- International Monetary Fund. Monetary and Capital Markets Department
- Published Date:
- April 2016
World Economic and Financial Surveys
Global Financial Stability Report
Potent Policies for a Successful Normalization
©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. | Economic stabilization—Periodicals.
Classification: LCC HG4523.G557
ISBN 978-1-51350-677-7 (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 March 28, 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—Potent Policies for a Successful Normalization (Washington, April 2016).
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- Assumptions and Conventions
- Executive Summary
- IMF Executive Board Discussion Summary
- Chapter 1 Potent Policies for a Successful Normalization
- Financial Stability Overview
- Global Market Disruptions and Risks to the Baseline
- Emerging Market Economies and China’s Complex Transition
- Advanced Economies: Banks’ Legacy Problems and New Challenges
- Scenarios and Policies
- Box 1.1. Developments in Financial Conditions
- Box 1.2. Brazil: Financial System Risks
- Box 1.3. Impact of Low and Negative Rates on Banks
- Box 1.4. Euro Area Financial Architecture—Progress, but Gaps Remain
- Annex 1.1. China: Corporate Loans Potentially at Risk
- Annex 1.2. Successful Normalization and Global Market Disruption Scenarios
- Chapter 2 The Growing Importance of Financial Spillovers from Emerging Market Economies
- International Financial Spillovers—Definition and Drivers
- Spillovers through Financial Markets
- What Explains the Rise in Emerging Market Financial Spillovers?
- Cross-Border Financial Market Effect of News about Fundamentals
- A Closer Look at the Portfolio Rebalancing Channel of Spillovers
- Box 2.1. Spillover Channels from China—From Real to Financial Linkages?
- Box 2.2. Bilateral Cross-Border Exposure through Mutual Funds
- Annex 2.1. Estimation of Spillovers and Assessment of the Relative Importance of Spillover Channels
- Annex 2.2. Description and Definition of Variables
- Annex 2.3. Surprise Approach
- Annex 2.4. Common Investor Channel for Financial Spillovers from Emerging Market Economies
- Chapter 3 The Insurance Sector—Trends and Systemic Risk Implications
- Insurance and Systemic Risk: Conceptual Issues
- Trends in Global Insurance Markets
- Comovement, Financial Stability, and Systemic Risk
- What Is Behind the Higher Systemic Risk Contributions?
- Insurance Sector Regulation
- Conclusions and Policy Implications
- Box 3.1. Insurance Models
- Box 3.2. Designation of Global Systemically Important Insurers
- Box 3.3. Reinsurance, Retrocession, and Financial Stability
- Box 3.4. Insurance in China
- Box 3.5. Inward and Outward Spillovers and Centrality of European Insurers
- Annex 3.1. Regulatory Standards for Valuations in the Insurance Sector
- Annex 3.2. Data and Methodology
- 1.1. The Effects of Energy Commodities on Emerging Market Economies and Other Economies and Their Buffers and Policy Indicators
- 1.2. Loss-of-Market-Access Indicators
- 1.3. Selected Indicators of Advanced Economy Banks
- Annex 1.1.1. Chinese Nonfinancial Firms in Sample: Companies, Borrowing, and Debt-at-Risk
- Annex 1.2.1. Successful Normalization Scenario Assumptions
- Annex 1.2.2. Global Market Disruption Scenario Assumptions
- Annex 2.2.1. Definitions of Variables
- Annex 3.1.1. Regulatory Standards for Valuations in the Insurance Sector
- Annex 3.2.1. Determinants of Life Insurers’ Asset Allocation to Higher-Risk Assets
- 1.1. Global Financial Stability Map: Risks and Conditions
- 1.2. Global Financial Stability Map: Components of Risks and Conditions
- 1.3. Recent Market Developments
- 1.4. Equity Risk Premiums and Earnings Decompositions
- 1.5. Global Oil Prices, Equity, and Bond Markets
- 1.6. U.S. High-Yield Markets and Lending Conditions
- 1.7. Deterioration of Inflation Expectations
- 1.8. Interest Rate Expectations and Bond Term Premiums
- 1.9. Simulated Peak Effects under Global Market Disruption Scenario
- 1.10. China and Emerging Market Economies: Credit and Profitability
- 1.11. Chinese Listed Companies: Leverage, Interest Coverage, and Debt-at-Risk
- 1.12. Chinese Listed Companies’ Performance
- 1.13. China: Corporate Bond Issuance and Pricing
- 1.14. China: Equity Markets and Exchange Rates
- 1.15. The Global Commodity Crisis
- 1.16. Corporations, Sovereigns, and Their Nexus
- 1.17. Banking System Health
- 1.18. Oil Prices and Economic Links in the Caucasus and Central Asia, and Middle East and North Africa Regions
- 1.19. Performance of the Banking System in the Caucasus and Central Asia, and Middle East and North Africa Regions since June 2014
- 1.20. Falling Bank Valuations Reflect Weakening Outlook
- 1.21. Valuations Reflect Legacy and Business Model Challenges
- 1.22. Simulated Peak Effects under Successful Normalization Scenario
- Annex 1.1.1. China: Reported NPL + SML Ratio, and Debt-at-Risk Ratio
- Annex 1.1.2. Sensitivity of Variations in Interest Coverage Threshold
- Annex 1.1.3. Corporate Sector Loans Potentially at Risk
- Annex 1.2.1. Successful Normalization Scenario Simulation Results
- Annex 1.2.2. Global Market Disruption Scenario Simulation Results
- 2.1. Trade between Advanced and Emerging Market Economies
- 2.2. Global Financial Integration
- 2.3. Global Gross Exports and Domestic Value-Added Exports
- 2.4. Example of Shock Transmission through Common Lenders
- 2.5. Advanced Economies’ Financial Exposures to Emerging Market Economies
- 2.6. Spillover Indices for Various Asset Classes and Components
- 2.7. Spillovers before and after the Global Financial Crisis
- 2.8. Average Equity Spillovers from Selected Emerging Market Economies
- 2.9. Contribution to Variation in Emerging Market Economy Equity Spillovers, 1995–2014
- 2.10. Emerging Market Economy Outward Equity Spillovers by Sector
- 2.11. Chinese Industrial Sector: Equity Market Spillovers to Advanced Economy Sectors
- 2.12. Emerging Market Economy Equity Market Spillovers: Role of Firm-Level Factors
- 2.13. Contribution to Variation in Emerging Market Economy Foreign Exchange Spillovers, 1995–2014
- 2.14. Foreign Exchange Spillovers of Selected Emerging Market Economies, 2011–15
- 2.15. Spillover of Growth Surprises in Major Emerging Market Economies
- 2.16. Financial Interdependence on Emerging Market Economies through Global Funds
- 2.17. Contributions to Variation in Bond and Equity Returns in Advanced and Emerging Market Economies
- 3.1. Selected Countries: Relative Size of Financial Intermediaries
- 3.2. Systemic Risks in Insurance
- 3.3. Global Insurance Sector Size and Market Structures
- 3.4. Changing Insurance Business Models and Systemic Risk Factors
- 3.5. Time-Series Clustering of Life Insurers on Equity Returns
- 3.6. Variation of Insurers’ Equity Return Due to First Principal Component
- 3.7. CoVaR Indices
- 3.8. Conditional Capital Shortfall
- 3.9. Forward-Looking Default Correlation Networks
- 3.10. Spillovers between Insurance and Other Financial Sectors
- 3.11. Life Insurers’ Investments
- 3.12. Sensitivity of Life Insurers’ Risky Assets to Firm-Level Factors
- 3.13. U.S. Life Insurers’ Higher-Risk Assets
- 3.14. U.S. Insurance Sector Bond Holdings and Turnover
- 3.15. Insurers’ Interest Rate and Market Return Sensitivity
- 3.16. Compliance with Insurance Core Principles
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, 2014–15 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years or months (for example, 2014/15) 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 global financial stability risks have risen since October 2015. The report finds that the outlook has deteriorated in advanced economies because of heightened uncertainty and setbacks to growth and confidence, while declines in oil and commodity prices and slower growth have kept risks elevated in emerging markets. These developments have tightened financial conditions, reduced risk appetite, raised credit risks, and stymied balance sheet repair. A broad-based policy response is needed to secure financial stability. Advanced economies must deal with crisis legacy issues, emerging markets need to bolster their resilience to global headwinds, and the resilience of market liquidity should be enhanced. The report also examines financial spillovers from emerging market economies and finds that they have risen substantially. This implies that when assessing macrofinancial conditions, policymakers may need to increasingly take into account economic developments in emerging market economies. Finally, the report assesses changes in the systemic importance of insurers, finding that across advanced economies the contribution of life insurers to systemic risk has increased in recent years. The results suggest that supervisors and regulators should take a more macroprudential approach to the sector.
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 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 Viral Acharya, Ali Al-Eyd, Adrian Alter, Luis Brandão-Marques, Carlos Caceres, John Caparusso, Jorge Chan-Lau, Qianying Chen, Sally Chen, Yingyuan Chen, Kay Chung, Fabio Cortes, Cristina Cuervo, Alfredo Cuevas, Martin Edmonds, Jesse Eiseman, Selim Elekdag, Jennifer Elliott, Michaela Erbenova, Alan Feng, Caio Ferreira, Ellen Gaston, Tryggvi Gudmundsson, Anastasia Guscina, Michael Hafeman, Fei Han, Xinhao Han, Thomas Harjes, Sanjay Hazarika, Geoffrey Heenan, Dyna Heng, Henry Hoyle, Benjamin Huston, Gregorio Impavido, Mustafa Jamal, Andy Jobst, Bradley Jones, David Jones, Oksana Khadarina, John Kiff, Ivo Krznar, Suchitra Kumarapathy, Frederic Lambert, Tak Yan Daniel Law, Sheheryar Malik, Alejandro Lopez Mejia, Inutu Lukonga, Hui Miao, Paul Mills, Rebecca McCaughrin, Win Monroe, Nico Marina Moretti, Aditya Narain, Erlend Nier, Evan Papageorgiou, Vladimir Pillonca, Fabiano Rodrigues Bastos, Christian Saborowski, Luca Sanfilippo, Juan Sole, Ilan Solot, Moez Souissi, Nobuyasu Sugimoto, Jay Surti, Narayan Suryakumar, Shamir Tanna, Nico Valckx, Francis Vitek, Jeffrey Williams, Kai Yan, and Ling Zhu. Magally Bernal, Carol Franco, Juan Rigat, and Adriana Rota were responsible for word processing.
Joe Procopio from the Communications Department led the editorial team and managed the report’s production with support from Katy Whipple and Linda Kean and editorial assistance from Michelle Chen, Lucy Scott Morales, Sherrie Brown, Gregg Forte, EEI Communications, and AGS (an RR Donnelley Company).
This particular edition of the GFSR draws in part on a series of discussions with banks, securities firms, asset management companies, hedge funds, standards setters, financial consultants, pension funds, central banks, national treasuries, and academic researchers.
This GFSR reflects information available as of March 25, 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 March 28, 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.