- International Monetary Fund. Monetary and Capital Markets Department
- Published Date:
- April 2012
©2012 International Monetary Fund
Joint Bank-Fund Library
Global financial stability report—Washington, DC:
International Monetary Fund, 2002—
- v. ; cm.—(World economic and financial surveys, 0258-7440)
- 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
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- Executive Summary
- Chapter 1 Global Financial Stability Assessment
- Chapter 2 Sovereigns, Banks, and Emerging Markets: Detailed Analysis and Policies
- The Sovereign Debt Crisis—Shifting From a Bad to a Good Equilibrium
- Bank Deleveraging—Why, What, by How Much, and Where?
- Emerging Markets—Still Resilient?
- The Quest for Lasting Stability
- Annex 2.1. Methodology for the EU Bank Deleveraging Exercise
- Annex 2.2. Sovereign Risk in the United States, Japan, and Germany—Signals from the Markets
- Annex 2.3. Developments in U.S. Housing Markets
- Annex 2.4. The ECB’s LTROs: Keeping the Benefits and Avoiding the Pitfalls
- Chapter 3 Safe Assets: Financial system Cornerstone?
- The Safe Asset Universe
- Roles of Safe Assets for Various Participants
- The Supply of Safe Assets
- Financial Stability Implications
- Key Conclusions and Policy Implications
- Annex 3.1. Exposures to Common Risk Factors
- Annex 3.2. Central Bank Securities Policies since 2007
- Annex 3.3. Collateral Requirements of Central Counterparties for Over-the-Counter Derivatives
- Chapter 4 The Financial Impact of Longevity Risk
- Annex: Summing Up by the Chair
- Statistical Appendix
- [Available online at www.imf.org/external/pubs/ft/gfsr/2012/01/pdf/statapp.pdf]
- 1.1. Addressing the Euro Area Crisis and Moving Toward a More Integrated Union
- 2.1. What Explains the Performance of European Bank Equities?
- 2.2. European Banks’ Business Plans
- 2.3. A Comparison of the GFSR Approach with the European Banking Authority’s Bank Capital Strengthening Exercise
- 2.4. How Derivatives Markets Link U.S. Banks and European Counterparties
- 2.5. What Happens in Emerging Markets if Recent Bank and Portfolio Inflows Reverse?
- 2.6. Eurobonds and the Future of the Economic and Monetary Union
- 2.7. Update on Regulatory Reforms
- 3.1. The Size of Sovereign Wealth Funds and Their Role in Safe Asset Demand
- 3.2. The Impact of Changes in the OTC Derivatives Market on the Demand for Safe Assets
- 3.3. Regulatory Risk Weighting of Banks’ Government Debt Holdings: Potential Bias in Capital Adequacy Ratios
- 3.4. Impact of the Basel III Liquidity Coverage Ratio on the Demand for Safe Assets
- 3.5. The Impact of a Further Loss of Sovereign Debt Safety Illustrated in a Mean-Variance Framework
- 3.6. Conventional Monetary Policy and Its Demand for Safe Assets under Normal Conditions
- 4.1. The Evolution of Life Expectancy in the Twentieth and Twenty-First Centuries
- 4.2. Forecasting Longevity
- 4.3. An Example of a Longevity Shock
- 4.4. The Impact of Aging on the Macro Economy and on Financial Stability
- 4.5. Pension Reform in the Netherlands: Proactively Dealing with Longevity Risk
- 4.6. Recent Activity in the Dutch and U.K. Buy-Out, Buy-In, and Longevity Swap Markets
- 1.1. Indebtedness and Leverage in Selected Advanced Economies
- 1.2. Impact of European Bank Deleveraging under Three Policy Scenarios, through End-2013
- 1.3. Three Past Episodes of Household Deleveraging Associated with a Banking Crisis
- 2.1. Sovereign Debt: Market and Vulnerability Indicators
- 2.2. Share of Foreign Investors in Gross Refinancing Needs of Selected Euro Area Sovereigns under Three Policy Scenarios
- 2.3. Amount of Additional Funding from Domestic Investors Required by Selected Euro Area Sovereigns under Three Policy Scenarios, 2012
- 2.4. Capital Flow, Banking, and Policy Indicators in Selected Emerging and Other Markets
- 2.5. Selected Bank Balance Sheet Items
- 2.6. Weights Used in Calculation of the Net Stable Funding Ratio
- 2.7. Average Rollover Rates for Bank Funding under Three Policy Scenarios
- 2.8. Bank Deleveraging Strategy
- 3.1. Historical Overview of S&P Sovereign Debt Ratings of Selected OECD Countries, 1970–January 2012
- 3.2. Long-Term Senior Sovereign Debt Ratings and Implied Probabilities of Default
- 3.3. Demand and Supply Factors and Their Anticipated Impact on Safe Asset Markets
- 3.4. Top Five Financially Deep Worldwide Economies, as Share of Own GDP and of Global Financial Depth, 1989 and 2009
- 3.5. Central Bank Changes in Policies on Collateral and Purchases of Nongovernmental Securities since 2007
- 3.6. Collateral Requirements of the Big Three CCPs Handling OTC Derivatives
- 4.1. Pension Estimates and Population Estimates of Male Life Expectancy at Age 65 in Selected Advanced Economies
- 4.2. Longevity Risk and Fiscal Challenges in Selected Countries
- 4.3. Mortality Tables Used by Reporting Pension Plans
- 4.4. Corporate Pension Funding Ratios and Discount Rate Assumptions for Selected Countries
- 4.5. The Impact of Longevity Risk on Pension Liabilities
- 1.1. Global Financial Stability Map
- 1.2. Global Financial Stability Map: Assessment of Risks and Conditions
- 1.3. Central Bank Balance Sheet Expansion
- 1.4. Asset Price Performance since September 2011 GFSR
- 1.5. WEO Projections of 2012 GDP Growth in Selected Euro Area Countries
- 1.6. Policy Action to Entrench Stability and Avoid Downside Risks
- 1.7. External Positions and Gross Debt in Selected Euro Area Countries
- 1.8. Debt Burdens in Selected Advanced Economies, 2011
- 1.9. Household Net Financial Assets and Gross Debt, End-September 2011
- 1.10. Two Household Credit Cycles: 1980s and 2000s
- 2.1. Credit Default Swap Spreads in Selected Euro Area Government Bond Markets
- 2.2. Ten-Year Government Bond Yields and Trading Ranges, Selected Euro Area Countries, 2011–12
- 2.3. Daily Trading Volume of Italian Sovereign Bonds
- 2.4. Changes in the Sovereign Investor Base
- 2.5. Custodial Holdings of Selected Euro Area Sovereign Bonds, 2011
- 2.6. Cumulative Change in Foreign Bank Holdings of Sovereign Debt of Selected Euro Area Countries, 2010:Q1–2011:Q3
- 2.7. Returns and Volatility of U.S. and European Sovereign Bonds, 2011
- 2.8. Ten-Year Peripheral Euro Area Government Bond Spreads over AAA Core
- 2.9. ECB Purchases of Government Bonds under Its SMP
- 2.10. ECB Lending and Bank Holdings of Euro Area Sovereign Bonds, December 2011–January 2012
- 2.11. Yields on Government Bonds of Italy and Spain, November 2011 and March 2012
- 2.12. Projections for Government Debt and Average Interest Rate in Selected Advanced Economies, 2011–16
- 2.13. Scenarios for Ratio of Government Interest Expenditure to GDP, Selected Advanced Economies
- 2.14. Foreign Investor Share of Total Sovereign Debt, 2009–11, Selected Euro Area Economies
- 2.15. Bank Leverage
- 2.16. Bank Loan-to-Deposit Ratios
- 2.17. Bank Price-to-Tangible Book Value
- 2.18. Bank Five-Year Credit Default Swap Spreads
- 2.19. U.S. Prime Money Market Fund Exposures to Banks
- 2.20. Bank Debt Issuance
- 2.21. Cumulative Euro Area Deposit Flows, 2011–12
- 2.22. ECB Liquidity Facilities and Interbank Market Spreads
- 2.23. Credit Growth to the Nonfinancial Private Sector
- 2.24. Contributions to Euro Area Bank Lending Conditions for Companies
- 2.25. Change in Banks’ Foreign Private Sector Claims, 2011:Q3
- 2.26. Contributions to Reduction in Aggregate Bank Leverage Ratio, Current Policies Scenario
- 2.27. Contributions to Aggregate Reduction in Bank Assets, Three Policy Scenarios
- 2.28. Factor Contributions to Aggregate Reduction in Bank Assets, Three Policy Scenarios
- 2.29. Reduction in Supply of Credit by Sample Banks, Three Policy Scenarios
- 2.30. European Banks: Composition of Assets, 2010
- 2.31. Reduction in Supply of Credit, by Banking System, Current Policies Scenario
- 2.32. Euro Area Credit Supply Shock: Three Scenarios Relative to Historical Episodes
- 2.33. United States: Nonfinancial Corporate Borrowing and Return on Assets
- 2.34. Euro Area: Nonfinancial Corporate Borrowing and Return on Assets
- 2.35. Reliance on Bank Financing by Nonfinancial Corporations
- 2.36. Change in Nonfinancial Corporate Debt, 2000–10
- 2.37. Nonfinancial Corporations: Interest Coverage Ratio and Implied Ratings
- 2.38. Corporate Credit Quality in Western Europe, 2007–12
- 2.39. Euro Area Bank Deleveraging in Emerging Markets, 2008 and 2011
- 2.40. Deleveraging in Emerging Markets by Selected Advanced Economy and EM Local Banks, 2011:Q3
- 2.41. Emerging Market Credit Cycle for Euro Area Banks and Other Banks, 2010–11
- 2.42. Long-Term Specialty Finance in Emerging Markets
- 2.43. Emerging Europe: Cross-Border Bank Flows and Foreign Exchange Funding Costs
- 2.44. Reduction in Supply of Credit by Sample Banks to Emerging Europe: Current and Weak Policies Scenarios
- 2.45. Loans Denominated in Foreign Currency as a Share of GDP, Selected Countries in Emerging Europe, 2007 and 2011
- 2.46. Emerging Europe: Reserve Coverage of Short-Term External Debt, Selected Countries, 2007 and 2011
- 2.47. Emerging Europe: Sovereign Gross Financing Needs, Selected Countries, 2012
- 2.48. Net Flows in Emerging Market Funds, 2011–12
- 2.49. Performance of Emerging Market Assets, 2011–12
- 2.50. Changes in Residential Property Prices and Sales in China, 2011–12
- 2.51. Ratio of House Price to Annual Household Income for Selected Cities, 2011
- 2.52. China: Projected Nonperforming Loan Rates under Adverse Macroeconomic Scenarios
- 2.53. Annual Change in Private Credit, 2009–11
- 2.54. Capital Generation under Three Policy Scenarios
- 2.55. How Can Banks Improve Capital and Liquidity Ratios?
- 2.56. United States: Sovereign Market Indicators, March 2012
- 2.57. Germany: Sovereign Market Indicators, March 2012
- 2.58. Japan: Sovereign Market Indicators, March 2012
- 2.59. ECB LTROs and Bank Term Funding
- 2.60. Sovereign Bond Yields for Italy and Spain
- 3.1. Ten-Year Government Bond Yields in Selected Advanced Economies
- 3.2. Asset Exposures to Common Risk Factors before and after Global Crisis
- 3.3. Volatility of Excess Returns in Debt Instruments before and after Crisis
- 3.4. Outstanding Amounts of Marketable Potentially Safe Assets
- 3.5. Holdings of Government Securities Worldwide, by Investor Type, End-2010
- 3.6. Sovereign Debt Holdings, by Type and Location of Investor
- 3.7. Banks’ Holdings of Sovereign Debt, by Selected Country, End-September 2011
- 3.8. Official Reserve Accumulation, by Instrument
- 3.9. Government Securities Purchases and Holdings by Sectors
- 3.10. U.S. and U.K. Central Bank Holdings of Government Securities, by Remaining Maturity
- 3.11. Distribution of Selected Advanced and Emerging Market Economies, by Sovereign Debt Rating
- 3.12. OECD Countries: General Government Gross Debt Relative to GDP, End–2011
- 3.13. OECD Countries: General Government Gross Debt, 2010-16
- 3.14. Private-Label Term Securitization Issuance
- 3.15. Selected Advanced Economies: Changes in Central Bank Assets and Liabilities since the Global Crisis
- 3.16. Government Bond Holdings and Risk Spillovers between Sovereign and Banks
- 4.1. United Kingdom: Projected Life Expectancy at Birth, for Males, 1966-2031
- 4.2. Increases in Costs of Maintaining Retirement Living Standards due to Aging and to Longevity Shock
- 4.3. Life Expectancy at Age 63, by Year of Mortality Table
- 4.4. Increase in Actuarial Liabilities from Three-Year Increase in Longevity, by Discount Rate
- 4.5. Index of Share of Pension Entitlements Linked to Life Expectancy in Selected Countries
- 4.6. Structure of Pension Buy-Out and Buy-In Transactions
- 4.7. Structure of Longevity Swap Transactions
- 4.8. Structure of Longevity Bond Transactions
- 4.9. Attitudes of Pension Plan Sponsors toward Hedging Pension Risk, by Type of Risk
- 4.10. Attitudes of Potential Sellers of Longevity Risk toward Hedging
The Global Financial Stability Report (GFSR) assesses key risks facing the global financial system. 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. Against a background of continuing challenges to global financial stability, 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 vulnerabilities and contagion risks stemming from bank deleveraging, investigates the resilience of emerging markets, examines the implications of recent reforms and sovereign stress for safe assets, and assesses the growing financial costs that longevity risk poses for financial and fiscal institutions.
The analysis in this report has been coordinated by the Monetary and Capital Markets (MCM) Department under the general guidance of José Viñals, Financial Counsellor and Director. The project has been directed by Jan Brockmeijer and Robert Sheehy, both Deputy Directors; Peter Dattels and Laura Kodres, Assistant Directors; and Matthew Jones, Advisor. It has benefited from comments and suggestions from the senior staff in the MCM department.
Individual contributors to the report are: Abdullah Al-Hassan, Sergei Antoshin, Serkan Arslanalp, Ana Carvajal, Eugenio Cerutti, Jorge A. Chan-Lau, Ken Chikada, Nehad Chowdhury, Sean Craig, Jihad Dagher, Reinout De Bock, Giovanni Dell’Ariccia, Frank Eich, Michaela Erbenova, Luc Everaert, Maximilian Fandl, Jeanne Gobat, Tommaso Mancini Griffoli, Vincenzo Guzzo, Kristian Hartelius, Sanjay Hazarika, Eija Holttinen, Anna Ilyina, Patrick Imam, Silvia Iorgova, William Kerry, John Kiff, Michael Kisser, Peter Lindner, Estelle Xue Liu, André; Meier, Paul Mills, Srobona Mitra, Hanan Morsy, S. Erik Oppers, Jukka Pihlman, Esther Perez Ruiz, Marta Sánchez Saché, Christian Schmieder, Jochen Schmittmann, Alasdair Scott, Katharine Seal, Tiago Severo, Mauricio Soto, Mark Stone, Tao Sun, Narayan Suryakumar, Takahiro Tsuda, Nico Valckx, and Chris Walker. Ivailo Arsov, Martin Edmonds, Oksana Khadarina, and Yoon Sook Kim provided analytical support. Gerald Gloria, Nirmaleen Jayawardane, Juan Rigat, and Ramanjeet Singh were responsible for word processing. Joanne Blake and Gregg Forte, of the External Relations Department, 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, pension funds, central banks, national treasuries, and academic researchers. The report reflects information available up to March 30, 2012.
The report benefited from comments and suggestions from staff in other IMF departments, as well as from Executive Directors following their discussion of the GFSR on March 30, 2012. 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.
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;
/ between years (for example, 2008/09) 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 is 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 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.
Recent important policy steps have brought some much-needed relief to euro area financial markets. As discussed in Chapters 1 and 2, sovereign spreads have declined, bank funding markets have partly reopened, and equity prices have recovered. Nevertheless, pressures on European banks remain, including from sovereign risks, weak euro area growth, high rollover requirements, and the need to strengthen capital cushions to regain investor trust. Together, these pressures have induced a broader drive to reduce balance sheet size. Analysis in this Global Financial Stability Report suggests that large EU-based banks could shrink their combined balance sheet by as much as $2.6 trillion (€2.0 trillion) through end-2013, or almost 7 percent of total assets. Although subject to considerable uncertainty, our estimate is that about one-fourth of this deleveraging could occur through a reduction in lending, with the remainder coming largely from sales of securities and noncore assets. Under the baseline, the impact on euro area credit supply is estimated at about 1.7 percent of present credit outstanding. Some balance sheet reduction by individual banks is necessary because high leverage is no longer supported by either markets or regulators and some activities are no longer viable. But the potential consequences of a synchronized and large-scale deleveraging warrant supervisory efforts to avoid serious damage to asset prices, credit supply, and economic activity in Europe and beyond.
Against this backdrop, European policymakers need to build on recent improvements to implement the agreed reforms swiftly. Avoiding fresh setbacks will be critical, especially on the difficult path ahead, which is fraught with political and implementation risk. The recent decision to combine the European Stability Mechanism with the European Financial Stability Facility is welcome and, along with other recent European efforts, will strengthen the European crisis mechanism and support the IMF’s efforts to bolster the global firewall. But to achieve lasting stability and move to a path that inspires confidence, these crisis management policies need to be anchored with a road map of further financial and fiscal integration of the Economic and Monetary Union.
Most emerging markets have policy room to buffer moderate deleveraging forces emanating from the European Union, but their resilience could be tested in a downside scenario, notably in emerging Europe. Elsewhere, the United States and Japan have yet to forge a political consensus for medium-term deficit reduction, perpetuating latent risks to financial stability. Meanwhile, the global financial regulatory framework is being strengthened, but key agreements still need to be concluded, while the transition to this new setting could add to cyclical challenges facing financial institutions.
The financial crisis and concerns about sovereign debt sustainability in some countries have reminded investors that no asset can be viewed as truly risk free. Chapter 3 examines the various roles of safe assets and the effects of different regulatory, policy, and market distortions, and it discusses future pressure points that may arise. It finds that the combination of heightened uncertainty, regulatory reforms, and crisis-related responses from central banks will drive up demand. On the supply side, the number of sovereigns whose debt is considered safe is declining—taking potentially $9 trillion in safe assets out of the market by 2016 (roughly 16 percent of the projected total). These developments will put upward pricing pressures on the remaining assets considered safe. Regulations should be designed flexibly and should be gradually phased in, according to an internationally agreed schedule, to avoid a choppy or uneven path of adjustment to a new price for safe assets.
Chapter 4 highlights the potentially very large financial implications of longevity risk—that is, the risk that people may live longer than expected. The chapter defines the risk, shows its magnitude—amounting to between 25 percent and 50 percent of 2010 GDP, on average—and provides estimates of its effects on fiscal balance sheets and businesses. More attention to longevity risk is warranted now, given the potential size of these effects on already weakened public and private balance sheets, and because the effective mitigation measures take years to bear fruit. Governments need to acknowledge their exposure to longevity risk; put in place methods for better risk sharing between governments, private sector pension sponsors, and individuals; and promote the growth of markets for the transfer of longevity risk.