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45761 Ch 00 FM.Indd World Economic and Financial Surveys Global Financial Stability Report Transition Challenges to Stability October 2013 International Monetary Fund ©2013 International Monetary Fund Cataloging-in-Publication Data Joint Bank-Fund Library Global financial stability report – Washington, DC : International Monetary Fund, 2002– v. ; cm. – (World economic and financial surveys, 0258-7440) Semiannual Some issues also have thematic titles. ISSN 1729-701X 1. Capital market — Development countries — Periodicals. 2. International finance — Periodicals. 3. Economic stabilization — Periodicals. I. International Monetary Fund. II. Series: World economic and financial surveys. HG4523.G563 ISBN 978-1-47552-497-0 (paper) 978-1-48431-915-4 (ePub) 978-1-48432-364-9 (Mobipocket) 978-1-48438-396-4 (PDF) Please send orders to: International Monetary Fund, Publications Services P.O. Box 92780, Washington, DC 20090, U.S.A. Tel.: (202) 623-7430 Fax: (202) 623-7201 E-mail: [email protected] www.imfbookstore.org www.elibrary.imf.org CONTENTS Assumptions and Conventions viii Preface ix Executive Summary xi Chapter 1 Making the Transition to Stability 1 Financial Stability Overview 1 Challenges Related to Accommodative Monetary Policies Will Test Markets and Policymakers 4 Box 1.1. Mortgage Real Estate Investment Trusts: Business Model Risks 12 Box 1.2. First-Time Issuers: New Opportunities and Emerging Risks 17 The Euro Area Banking, Corporate, and Sovereign Nexus 31 Global Banking Challenges: Profitability, Asset Quality, and Leverage 41 Box 1.3. Financial Regulatory Reform Update 47 Box 1.4. Recent Financial Sector Assessment Program Mission Findings 49 Making the Transition to Stability 50 Annex 1.1. Exploring the Factors Driving Bank Interest Rates on Corporate Loans 53 Annex 1.2. Euro Area Corporate Debt Overhang and Implications for Bank Asset Quality 57 Box 1.5. The GFSR Analysis of Corporate Credit Quality versus Bank Stress Tests 61 References 62 Chapter 2 Assessing Policies to Revive Credit Markets 63 Summary 63 Introduction 63 Recent Developments in Credit Markets 63 What Policies Have Been Implemented to Support Credit? 67 Box 2.1. Policies to Diversify Credit Options for Small and Medium Enterprises in Europe 70 Are Current Policies on Target? 71 Box 2.2. Challenges in the Structural Estimation of Credit Supply and Demand 76 Box 2.3. The Effect of the Liquidity Crisis on Mortgage Lending 82 Designing Effective Policies for Reviving Credit Markets 83 Box 2.4. Policy Measures to Finance Small and Medium Enterprises during Crises: The Case of Korea 84 Box 2.5. Lessons from the Nordic Banking Crises 87 Annex 2.1. Previous Findings in the Literature on Credit Constraints 90 Annex 2.2. Determinants of Bank Lending Standards 98 Annex 2.3. A Model of Bank Lending 98 References 101 Chapter 3 Changes in Bank Funding Patterns and Financial Stability Risks 105 Summary 105 Introduction 106 Bank Funding Structures: Determinants and Recent Developments 107 Box 3.1. Typology of Bank Funding 108 International Monetary Fund | October 2013 iii GLOBAL FINANCIAL STABILITY REPORT: Transition CHALLENGES to Stability Box 3.2. What the Crisis Taught Us about Bank Funding 113 Are Bank Funding Structures Relevant to Financial Stability? 114 Box 3.3. Changes in Cross-Border Bank Funding Sources 117 Crisis and the Impact of Regulatory Reforms on the Pricing of Bank Liabilities 119 Box 3.4. Bank Funding in Emerging Market Economies and the Impact of Regulatory Reforms 121 Box 3.5. Investor Base for Bail-in Debt and Bank Bond Ratings 126 Summary and Policy Recommendations 131 Annex 3.1. Data Description and Additional Empirical Results 134 Annex 3.2. Regulatory Developments Affecting Bank Funding 139 Annex 3.3. Bank Bond Pricing Model 143 References 147 Glossary 149 Annex: IMF Executive Board Discussion Summary 157 Statistical Appendix 159 Figures 1. Major Net Exporters and Importers of Capital in 2012 161 2. Sovereign Credit Default Swap Spreads 162 3. Selected Credit Default Swap Spreads 163 4. Selected Spreads 164 5. Implied Volatility Indices 165 6. United States: Corporate Bond Market 166 7. Euro Area: Corporate Bond Market 167 8. United States: Commercial Paper Market 168 Tables 1. Capital Market Size: Selected Indicators, 2012 169 2. MSCI Equity Market Indices 170 3. Emerging Markets Bond Index: EMBI Global Sovereign Yield Spreads 172 4. Emerging Market Private External Financing: Total Bonds, Equities, and Loans 174 5. Emerging Market Private External Financing: Bonds 177 6. Emerging Market Private External Financing: Equities 179 7. Emerging Market Private External Financing: Loans 181 8. Equity Valuation Measures: Dividend-Yield Ratios 184 9. Equity Valuation Measures: Price/Earnings Ratios 185 10. Emerging Markets: Mutual Funds 186 Tables 1.1. Market-Implied Interest Rate Pricing versus Historical Cycles 6 1.2. Bond Portfolio Interest Rate Sensitivities 9 1.3. Structure of the Japanese Government Bond Market 28 1.4. Foreign Assets Held by Japanese Investor Groups, end-2012 28 1.5. Japan Scenarios: Complete, Incomplete, and Disorderly 29 1.6. European Union Bank Deleveraging 46 1.7. Policy Recommendations 51 1.8. Determinants of Bank Interest Rates on New Small Loans 56 1.9. Amadeus Database, 2011 57 1.10. Mapping of Corporate Vulnerability Indicators to Probabilities of Default 60 1.11. Comparison of GFSR Analysis with Oliver Wyman’s Stress Tests for Spain 61 1.3.1. Comparison of Bank Regulations across Jurisdictions 47 2.1. Identifying Countries with Weak Credit Growth, BIS Data 65 2.2. Identifying Countries with Weak Credit, Other Data Sources 66 iv International Monetary Fund | October 2013 CONTENTS 2.3. Credit Policies Implemented since 2007 72 2.4. Determinants of Credit Growth 73 2.5. Structural Determinants of the Supply and Demand of Bank Lending to Firms in Selected Countries 77 2.6. Firm-Level Regressions of Changes in Debt-to-Asset Ratio for Manufacturing Firms 78 2.7. Previous Findings in the Literature 91 2.8. Euro Area: Determinants of Bank Lending Standards 97 2.9. United States: Determinants of Bank Lending Standards 97 3.1. Characteristics of Four G-SIBs in Simulation Exercise 131 3.2. Country and Bank Coverage Statistics 135 3.3. List of Variables Used in the Panel Data Analysis 136 3.4. Illustration of Creditor Hierarchy and Loss Sharing under Alternative Resolution Tools 141 3.5. Cross-Country Comparison of Covered Deposits, end-2010 148 Figures 1.1. Global Financial Stability Map 1 1.2. Global Financial Stability Map: Assessment of Risks and Conditions 2 1.3. Market Volatility Shock 3 1.4. Global Financial Conditions 3 1.5. Market Dashboard 4 1.6. U.S. Nonfinancial Firms’ Credit Fundamentals 5 1.7. Decomposition of Term Premium: Change From September 2008 to March 2013 7 1.8. Simulated Shock to 10-Year U.S. Treasury Term Premium 7 1.9. U.S. Mutual Fund Cumulative Flows 8 1.10. Global Bond Portfolio Duration 8 1.11. Nongovernment Bond Inventories, Total Trading Volumes, and Outstanding Bonds 9 1.12. Fire Sale “Risk Spiral” 10 1.13. Estimated Average Change in Mortgage Real Estate Investment Trust Portfolio Value for Parallel Interest Rate Shifts 11 1.14. Leveraged Mortgage Real Estate Investment Trusts Are More Vulnerable to Interest Rate Increases 11 1.15. Above-Trend Bond Flows from Advanced to Emerging Market Economies 15 1.16. Net Portfolio Flows into Fixed-Income Equity Markets by Country, 2009–12 16 1.17. Impact of Portfolio Flows on Local Currency Bond Yields 16 1.18. Allocation of Major Bond Funds to Emerging Markets 16 1.19. Duration of Emerging Market Fixed-Income Indices 20 1.20. Share of Nonresident Holdings of Local Currency Government Debt and Market Liquidity 20 1.21. Composition of the Holders of Local Currency Government Debt 20 1.22. Net New Issuance of Emerging Market Bonds 20 1.23. Credit Ratings of Emerging Market Corporate Bond Issues 21 1.24. Corporate Rating Changes in Emerging Markets 21 1.25. Nonfinancial Corporate Balance Sheet Metrics 22 1.26. Sharp Increase in Corporate Debt Defaults 22 1.27. China: Corporate Sector Fundamentals 23 1.28. External and Domestic Vulnerabilities 23 1.29. China: Credit Developments 23 1.30. Recent Stress in Emerging Markets 24 1.31. May 2013 Sell-Off of Emerging Market Bonds versus the Lehman Brothers Episode 25 1.32. Estimated Impact on Bond Yields from a Reversal of Capital Flows and Other Factors 25 1.33. Japanese Flows into Currency Overlay Funds 28 1.34. Japanese Banks’ Sensitivity to an Interest Rate Shock 30 1.35. Value-at-Risk in the Disorderly Scenario 30 1.36. Projected Flows to Selected Emerging Markets in the Disorderly Scenario 31 1.37. Bank-Corporate-Sovereign Nexus 32 International Monetary Fund | October 2013 v GLOBAL FINANCIAL STABILITY REPORT: Transition CHALLENGES to Stability 1.38. Stressed Euro Area Economy Bank Credit 33 1.39. Bank Buffers and Interest Rates on Corporate Loans 33 1.40. Individual Bank Buffers and Lending in Stressed Economies, 2013:Q1 33 1.41. Euro Area Sovereign Spreads, April–August 2013 33 1.42. Leverage Ratios 34 1.43. Leverage Ratios by Firm Size, 2011 34 1.44. Share of Debt at Firms with Various Debt-to-Assets Ratios, 2011 34 1.45. Share of Debt at Firms with Various Interest Coverage Ratios, 2011 34 1.46. Nonperforming Corporate Loans 35 1.47. Corporate Expected Default Frequencies and Bank Loan Interest Rates 35 1.48. Listed Firms: Changes in Debt, Capital Expenditures, and Dividends 36 1.49. Factors Affecting Bank Interest Rates on Corporate Loans 36 1.50. Interest Rates on Small Bank Loans and Model-Based Factor Decomposition 37 1.51. Corporate Debt Overhang 38 1.52. Distribution of Estimated Corporate Sector Probabilities of Default 39 1.53. Potential Losses on Corporate Loans and Banking System Buffers 40 1.54.
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