profile for the Commercial Real Estate Sector
- 1.31. Net Capital Inflows to Emerging Markets
- 1.32. U.S. Investment Flows in Foreign Securities
- 1.33. Portfolio Debt Inflows and Risk-Adjusted Local Government Yields
- 1.34. Average Monthly Retail Flows to Emerging Market Debt and Equity Mutual Funds
- 1.35. Capital Inflows, Real Credit, and Real Equity Prices
- 1.36. Emerging Market Equities: Foreign Inflows, Issuance, and Returns in 2010
- 1.37. Emerging Market External Corporate Issuance by Rating
- 1.38. Median Volatility of Inflation, Currencies, and Capital Flows
- 1.39. Real Policy Rates in February 2011
- 1.40. Ten-Year Government Bond Yields
- 1.41. Macroeconomic Surprise Indices
- 1.42. Ten-Year Break-Even Rates
- 1.43. Term Premium on U.S. Treasuries
- 1.44. Components of 10-Year Nominal Treasury Yield
- 1.45. Dubai: Foreign Borrowing Surge and Rollover Risk
- 1.46. Urban Real Estate Prices, CPI-Deflated
- 1.47. Maturity Profile of Debt of Dubai Government-Related Enterprises
- 1.48. Dubai: Composition of Debt
- 1.49. Credit Default Swap Spreads
- 1.50. United Arab Emirates: Recent Developments in Local Banks
- 1.51. Nonperforming Loans and Real Estate
- 1.52. Government Funding Costs and Debt Affordability
- 1.53. Annualized Transition Probability of a Performing Prime Mortgage to 60-Plus Day Delinquency Conditional on Local Unemployment Rate
- 1.54. U.S. Mortgage Delinquency Probability and Home Equity Distribution
- 1.55. Home Equity, Delinquency Rate, and House Price Declines
- 1.56. Indonesia: Foreign Holdings of Government Bonds and Bank Indonesia Certificates
- 1.57. Thailand: Weekly Foreign Portfolio Inflows and Reserves
- 1.58. Asian Residential Property Prices
- 1.59. Korea: Short-Term External Borrowing
- 1.60. Exchange-Traded Fund Assets ($1.2 Trillion), by Type of Exposure
- 1.61. Exchange-Traded Fund Trading: Synthetic Replication Based on Total Return Swaps
- 1.62. Counterparty Risks in Exchange-Traded Funds
- 1.63. Flash Crash: Intraday Prices, May 6, 2010
- 1.64. Gold Exchange-Traded Funds
- 2.1. Net Stable Funding Ratio by Region
- 2.2. Net Stable Funding Ratio by Business Model
- 2.3. Net Stable Funding Ratio by Bank, 2009
- 2.4. Systemic Liquidity Risk Index
- 2.5. Average Sensitivity of Volatility of Banks’ Return on Equity to Systemic Liquidity Risk Index
- 2.6. Sensitivity of Volatility of Banks’ Return on Equity Based on Market Capitalization to Systemic Liquidity Risk Index
- 2.7. Sensitivity of Volatility of Banks’ Return on Equity Based on Net Stable Funding Ratio to Systemic Liquidity Risk Index
- 2.8. Illustration of Individual Expected Losses Arising from Liquidity Risk
- 2.9. Illustration of Joint and Total Expected Shortfalls Arising from Systemic Liquidity Risk
- 2.10. Total Loan Reductions
- 2.11. Principal Component Analysis: Total Variation Explained by Each Factor
- 2.12. Methodology to Compute Systemic Liquidity under the Systemic Risk-Adjusted Liquidity Model
- 2.13. Conceptual Relation between the Net Stable Funding Ratio at Market Prices and Expected Losses from Liquidity Risk
- 2.14. Conceptual Scheme for the Probability Distribution of Joint Expected Shortfall from Liquidity Risk: Two-Firm (Bivariate) Case
- 2.15. Systemic Liquidity Risk ST Framework
- 3.1. House Price Indices
- 3.2. Government Participation in Housing Finance
- 3.3. Government Participation in Housing Finance: Emerging and Newly Industrialized Economies
- 3.4. Homeownership Rate and Government Participation in Housing Finance
- 3.5. Homeownership Rate
- 3.6. Residential Mortgage-Debt-to-GDP Ratio: Advanced Economies
- 3.7. Residential Mortgage-Debt-to-GDP Ratio: Emerging Europe
- 3.8. Nonperforming Residential Mortgage Loans
- 3.9. Home Foreclosures in the United Kingdom and the United States
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, 2008–09 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
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“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 sums of 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.
The boundaries, colors, denominations, and other information shown on the maps do not imply, on the part of the International Monetary Fund, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries.
The Global Financial Stability Report (GFSR) assesses key risks facing the global financial system with a view to identifying those that represent systemic vulnerabilities. In normal times, the report seeks to play a role in preventing crises by highlighting policies that may mitigate systemic risks, thereby contributing to global financial stability and the sustained economic growth of the IMF’s member countries. Despite ongoing economic recovery and improvements in global financial stability, structural weaknesses and vulnerabilities remain in some important financial systems. The current report highlights how risks have changed over the past six months, traces the sources and channels of financial distress with an emphasis on sovereign risk, notes the pressures arising from capital inflows in emerging economies, and discusses policy proposals under consideration to mend the global financial system.
The analysis in this report has been coordinated by the Monetary and Capital Markets (MCM) Department under the general direction of José Viñals, Financial Counsellor and Director. The project has been directed by MCM staff Jan Brockmeijer and Robert Sheehy, both Deputy Directors; Peter Dattels and Laura Kodres, Assistant Directors; and Matthew Jones, Deputy Division Chief. It has benefited from comments and suggestions from the senior staff in the MCM Department.
Contributors to this report also include Gohar Abajyan, Sergei Antoshin, Ivailo Arsov, Adolfo Barajas, Theodore Barnhill Jr., Reinout De Bock, Phil de Imus, Joseph Di Censo, Dawn Yi Lin Chew, Francesco Columba, Jaime Espinosa, Luc Everaert, Jeanne Gobat, Alessandro Gullo, Vincenzo Guzzo, Kristian Hartelius, Sanjay Hazarika, Geoffrey Heenan, Deniz Igan, Andreas Jobst, Geoffrey Keim, William Kerry, John Kiff, Turgut Kisinbay, Taline Koranchelian, Peter Lindner, Estelle Liu, Yinqiu Lu, Andrea Maechler, Rebecca McCaughrin, Andre Meier, Fabiana Melo, Paul Mills, Srobona Mitra, Ken Miyajima, Michael Moore, Erlend Nier, Hiroko Oura, Jaume Puig, Faezeh Raei, Marta Sánchez-Saché, Christian Schmieder, Liliana Schumacher, Gabriel Sensenbrenner, Tiago Severo, Narayan Suryakumar, Morgane de Tollenaere, Nico Valckx, and Ann-Margret Westin. Martin Edmonds, Ivan Guerra, Oksana Khadarina, Yoon Sook Kim, and Ryan Scuzzarella provided analytical support. Gerald Gloria, Nirmaleen Jayawardane, Juan Rigat, and Ramanjeet Singh were responsible for word processing. David Einhorn and Gregg Forte, of the External Relations Department, and Florian Gimbel, of MCM, edited the manuscript, and the External Relations Department coordinated production of the publication.
This particular issue draws in part on a series of discussions with banks, clearing organizations, securities firms, asset management companies, hedge funds, standards setters, financial consultants, and academic researchers. The report reflects information available up to March 23, 2011.
The report benefited from comments and suggestions from staff in other IMF departments, as well as from Executive Directors following their discussion of the Global Financial Stability Report on March 28, 2011. However, the analysis and policy considerations are those of the contributing staff and should not be attributed to the Executive Directors, their national authorities, or the IMF.
Global financial stability has improved over the past six months, bolstered by better macroeconomic performance and continued accommodative macroeconomic policies (see the April 2011 World Economic Outlook), but fragilities remain. The two-speed recovery—modest in advanced economies and robust in emerging market economies—has posed different policy challenges for countries. In advanced economies hit hardest by the crisis, governments and households remain heavily indebted, to varying degrees, and the health of financial institutions has not recovered in tandem with the overall economy. Emerging market economies are facing new challenges associated with strong domestic demand, rapid credit growth, relatively accommodative macroeconomic policies, and large capital inflows. Geopolitical risks could also threaten the economic and financial outlook, with oil prices increasing sharply amid fears of supply disruptions in the Middle East and North Africa.
The main task facing policymakers in advanced economies is to shift the balance of policies away from reliance on macroeconomic and liquidity support to more structural policies—less “leaning” and more “cleaning” of the financial system. This will entail reducing leverage and restoring market discipline, while avoiding financial or economic disruption during the transition. Thus, ongoing policy efforts to withdraw (implicit) public guarantees and ensure bondholder liability for future losses must build on more rapid progress toward stronger bank balance sheets, ensuring medium-term fiscal sustainability and addressing excessive debt burdens in the private sector.
For policymakers in emerging market economies, the task is to limit overheating and a buildup of vulnerabilities—to avoid “cleaning” later. Emerging market economies have continued to benefit from strong growth relative to that in advanced economies, accompanied by increasing portfolio capital inflows. This is putting pressure on some financial markets, contributing to higher leverage, potential asset price bubbles, and inflationary pressures. Policymakers will have to pay increasing attention to containing the buildup of macrofinancial risks to avoid future problems that could inhibit their growth and damage financial stability. In a number of cases, this will entail a tighter macroeconomic policy stance, and, when needed, the use of macroprudential tools to ensure financial stability. Increasing the financial sector’s capacity to absorb higher flows through efforts to broaden and deepen local capital markets will also help.
In the next few months, the most pressing challenge is the funding of banks and sovereigns, particularly in some vulnerable euro area countries. As detailed in Chapter 1 of this Global Financial Stability Report, policies aimed at fiscal consolidation and strengthening bank balance sheets in these countries should be supported by credible assurances that multilateral backstops are sufficiently flexible and endowed to facilitate an orderly deleveraging without triggering further fiscal or bank funding strains. In other countries, funding is less problematic, but still a concern. Under a baseline scenario, higher funding costs and a rising government debt stock will cause government interest payments to increase in most advanced economies (see also the April 2011 Fiscal Monitor). If deficit reduction continues as projected, the interest costs should generally remain manageable, although much greater progress on medium-term fiscal consolidation strategies will be needed in both the United States and Japan to avoid downside risks to financial stability and to preserve confidence. In Japan, the immediate fiscal priority is to support reconstruction following the earthquake, returning in due course to progress toward mediumterm consolidation goals.
Overall, despite the transfer of risks from the private to the public sector during the crisis, confidence in the banking systems of many advanced economies has not been restored and continues to interact adversely with the sovereign risks in the euro area. Analysis presented in this report suggests that in order to restore market confidence and reduce excessive reliance on central bank funding, considerable further strengthening of euro area bank balance sheets will be needed. This will require higher capital levels, if a detrimental process of deleveraging is to be avoided, and a set of mostly smaller banks will have to be restructured and, where necessary, resolved. In the United States, a lackluster housing market, legacy mortgage problems, and a backlog of foreclosures continue to put pressure on the banking system, limiting credit creation and a return to a fully functioning mortgage market. Larger bank capital buffers and strengthened balance sheets will also be necessary as countries transition to a new and more demanding regulatory regime. Countries in which banking systems are still struggling should enhance transparency (including through more rigorous and realistic stress tests) and recapitalize, restructure, and (if necessary) close weak institutions. Without these longer-term financial sector reforms, short-term funding difficulties may escalate into another systemic liquidity event.
Measuring and mitigating systemic liquidity risks should be at the forefront of the agenda of policymakers. Those risks were a main feature of the latest crisis and have yet to be addressed. Chapter 2 takes a close look at this topic, examining the role that Basel III liquidity requirements will play when they are introduced. The analysis suggests that, while helping to raise liquidity buffers, Basel III will be unable to fully address the systemic nature of liquidity risk. The chapter provides some illustrative techniques for measuring systemic liquidity risk and firms’ contribution to it, and suggests some accompanying macroprudential tools that could, after further refinement and testing, be used to mitigate such risks. For instance, one of the approaches provides a way to gauge, based on a firm’s assets and liabilities and its interbank connections, the higher capital needed to ensure that its risk of insolvency does not cause a destabilizing liquidity run during stressful periods. Tools of this type would allow for more effective sharing of the private-public burden of systemic liquidity risk and help reduce central bank interventions during periods of stress.
A common feature of the crisis in many countries was excessive and misallocated credit growth, which helped fuel housing market booms. Chapter 3 examines the connections between the housing finance systems and financial stability, noting that the structure of some countries’ housing finance systems led to a deeper housing bust and financial instability. The chapter suggests a set of best practices for housing finance. For the United States, where the housing market and its financing are still problematic, these best practices imply that there should be betterdefined and more transparent government participation in the housing market, including a diminished role of the two large government-sponsored entities (Freddie Mac and Fannie Mae). These goals will need to be pursued incrementally, while taking into account the still-weak housing market and economic recovery. Economies seeking to create a strong housing finance system are advised to “go back to basics”—ensuring safe loan origination and encouraging simple and transparent mortgage contracts.