- International Monetary Fund. Monetary and Capital Markets Department
- Published Date:
- October 2016
World Economic and Financial Surveys
Global Financial Stability Report
Fostering Stability in a Low-Growth, Low-Rate Era
©2016 International Monetary Fund
Cover and Design: Luisa Menjivar and Jorge Salazar
Composition: AGS, An RR Donnelley Company
Joint Bank-Fund Library
Names: International Monetary Fund.
Title: Global financial stability report.
Other titles: GFSR | World economic and financial surveys, 0258-7440
Description: Washington, DC : International Monetary Fund, 2002- | Semiannual | Some issues also have thematic titles. | Began with issue for March 2002.
Subjects: LCSH: Capital market—Statistics—Periodicals. | International finance—Forecasting—Periodicals. |
Classification: LCC HG4523.G557
ISBN 978-1-51355-958-2 (Paper)
Disclaimer: The Global Financial Stability Report (GFSR) is a survey by the IMF staff published twice a year, in the spring and fall. The report draws out the financial ramifications of economic issues highlighted in the IMF’s World Economic Outlook (WEO). The report was prepared by IMF staff and has benefited from comments and suggestions from Executive Directors following their discussion of the report on September 23, 2016. The views expressed in this publication are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Directors or their national authorities.
Recommended citation: International Monetary Fund, Global Financial Stability Report—Fostering Stability in a Low-Growth, Low-Rate Era (Washington, October 2016).
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- Assumptions and Conventions
- Further Information and Data
- Executive Summary
- IMF Executive Board Discussion Summary
- Chapter 1 Financial Stability Challenges in a Low-Growth, Low-Rate Era
- Financial Stability Overview
- Medium-Term Risks Rising
- Emerging Market Economies: A Smooth Deleveraging?
- Global Stability Challenges in the New Era
- Box 1.1. Impact of Brexit
- Box 1.2. The Basel Committee Agenda: Achieving Certainty without Compromising Integrity
- Annex 1.1. Financial Stagnation and Protectionism Scenario
- Chapter 2 Monetary Policy and the Rise of Nonbank Finance
- Trends in the Transmission of Monetary Policy
- Channels of Monetary Policy Transmission
- Empirical Evidence on the Transmission of Monetary Policy
- Policy Discussion
- Conclusions and Policy Recommendations
- Box 2.1. Monetary Policy and the Stock Returns of Banks and Nonbanks
- Box 2.2. Exchange Rate Volatility, Monetary Policy, and Nonbanks
- Annex 2.1. Aggregate Vector Autoregression Analysis
- Annex 2.2. Microanalysis of the Behavior of Financial Firms
- Annex 2.3. Microanalysis of Borrower Behavior
- Chapter 3 Corporate Governance, Investor Protection, and Financial Stability in Emerging Markets
- Nexus between Corporate Governance, Investor Protection, and Financial Stability
- The Evolving Nature of Corporate Governance and Investor Protection
- Corporate Governance, Investor Protection, and Financial Stability
- Conclusions and Policy Implications
- Box 3.1. Examples of Corporate Governance Reforms in Selected Emerging Market Economies
- Box 3.2. Strengthening Corporate Governance for State-Owned Enterprises in China
- Annex 3.1. Emerging Market Corporate Fundamentals and Governance
- Annex 3.2. Analysis of Firm-Level Stock Price Comovement and Crash Risk
- Annex 3.3. Estimating the Impact of Global Financial Shocks on Firm Equity Returns
- Annex 3.4. Data Sources and Country Coverage
- Table 1.1.1 Brexit Implications for the U.K. Financial Sector
- Annex Table 1.1.1. Financial Stagnation and Protectionism Scenario, Assumptions
- Table 3.1. Firm-Level Governance and Firm Characteristics
- Table 3.2. Corporate Governance, Investor Protection, and Capital Market Development
- Annex Table 3.1.1. Firm Governance and Fundamentals: Selected Regressions
- Annex Table 3.2.1. Firm-Level Stock Price Comovement and Crash Risk
- Annex Table 3.3.1. Global Financial Shocks and Firm Equity Returns
- Annex Table 3.4.1. Data Sources
- Figure 1.1. Global Financial Stability Map: Risks and Conditions
- Figure 1.2. Global Financial Stability Map: Assessment of Risks and Conditions
- Figure 1.3. Brexit’s Impact on Financial Markets
- Figure 1.4. Decomposition of Equity Market Performance
- Figure 1.5. Policy Uncertainty
- Figure 1.6. Global Growth Momentum and Interest Rates
- Figure 1.7. Sovereign Bond Yields and Term Premiums in Advanced Economies
- Figure 1.8. Drivers of Government Bond Yields
- Figure 1.9. Effects on Credit Growth of Shocks to Equity Prices
- Figure 1.10. Developed and Emerging Market Economy Banks: Capital and Liquidity Indicators
- Figure 1.11. Price-to-Book and Return on Equity Decomposition, 2006–15
- Figure 1.12. Advanced Economies: Trends in Bank Profitability
- Figure 1.13. Bank Performance in a “Cyclical Recovery” Scenario, by Region
- Figure 1.14. Stylized Net Capital Impact of Nonperforming Loan Disposal at Euro Area Banks
- Figure 1.15. European and U.S. Banks—Operating Efficiency and Cost Rationalization
- Figure 1.16. European Banks’ Elevated Cost of Funding
- Figure 1.17. European Bank Profitability in a “Structural Reform” Scenario
- Figure 1.18. Japanese Banks and Foreign Exchange Funding
- Figure 1.19. Low Interest Rates and Insurance Companies
- Figure 1.20. U.S. Pension Fund Discount Rate
- Figure 1.21. Pension Funding Shortfalls in the United States and the United Kingdom
- Figure 1.22. Portfolio Flows to Emerging Market Economies and Asset Prices
- Figure 1.23. Corporate Borrowing: Stabilized, but at a High Level
- Figure 1.24. Scenarios for Deleveraging in Emerging Market Firms and Default Rates
- Figure 1.25. Sensitivity of Emerging Market Economy Assets to Global Policy Uncertainty
- Figure 1.26. China: Credit Overhang and Shadow Credit
- Figure 1.27. China: Bank Linkages to the Structured Investment Complex
- Figure 1.28. Financial Stagnation and Protectionism Scenario: Simulated Peak Effects
- Figure 1.1.1. Brexit Implications for the United Kingdom
- Figure 1.1.2. Brexit Impact on the U.K. Commercial Real Estate Markets
- Annex Figure 1.1.1. Financial Stagnation and Protectionism Scenario, Aggregated Simulated Paths
- Figure 2.1. The Relative Importance of Nonbank Financial Intermediaries
- Figure 2.2. Trends in the Transmission of Monetary Policy
- Figure 2.3. Transmission of Monetary Policy through the Reaction of Financial Intermediaries
- Figure 2.4. Marked-to-Market Assets by Sector
- Figure 2.5. Value at Risk in Risk Management by Asset Class and Year
- Figure 2.6. Transmission of Monetary Policy and Size of Nonbank Financial Sector
- Figure 2.7. Response to a Monetary Policy Contraction
- Figure 2.8. Risk Taking and Monetary Policy in the United States
- Figure 2.9. Monetary Policy and Total Assets Owned by Financial Intermediaries
- Figure 2.10. Bank Regulation, Monetary Policy, and Total Assets Owned by Financial Institutions
- Figure 2.11. Risk Taking by Mutual Funds and Monetary Policy
- Figure 2.12. Bond Finance around the World
- Figure 2.13. Bond Financing and Monetary Policy
- Figure 2.1.1. Stock Price Responses to Unconventional Monetary Policy
- Figure 2.2.1. Sensitivity of Financial Firms to Exchange Rate Changes, 1995–2016
- Figure 2.2.2. Foreign Currency Liabilities of Banks and Nonbanks, 2001–14
- Annex Figure 2.1.1. Trends in the Transmission of Monetary Policy—Robustness
- Annex Figure 2.2.1. Summary Statistics
- Figure 3.1. Corporate Governance and Equity Returns
- Figure 3.2. Corporate Governance and Volatility of Stock Market Returns in Emerging Market Economies
- Figure 3.3. Ownership Structure and Closely Held Shares
- Figure 3.4. Minority Shareholder Protection
- Figure 3.5. Country-Level Corporate Governance and Investor Protection
- Figure 3.6. Emerging Market Firm-Level Governance Index
- Figure 3.7. Corporate Governance and Firm-Level Valuation
- Figure 3.8. Firm-Level Governance and Valuation
- Figure 3.9. Corporate Governance and Market Liquidity
- Figure 3.10. Stock Return Comovement
- Figure 3.11. Stock Market Comovement (R2) over Time
- Figure 3.12. Crash Risk
- Figure 3.13. Event Study: Firm-Level Governance and Equity Returns
- Figure 3.14. Impact of Global Financial Shocks on Equity Returns
- Figure 3.15. Corporate Governance and Selected Balance Sheet Indicators
- Figure 3.16. Firm-Level Governance and the Bond Market
- Figure 3.17. Firm-Level Governance and Solvency
- Figure 3.18. Country-Level and Firm-Level Governance and Short-Term Debt
- Figure 3.2.1. Selected Emerging Market Economies: State-Owned Enterprises
- Figure 3.2.2. Leverage and Equity Price Comovement of State-Owned Enterprises in China
Assumptions and Conventions
The following conventions are used throughout the Global Financial Stability Report (GFSR):
… to indicate that data are not available or not applicable;
—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, 2015–16 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years or months (for example, 2015/16) to indicate a fiscal or financial year.
“Billion” means a thousand million.
“Trillion” means a thousand billion.
“Basis points” refers to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
If no source is listed on tables and figures, data are based on IMF staff estimates or calculations.
Minor discrepancies between sums of constituent figures and totals shown reflect rounding.
As used in this report, the terms “country” and “economy” do 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.
Further Information and Data
The data and analysis appearing in the GFSR are compiled by the IMF staff at the time of publication. Every effort is made to ensure, but not guarantee, their timeliness, accuracy, and completeness. When errors are discovered, there is a concerted effort to correct them as appropriate and feasible. Corrections and revisions made after publication are incorporated into the electronic editions available from the IMF eLibrary (www.elibrary.imf.org) and on the IMF website (www.imf.org). All substantive changes are listed in detail in the online tables of contents.
For details on the terms and conditions for usage of the contents of this publication, please refer to the IMF Copyright and Usage website, www.imf.org/external/terms.htm.
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.
The current report finds that short-term risks to global financial stability have abated since April 2016. The rise of commodity prices from their lows, along with the ongoing adjustments in emerging markets, has supported a recovery in capital flows. In advanced economies, weaker growth has been mitigated by the prospect of further monetary accommodation. Despite this decrease in short-term risk, the report finds that medium-term risks continue to build. The political climate is unsettled in many countries, making it more difficult to tackle legacy problems. Financial institutions in advanced economies face a number of structural and cyclical challenges. Corporate leverage in many emerging market economies remains high and would fall only gradually under the report’s baseline scenario. Policymakers need a more potent and balanced policy mix to deliver a stronger path for growth and financial stability. There is an urgent need to raise global growth, strengthen the foundations of the global financial system, and bolster confidence. The report also examines how the rise of nonbank financing has altered the impact of monetary policy and finds that the fears of a decline in the effectiveness of monetary policy are unfounded. It appears that the transmission of monetary policy is in fact stronger in economies with larger nonbank financial sectors. Finally, the report examines the link between corporate governance, investor protection, and financial stability in emerging market economies. It finds that the improvements over the past two decades have helped bolster the resilience of their financial systems. These benefits strengthen the case for further reform.
The analysis in this report has been coordinated by the Monetary and Capital Markets (MCM) Department under the general direction of Ratna Sahay, Acting Director. The project has been directed by Peter Dattels and Dong He, both Deputy Directors, as well as by Gaston Gelos and Matthew Jones, both Division Chiefs. It has benefited from comments and suggestions from the senior staff in the MCM Department.
Individual contributors to the report are Ali Al-Eyd, Adrian Alter, Nicolás Arregui, Mohamed Bakoush, Luis Brandão-Marques, John Caparusso, Stephen Cecchetti, Sally Chen, Yingyuan Chen, Fabio Cortes, Cristina Cuervo, Martin Edmonds, Selim Elekdag, Jennifer Elliott, Michaela Erbenova, Alan Xiaochen Feng, Caio Ferreira, Rohit Goel, Lucyna Gornicka, Xinhao Han, Thomas Harjes, Sanjay Hazarika, Geoffrey Heenan, Dyna Heng, Eija Holttinen, Henry Hoyle, Hibiki Ichiue, Viacheslav Ilin, Mustafa Jamal, Andy Jobst, David Jones, Oksana Khadarina, Tak Yan Daniel Law, Yang Li, Peter Lindner, Nicolás Magud, Sherheryar Malik, Rebecca McCaughrin, Naoko Miake, Win Monroe, Machiko Narita, Evan Papageorgiou, Vladimir Pillonca, Lev Ratnovski, Luca Sanfilippo, Dulani Senevirante, Juan Solé, Ilan Solot, Garence Staraci, Nobuyasu Sugimoto, Narayan Suryakumar, Shamir Tanna, Laura Valderrama, Francis Vitek, Dmitry Yakovlev, Jeffrey Williams, Nicholas Wood, and Rasool Zandvakil. Magally Bernal, Carol Franco, Lilit Makaryan, Juan Rigat, and Adriana Rota were responsible for word processing.
Gemma Diaz from the Communications Department led the editorial team and managed the report’s production with support from Michael Harrup, Linda Kean, and Joe Procopio, and editorial assistance from Lorraine Coffey, Gregg Forte, Susan Graham, Lucy Scott Morales, Nancy Morrison, Annerose Wambui Waithaka, Katy Whipple,
AGS (an RR Donnelley Company), and EEI Communications.
We are thankful to the Research Department at Keefe, Bruyette & Woods (KBW) for insightful discussions and data support relating to the sensitivity of bank earnings to changes in interest rates. This particular issue of the GFSR draws in part on a series of discussions with banks, securities firms, asset management companies, hedge funds, standard setters, financial consultants, pension funds, central banks, national treasuries, and academic researchers.
This GFSR reflects information available as of September 19, 2016. 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 23, 2016. However, the analysis and policy considerations are those of the contributing staff and should not be attributed to the IMF, its Executive Directors, or their national authorities.