Table Of ContentW o r l d E c o n o m i c a n d F i n a n c i a l S u r v e y s
Global Financial Stability Report
Restoring Confidence and
Progressing on Reforms
OCTOBER 2012
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Contents
Preface ix
executive summary xi
Chapter 1 Global Financial stability Assessment 1
Status of Stability Indicators 1
The Euro Area 4
The United States 15
Japan 16
Emerging Markets and Other Economies 16
Regulatory Reform 17
References 20
Chapter 2 Restoring Confidence and Containing Global spillovers 21
Global Debt Overhang and Stability Challenges 21
Euro Area Crisis—Reversing Financial Fragmentation 25
The United States: Stability or Complacency 42
Japan How Safe a Safe Haven 52
Emerging Markets and Other Economies: Navigating Domestic and Global Risks 55
Annex 2.1. Update to the EU Bank Deleveraging Exercise 68
References 73
Chapter 3 the Reform Agenda: An Interim Report on Progress toward a safer Financial system
Summary
Structural Features Associated with the Crisis
The Goal of Reforms—Desirable Structures of Financial Intermediation
Objectives and Implications of the New Regulatory Initiatives
Structural Implications of Crisis Intervention Measures
Change over the Past Five Years: Are Financial Systems Structurally Safer?
Analyzing the Effect of Reforms on Structures—An Early Look
Implications for the Reform Agenda
Annex 3.1. Financial Structure Indices
Annex 3.2. Regulatory Initiatives: Proposals and Implementation Status
Annex 3.3. Exploring the Impact of Regulatory and Crisis Intervention Policies
on Financial Structures
Annex 3.4. Indices of Progress on Basel Capital and Liquidity Standards
References
Chapter 4 the Financial Impact of Longevity Risk
Summary
The Relationship between Financial Structures and Economic Outcomes
Simple Correlations
Country Case Studies
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CONTENTS
Multivariate Regressions
Policy Implications
Annex 4.1. What Does the Literature Say About the Relationship between Financial
Structures and Economic Outcomes?
Annex 4.2. Econometric Study on Financial Structures and Economic Outcomes:
Data, Methodology, and Detailed Results
Annex 4.3. Financial Structure Variables and the Probability of Banking Crises:
Data, Methodology, and Detailed Results
References
Glossary
Annex: summing Up by the Chair
statistical Appendix
[Available online at www.imf.org/external/pubs/ft/gfsr/2012/02/pdf/statapp.pdf]
Boxes
1.1. Falling Confidence, Rising Risks, and Complacency 6
1.2. Recent Policy Initiatives, Developments, and Challenges in the Euro Area 9
1.3. Resilience of the Euro, or Fragile Equilibrium? 14
1.4. Regulatory Reform: From Rulemaking to Implementation 18
2.1. Systemic Risk in International Dollar Credit 25
2.2. Why Are Euro Area Periphery Sovereign Spreads So High ? 28
2.3. European Bank Deleveraging: An Update 31
2.4. Corporate Sector Fundamentals, Funding Conditions, and Credit Risks 36
2.5. Key Challenges for the Dealer Operations of U.S. Banks 43
2.6. How Impaired Is Liquidity in the U.S. Corporate Bond Trading Market ? 49
2.7. Avoiding the Pitfalls of Financial Liberalization in China—Credit Risk, Liquidity
Mismatches, and Moral Hazard in Nonbank Intermediation 63
3.1. Risks Associated with New Forms of Financial Intermediation
3.2. Global Deleveraging Landscape: Economy- and Bank-Level View
3.3. TRuPs and the Impact of Basel III on U.S. Banks
3.4. Side Effects of Low Policy Interest Rates
3.5. Did Some Banking Systems Withstand International Contagion Because They Are
Less Globally Integrated
4.1. Financial Depth and Economic Outcomes
4.2. How Robust Are the Econometric Results?
4.3. Australia
4.4. The United States
4.5. Germany
4.6. Japan
4.7. China
tables
2.1. Indebtedness and Leverage in Selected Advanced Economies 22
2.2. Banking Financial Stability Indicators 23
2.3. Sovereign Market and Vulnerability Indicators 24
2.4. Key Features of Sovereign Funding and Bank Deleveraging Scenario s 34
2.5. Holdings of Treasury Securities, by Sector 46
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CONTENTS
2.6. Impact on Domestic Bank Balance Sheets from a Hypothetical Reversal of Foreign Inflows
into Local Bond Markets 59
2.7. Overview of Recent Macroprudential and Capital Flow Measures in Selected Emerging
Market and Other Economies 66
2.8. Indicators of Vulnerability and Policy Space For Emerging Market and Other Economie s 67
2.9. Summary of Updates in the Deleveraging Exercise 69
2.10. Assumptions on Key Macro-Financial Variables 69
2.11. Average Funding Rollover Rates 70
2.12. Amount of Additional Funding Required from Domestic Investors 71
2.13. Progress on the Implementation of Business Plans by Selected EU Banks 72
3.1. Financial Structure before the Crisis and Financial Stress during the Crisis
3.2. Snapshot of the New Regulatory Initiatives
3.3. Possible Effects of Regulatory Reforms on Financial Structure
3.4. Government and Central Bank Crisis Measures, 2007–10
3.5. Effect of Progress in Basel Capital Rules on Intermediation Structures
3.6. Indices, Subindices, and Data Sources
3.7. Snapshot of the New Global Regulatory Initiatives: Resolution of G-SIFIs
3.8. Status of Initiatives, by Selected Economy
3.9. Effect of Progress in Basel Liquidity Rules on Intermediation Structures
3.10. Effect of Financial Policies on Intermediation Structures: Crisis Intervention Policies
3.11. Basel Capital and Liquidity Progress Index
4.1. Financial Structure Measures in This GFSR
4.2. Financial Sector Size, Structure, and Economic Performance in Case Study Countries
4.3. Summary of Fixed-Effects Panel Estimation Results on Economic Outcomes, 1998–2010
4.4. List of Variables Used in Regression Analysis
4.5. Fixed-Effects Panel Estimation with Interaction Term, 1998–2010
4.6. Fixed-Effects Panel Estimation with Quadratic Term, 1998–2010
4.7. Systemic Banking Crises and Financial Structure Variables: Probit Model
Figures
1.1. Global Financial Stability Map 2
1.2. Global Financial Stability Map: Assessment of Risks and Conditions 3
1.3. Asset Price Performance since April 2012 GFSR 4
1.4. Cumulative Flows to Global Mutual Funds 4
1.5. Portfolio and Other Investment Capital Flows in the Euro Area, Excluding Central Bank s 5
1.6. Spain and Italy: Changes in Foreign Investor Shares and Yields 5
1.7. Euro Area Exposures to Greece, Ireland, Italy, Portugal, and Spai n 5
1.8. Periphery Minus Core Credit Default Swap Spread s 5
1.9. Total Deleveraging by Sample Banks 12
1.10. Reduction in Euro Area Supply of Credit under Alternative Policy Scenarios 12
1.11. Impact on Investment from EU Bank Deleveraging 12
1.12. Impact on Employment from EU Bank Deleveraging 12
1.13. Impact on GDP from EU Bank Deleveraging 13
1.14. Reduction in Bank Assets: Sensitivity to Periphery Sovereign Spread s 13
2.1. Government Bond Yields and Volatility 27
2.2. Bank Holdings of Government Bonds in Spain and Italy 27
2.3. Sovereign–Bank Nexus for Italy and Spain 27
2.4. Portfolio Outflows from Italy and Spain 27
2.5. Periphery Minus Core Bank Credit Default Swap Spread s 29
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CONTENTS
2.6. Euro Area Bank Debt Issuance 29
2.7. Bank Deposit Flows in the Euro Area 29
2.8. Bank Customer Deposit Trends 30
2.9. Changes in the Sovereign Investor Base 30
2.10. Bank Credit to Domestic Governments and the Private Sector,
Selected Euro Area Countries 30
2.11. Change in Euro Area Bank Cross-Border Exposures 33
2.12. Change in Interest Rate on New Bank Loans 33
2.13. Pressure on Euro Area Banks 33
2.14. Total Deleveraging by Sample Banks 35
2.15. Total Deleveraging Due to Selected Stand-Alone Factor s 35
2.16. Reduction in Supply of Credit to Euro Area: Core versus Periphery 35
2.17. Reduction in Credit Supply: Global Spillovers 37
2.18. Impact of EU Bank Deleveraging on GDP, 2013 Projection 37
2.19. Reduction in Credit Supply to Euro Area: Sensitivity to Periphery Sovereign
Spreads under Alternative Policy Scenarios 38
2.20. Bank Credit to Nonfinancial Firms in Italy and Spain 38
2.21. Corporate Bond Issuance Needs through End-2013 under Alternative
Deleveraging Scenarios 38
2.22. Projected Average Interest Rates on Outstanding Sovereign Deb t 39
2.23. Projected Sovereign Interest Expense as a Proportion of Revenue 39
2.24. Sovereign and Corporate Credit Ratings in the Euro Area Periphery 39
2.25. TARGET2 Projections 41
2.26. Borrowing from Central Banks 41
2.27. U.S. Five-Year Swap Rate and Implied Probability Distribution 42
2.28. Contributions to Change in Fitted 10-Year Nominal Treasury Yield 46
2.29. Private Sector Financial Balance Relative to Year before Outbreak of Financial Crisis,
Selected Advanced Economies 46
2.30. Change in 10-Year U.S. Treasury Yield in Recent Business Cycle s 46
2.31. Bank Credit in Past and Current Credit Cycles 47
2.32. Market Reaction: Heightened Uncertainty and Policy 47
2.33. U.S. Government Debt and Interest Payments 47
2.34. Foreign Investors’ Share of Outstanding Sovereign Debt, as of End-2011 48
2.35. Rollover Risk: Weighted Average Maturity of Sovereign Bond s 48
2.36. Primary Dealers’ Positioning in U.S. Treasury Securitie s 48
2.37. Bank Holdings of Government Debt in Selected Advanced Economies 52
2.38. Sensitivity of Japanese Banks to a 100 Basis Point Interest Rate Shock 53
2.39. Cumulative Purchases of Japanese Government Bonds since 2007 53
2.40. Japanese Bank Holdings of Government Debt to 2017 under Current Trend 53
2.41. Foreign Claims of Japanese Banks 54
2.42. Foreign Holdings of Japanese Government Securities 54
2.43. Emerging Market Bond Fund Assets under Management, by Geographic Location 55
2.44. Resilience of Inflows into Emerging Market Local-Currency Bond Funds
Despite Euro Area Stress 55
2.45. Performance of Emerging Market Equities and Bonds vs. Economic Surprise Index 56
2.46. Sensitivity of Selected Sovereign CDS to CDS of Euro Area Periphery, 2011–12 56
2.47. Net International Investment Position versus Gross External Debt, Selected
Economies, 2011 57
2.48. Share of Foreign-Currency-Denominated Bank Loans in Total Loan s 57
2.49. Ratio of Nonperforming Loans to Total Loans 57
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2.50. Change in Volatility of Local Bond Returns Relative to Foreign Participation
and Domestic Investor Base 58
2.51. Nonresident Holdings of Government Debt and Market Liquidity 58
2.52. Bank Holdings of Local Currency Government Debt and Additional Purchases
under Outflow Scenario 60
2.53. Credit Cycle Position of Selected Economies: 2006 and 2011 61
2.54. Change in Private Sector Credit, 2006–11 61
2.55. Change in Real House Prices, 2006–11 62
2.56. Nonperforming Loans in Selected Economies, 2008, 2010, and 2011 62
2.57. Ratio of Price to Book Value of Banks in Selected Economies, 2010–12 62
3.1. Size of the Global Financial Systems
3.2. Market-Based Intermediation
3.3. Market-Based Intermediation: New Financial Products
3.4. Scope and Scale: Interconnectedness, Funding, Concentration
3.5. Globalization
3.6. Illustration of Difference-in-Differences Method
4.1. Time Varying Correlations: Financial Globalization Inex
4.2. Time Varying Correlations: Financial Buffers
4.3. Financial Structure and Economic Growth, 1998–2010
Editor’s note: October 9, 2012
This PDF differs from the printed version in that the following error has been corrected:
The legend in Figure 2.11 on page 33 has been corrected from:
Government
Interbank
Private sector
To read:
Government
Interbank
Private sector
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PReFACe
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. Risks to financial stability have increased since the April 2012 GFSR, as confidence in the
global financial system has become very fragile. Despite significant and continuing efforts by European policy-
makers, the principal risk remains the euro area crisis. The current report highlights how risks have changed
over the past six months, traces the sources and channels of financial distress with a focus on bank deleverag-
ing and euro area market fragmentation, examines progress on the reform agenda and whether the reforms are
contributing to a safer financial system, and analyzes the relationship between financial structures and eco-
nomic outcomes to determine if certain financial systems are associated with higher or more stable growth.
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
Jan Brockmeijer and Robert Sheehy, both Deputy Directors; Peter Dattels and Laura Kodres, Assistant Direc-
tors; and Matthew Jones, Advisor. It has benefited from comments and suggestions from the senior staff in the
MCM department.
Individual contributors to the report were Sergei Antoshin, Nicholas Arregui, Serkan Arslanalp, Sophia
Avramova, Adolfo Barajas, Ana Carvajal, Eugenio Cerutti, Su Hoong Chang, Ken Chikada, Nehad
Chowdhury, Kay Chung, Sean Craig, Era Dabla-Norris, Reinout De Bock, Martin Edmonds, Jennifer Elliott,
Michaela Erbenova, Ellen Gaston, Jeanne Gobat, Tom Gole, Kristian Hartelius, Sanjay Hazarika, Changchun
Hua, Anna Ilyina, Patrick Imam, Marcel Kasumovich, William Kerry, John Kiff, Oksana Khadarina, Michael
Kleeman, Alexandre Kohlhas, Peter Lindner, Rebecca McCaughrin, Tommaso Mancini Griffoli, André
Meier, Fabiana Melo, Paul Mills, Srobona Mitra, Gianni de Nicolò, S. Erik Oppers, Nada Oulidi, Evan
Papageorgiou, Jaume Puig, Lev Ratnovski, André Santos, Jochen Schmittmann, Katharine Seal, Stephen
Smith, Tao Sun, Jay Surti, Narayan Suryakumar, Takahiro Tsuda, Nico Valckx, Constant Verkoren, Chris
Walker, Rodolfo Wehrhahn, Christopher Wilson, Xiaoyong Wu, Mamoru Yanase, Lei Ye, Luisa Zanforlin, and
Jianping Zhou.
Ivailo Arsov, Martin Edmonds, Mehmet Gorpe, Mustafa Jamal, Oksana Khadarina, and Yoon Sook Kim
provided analytical support. Gerald Gloria, Nirmaleen Jayawardane, Juan Rigat, and Ramanjeet Singh were
responsible for word processing. Joanne Johnson of the External Relations Department edited the manuscript
and coordinated production of the publication, with assistance from Gregg Forte.
This issue of the GFSR draws, in part, on a series of discussions with banks, clearing organizations, securi-
ties 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
September 14, 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 September 14, 2012. However, the analysis and
policy considerations are those of the contributing staff and should not be attributed to the Executive Direc-
tors, their national authorities, or the IMF.
International Monetary Fund | October 2012 ix
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