This September 2004 issue of the Global Financial Stability Report highlights that over the past six months, the global financial system, especially the health of financial intermediaries, has been further strengthened by the broadening economic recovery. The financial system has not looked as resilient as it does in the summer of 2004, in the three years since the bursting of the equity bubble. Financial intermediaries, banks and nonbanks alike, have strengthened their balance sheets to a point where they could, if necessary, absorb considerable shocks.

© 2004 International Monetary Fund

Production: IMF Multimedia Services Division

Cover: Phil Torsani

Photo: Padraic Hughes

Figures: Theodore F. Peters, Jr.

Typesetting: Choon Lee

ISBN 9781589063785

ISSN 0258-7440

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  • Preface

  • Chapter I. Overview

    • Risks in the Period Ahead

    • Policy Conclusions for the Short and Medium Term

    • Issues for the Long Term: Reforms of the Pension Industry

    • Policy Issues for the Pension Sector

    • Capital Flows Between Emerging and Mature Markets

  • Chapter II. Global Financial Market Developments

    • Overview

    • Developments and Vulnerabilities in Mature Markets

    • Developments and Vulnerabilities in Emerging Markets

    • Emerging Market Financing

    • Banking Sector Developments in Emerging Markets

    • Structural Issues in Mature Markets

    • References

  • Chapter III. Risk Management and the Pension Fund Industry

    • Why Pension Funds Are Important for Financial Stability

    • The Funding Challenge

    • Key Influences on Pension Funds’ Financial Management

    • Asset Allocation and Risk Management

    • Conclusions and Policy Recommendations

    • References

  • Chapter IV. Emerging Markets as Net Capital Exporters

    • Stylized Facts

    • The Post-Crisis Balance Sheet Adjustment Process

    • Accumulation of Reserves and Reliance on Local Markets

    • Global Factors

    • Conclusions and Policy Issues

    • References

  • Glossary

  • Annex: Summing Up by the Chairman

  • Statistical Appendix

  • Boxes

    • 2.1 Stocks, Flows, and Vulnerability Assessments

    • 2.2 Market Repositioning and Deleveraging

    • 2.3 Financing Flows and Global Imbalances

    • 2.4 Emerging Market Spread Compression: Is It Real or Is It Liquidity?

    • 2.5 German Issue of Russian Federation Credit-Linked Notes

    • 2.6 Collective Action Clauses

    • 2.7 Russia: Recent Turbulence in the Banking Sector

    • 2.8 Insurance Industry Update

    • 2.9 Hedge Fund Strategy Definitions

    • 2.10 Sample of Popular Energy Contracts

    • 2.11 European Energy Trading

    • 2.12 The Revised Basel Capital Framework for Banks (Basel II)

    • 2.13 Recent Developments in Securitization Markets in Europe and Japan

    • 2.14 Definition of Value at Risk

    • 2.15 Volatility Estimation

    • 3.1 Hybrid Pension Plans

    • 3.2 Individuals’ Life-Cycle Savings and Global Capital Markets

    • 3.3 The Tax Treatment of Pension Plans: a Comparison for Selected Industrial Countries

    • 3.4 Proposed Risk-Based Capital System for Pension Funds in the Netherlands

    • 3.5 Comparison of U.S. FAS 87, U.K. FRS 17, and Proposed IAS Standards

    • 3.6 Defined Benefit (DB) Pensions and Corporate Finance Theory

    • 3.7 Economics and Pension Fund Asset Allocation

    • 4.1 Capital Flows to Africa and the Middle East

    • 4.2 Data Sources and the Trends in Bank Lending Flows to Emerging Markets

    • 4.3 Distressed Debt Markets: Recent Experiences in Mature and Emerging Markets

    • 4.4 Distance to Distress as a Measure of Balance Sheet Vulnerability

    • 4.5 Market-Based Insurance Mechanisms

  • Tables

    • 2.1 Selected Local Currency Bond Spreads

    • 2.2 Emerging Market Financing

    • 2.3 Emerging Market Countries: Selected Financial Soundness Indicators

    • 2.4 Exposure of Foreign Banks to Emerging Markets

    • 2.5 Hedge Funds: Number of Funds and Assets Under Management

    • 2.6 Leverage Estimates by Hedge Fund Strategy

    • 2.7 Price Volatility for Energy and Other Financial and Nonfinancial Instruments

    • 3.1 Life Expectancy at Birth: Estimates and Projections

    • 3.2 Asset Allocation of Autonomous Pension Funds

    • 3.3 Financial Assets of Institutional Investors, 2001

    • 3.4 Pension Fund Holdings Compared with the Size of Domestic Market, 2001

    • 3.5 Selected Countries: Total Outstanding Long-Term Bonds

    • 3.6 Sources of Retirement or Replacement Income

    • 4.1 Emerging Markets: Balance of Payments Errors and Omissions

    • 4.2 Bank Lending in Emerging Markets

    • 4.3 Debt Securities in Emerging Market Countries

    • 4.4 Capital Flows in Crisis and Non-Crisis Countries

    • 4.5 The Post-Crisis External Debt Adjustment in Selected Emerging Markets

    • 4.6 Reserves and Related Ratios for Selected Countries as of End-2003

    • 4.7 Derived Portfolio Investment Liabilities by Nonresident Holder: Equity and Debt Securities

    • 4.8 Derived Portfolio Investment Liabilities by Nonresident Holder: Short- and Long-Term Debt Securities

  • Figures

    • 2.1 One-Month Federal Funds Futures Rate

    • 2.2 Strip Curve Interest Rate Expectations

    • 2.3 Selected Central Bank Policy Rates

    • 2.4 Ten-Year Government Bond Yields

    • 2.5 Long-Term Inflation Expectations

    • 2.6 Implied Volatilities

    • 2.7 High-Grade Corporate Bond Spreads

    • 2.8 High-Yield Corporate Bond Spreads

    • 2.9 Equity Indices

    • 2.10 Twelve-Month Forward Price/Earnings Ratios

    • 2.11 Net Foreign Purchases of U.S. Financial Assets

    • 2.12 Emerging Market Debt Spreads

    • 2.13 Observed and Forecast EMBI+ Spreads

    • 2.14 EMBI Global Spreads vs. Eurodollar Interest Rate Expectations

    • 2.15 Emerging Market Debt Returns

    • 2.16 Spread Differentials in Emerging Market Debt

    • 2.17 Differentials Between Corporate and Emerging Market Spreads

    • 2.18 Emerging Market Credit Quality

    • 2.19 Correlations of MSCI World and Emerging Market Indices

    • 2.20 Brazil: Local Market Spreads over U.S. Treasuries

    • 2.21 Turkey: Local Market Spreads over German Bunds

    • 2.22 Brazil: Portfolio Investment in Local Currency Debt Instruments

    • 2.23 Brazil: Nonresident Holdings of Government Debt Instruments

    • 2.24 Turkey: Portfolio Investment in Local Currency Debt

    • 2.25 Turkey: Nonresident Holdings of Government Debt Instruments

    • 2.26 Cumulative Gross Annual Issuance of Bonds, Loans, and Equity

    • 2.27 Quarterly Net Issuance

    • 2.28 Cumulative Gross Annual Issuance of Bonds

    • 2.29 Cumulative Gross Annual Issuance of Equity

    • 2.30 Cumulative Gross Annual Issuance of Loans

    • 2.31 Foreign Direct Investment to Emerging Markets

    • 2.32 Emerging Market Countries: Bank Market Valuations

    • 2.33 Total Number of Energy Options and Futures Contracts

    • 2.34 Selected Energy Prices

    • 2.35 United States: Household Net Worth

    • 2.36 United States: Household Debt as a Percentage of GDP

    • 2.37 Euro Area and United Kingdom: Ratio of Household Debt to GDP

    • 2.38 Japan: Household Net Worth

    • 2.39 United States: Debt to Net Worth Ratio of Nonfinancial Corporations

    • 2.40 United States: Cash Flow of Nonfinancial Corporate Business

    • 2.41 United States: Financing Gap of Nonfinancial Corporations

    • 2.42 Euro Area and United Kingdom: Ratio of Nonfinancial Corporate Debt to GDP

    • 2.43 Japan: Capital to Asset Ratio of Corporate Sector

    • 2.44 Japan: Corporate Debt and Cash Flow Relative to GDP

    • 2.45 Selected Countries: Banks’ Return on Equity

    • 2.46 Large Complex Financial Institutions (LCFIs) and Commercial Banks: Market Risk Indicator (MRI)

    • 2.47 Entire Portfolio: Market Risk Indicator (MRI) and Diversification

    • 2.48 Difference Between Undiversified and Diversified Value at Risk

    • 2.49 Selected Countries: Value at Risk Sensitivity

    • 2.50 Large Complex Financial Institutions: Market Risk Indicator (MRI) and Credit Risk Indicator (CRI)

    • 3.1 Life Expectancy at Birth

    • 3.2 Remaining Life Expectancy at Age 65

    • 3.3 Median Age of Population, by Country

    • 3.4 Dependency Ratio for Selected Countries

    • 3.5 Asset Allocation of Autonomous Pension Funds, 2001

    • 3.6 United States: Ratio of Assets to Projected Benefit Obligations (PBOs) for the Fortune 500

    • 3.7 Netherlands: Funding Ratio of Pension Funds

    • 3.8 Japan: Employee Pension Funds

    • 3.9 United States: Distribution of Corporate Defined Benefit Pension Plans by Funding Ratio, 2003

    • 3.10 Estimated Valuation Effects on Projected Benefit Obligation (PBO) Funded Ratios

    • 3.11 United States: Assets Under Management of Private Pension Schemes

    • 4.1 Capital Flows to Emerging Markets

    • 4.2 Private and Official Outflows/Inflows of Residents and Nonresidents in Emerging Markets

    • 4.3 International Equity Issuance and FDI in China vs. All Other Emerging Market Countries

    • 4.4 Capital Flow Trends for Crisis and Non-Crisis Countries

    • 4.5 Cumulative Net External Debt Issuance: Crisis vs. Non-Crisis Countries

    • 4.6 Selected Emerging Market Crisis Countries: Sudden Stops, Asset Prices, and GDP

    • 4.7 Distance to Distress in Selected Emerging Market Crisis Countries

    • 4.8 Reserves to Short-Term Debt Ratios and Sovereign Default Probabilities

    • 4.9 Welfare Effects of Self-Insurance Policy

    • 4.10 Global Imbalances

    • 4.11 Net Private Capital Flows to Emerging Markets and Foreign Purchases of G3 Bonds and Stocks

    • 4.12 Risk-Adjusted Rates of Return

    • 4.13 Emerging Market Mutual and Hedge Fund Assets

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, 1997-99 or January-June) to indicate the years or months covered, including the beginning and ending years or months;

  • / between years (for example, 1998/99) 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.


The Global Financial Stability Report (GFSR) assesses global financial market developments with the view to identifying potential systemic weaknesses. By calling attention to potential fault lines in the global financial system, the report seeks to play a role in preventing crises, thereby contributing to global financial stability and to sustained economic growth of the IMF’s member countries.

The report was prepared by the International Capital Markets Department (ICM), under the direction of the Counsellor and Director, Gerd Häusler. It is managed by an Editorial Committee comprising Hung Q. Tran (Chairman), W. Todd Groome, Jorge Roldos, and David J. Ordoobadi, and benefits from comments and suggestions from Charles R. Blitzer and L. Effie Psalida. Other ICM staff contributing to this issue include Renzo Avesani, Nicolas Blancher, Elie Canetti, Jorge Chan-Lau, Peter Dattels, Toni Gravelle, François Haas, Anna Ilyina, Markus Krygier, William Lee, Chris Morris, Jürgen Odenius, Kazunari Ohashi, Li Lian Ong, Lars Pedersen, Magdalena Polan, Manmohan Singh, Juan Solé, Rupert Thorne, Laura Valderrama, and Yingbin Xiao. Other contributors included Robert Gillingham, Peter Heller, and Dominique Simard of the Fiscal Affairs Department; a staff team of the Monetary and Financial Systems Department that included Robert Corker, Anne-Marie Guide, S. Kal Wajid, Sean Craig, Gianni De Nicoló, Jan Willem van der Vossen, and Kalin Tintchev; and Kenichiro Kashiwase and Laura Kodres of the Research Department. Martin Edmonds, Ivan Guerra, Silvia Iorgova, Anne Jansen, Oksana Khadarina, Yoon Sook Kim, Ned Rumpeltin, and Peter Tran provided research assistance. Caroline Bagworth, Cynthia Galang, Vera Jasenovec, Elsa Portaro, and Ramanjeet Singh provided expert word processing assistance. Jeff Hayden of the External Relations Department edited the manuscript and coordinated production of the publication.

This particular issue draws, in part, on a series of informal discussions with commercial and investment banks, securities firms, asset management companies, hedge funds, insurance companies, pension funds, stock and futures exchanges, and credit rating agencies in Canada, Colombia, France, Germany, Hong Kong SAR, Italy, Japan, Mexico, the Netherlands, Poland, Singapore, Switzerland, the United Kingdom, and the United States. The report reflects information available up to July 30.

The report has benefited from comments and suggestions from staff in other IMF departments, as well as from Executive Directors following their discussions of the Global Financial Stability Report on August 30, 2004. 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.