BIS Quarterly Review March 2017 International banking and financial market developments BIS Quarterly Review Monetary and Economic Department Editorial Committee: Claudio Borio Benjamin Cohen Dietrich Domanski Hyun Song Shin General queries concerning this commentary should be addressed to Benjamin Cohen (tel +41 61 280 8421, e-mail: [email protected]), queries concerning specific parts to the authors, whose details appear at the head of each section, and queries concerning the statistics to Philip Wooldridge (tel +41 61 280 8006, e-mail: [email protected]). This publication is available on the BIS website (www.bis.org/publ/qtrpdf/r_qt1703.htm). © Bank for International Settlements 2017. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1683-0121 (print) ISSN 1683-013X (online) BIS Quarterly Review March 2017 International banking and financial market developments Beyond swings in risk appetite .................................................................................................... 1 The breakdown in correlations ........................................................................................... 2 Box A: What is driving the renewed increase in Target2 balances? .............................................................................................................. 7 EMEs: between a rock and a hard place ......................................................................... 9 Big swings in Chinese financial markets as liquidity tightens ............................. 11 Box B: From wealth management products to the bond market .......................................................................................... 13 Highlights of global financial flows ......................................................................................... 15 Takeaways ................................................................................................................................ 15 Global credit recovered in the second half of 2016 ................................................ 16 Box : Non-US banks’ global dollar funding grows despite US money market reform .................................................................... 22 Special Features Consumption-led expansions ................................................................................................... 25 Enisse Kharroubi and Emanuel Kohlscheen Characteristics of consumption-led growth ............................................................... 27 Implications of consumption-led expansions ............................................................ 30 Box : Estimation of the effects of consumption-led expansions on subsequent GDP and consumption growth ................................ 31 Conclusion ............................................................................................................................... 35 Annex .......................................................................................................................................... 37 The new era of expected credit loss provisioning ............................................................. 39 Benjamin Cohen and Gerald Edwards Jr Why provision for expected credit losses? ................................................................. 40 Overview of the new standards ........................................................................................ 42 Box A: Key aspects of the BCBS supervisory guidance, 2015 ............................. 45 The transition: banks’ progress in implementation ................................................. 46 BIS Quarterly Review, March 2017 iii Box C: Enhanced risk disclosure needed during the transition period to IFRS 9 .......................................................................... 48 The steady state: impact on the financial system ..................................................... 49 Conclusions .............................................................................................................................. 53 The quest for speed in payments ............................................................................................. 57 Morten Bech, Yuuki Shimizu and Paul Wong Emergence of fast (retail) payments .............................................................................. 58 Box : How do fast payment systems work? ................................................................ 59 Technology adoption and diffusion ............................................................................... 60 The diffusion of real-time gross settlement ................................................................ 62 The diffusion of fast payments ......................................................................................... 63 Continuing evolution of the payments landscape ................................................... 66 Conclusions .............................................................................................................................. 67 The bond benchmark continues to tip to swaps ................................................................ 69 Lawrence Kreicher, Robert McCauley and Philip Wooldridge Benchmark tipping and the role of basis risk ............................................................. 70 Tracking the tipping process ............................................................................................. 72 Bond benchmarks around the world ............................................................................. 73 The shift from government futures to swaps, 1995–2016 ..................................... 75 In conclusion: the persistence of futures trading ...................................................... 77 Box : Disentangling overnight index swaps from interest rate swaps ..................................................................................................... 79 BIS statistics: Charts ............................................................................................................... A1 Special features in the BIS Quarterly Review ...................................................... B1 List of recent BIS publications ....................................................................................... C1 iv BIS Quarterly Review, March 2017 Notations used in this Review billion thousand million e estimated lhs, rhs left-hand scale, right-hand scale $ US dollar unless specified otherwise … not available . not applicable – nil or negligible Differences in totals are due to rounding. The term “country” as used in this publication also covers territorial entities that are not states as understood by international law and practice but for which data are separately and independently maintained. BIS Quarterly Review, March 2017 v Abbreviations Currencies ARS Argentine peso LTL Lithuanian litas AUD Australian dollar LVL Latvian lats BGN Bulgarian lev MXN Mexican peso BHD Bahraini dinar MYR Malaysian ringgit BRL Brazilian real NOK Norwegian krone CAD Canadian dollar NZD New Zealand dollar CHF Swiss franc OTH all other currencies CLP Chilean peso PEN Peruvian new sol CNY (RMB) Chinese yuan (renminbi) PHP Philippine peso COP Colombian peso PLN Polish zloty CZK Czech koruna RON Romanian leu DKK Danish krone RUB Russian rouble EEK Estonian kroon SAR Saudi riyal EUR euro SEK Swedish krona GBP pound sterling SGD Singapore dollar HKD Hong Kong dollar SKK Slovak koruna HUF Hungarian forint THB Thai baht IDR Indonesian rupiah TRY Turkish lira ILS Israeli new shekel TWD New Taiwan dollar INR Indian rupee USD US dollar JPY Japanese yen ZAR South African rand KRW Korean won vi BIS Quarterly Review, March 2017 Countries AR Argentina KR Korea AU Australia LT Lithuania BG Bulgaria LV Latvia BH Bahrain MX Mexico BR Brazil MY Malaysia CA Canada NO Norway CH Switzerland NZ New Zealand CL Chile PE Peru CN China PH Philippines CO Colombia PL Poland CZ Czech Republic RO Romania DK Denmark RU Russia EA Euro Area SA Saudi Arabia EE Estonia SE Sweden GB United Kingdom SG Singapore HK Hong Kong SAR SK Slovakia HU Hungary TH Thailand ID Indonesia TR Turkey IL Israel TW Chinese Taipei IN India US United States JP Japan ZA South Africa BIS Quarterly Review, March 2017 vii Beyond swings in risk appetite Many asset prices have traded sideways since the release of the previous BIS Quarterly Review in early December, while investors waited for clues on a number of sources of uncertainty. Market participants expected a change in the policy mix in the United States, with a greater role for fiscal policy, continued gradual tightening of monetary policy, a push for deregulation, and a more protectionist trade stance. However, the precise nature and timing of policy changes and their impact remained unclear. In February, stock markets rallied in the United States, while sovereign yields in a number of euro area countries came under pressure as investors shifted their focus towards political uncertainties in Europe. More broadly, asset returns have become less correlated across classes, regions and sectors. The close co-movements that characterised markets during much of the period following the Great Financial Crisis (GFC) seem to have broken down. This suggests that, over the period under review, swings in investor risk appetite were less of a driver of overall valuations. Stock prices were broadly supported by data confirming a general improvement in the macroeconomic outlook of advanced economies (AEs). Manufacturing and