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     Global Financial Stability Report
     The Quest for Lasting Stability

       April 2012

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The April 2012 Global Financial Stability Report assesses changes in risks to financial stability over the past six months, focusing on sovereign vulnerabilities, risks stemming from private sector deleveraging, and assessing the continued resilience of emerging markets. The report probes the implications of recent reforms in the financial system for market perception of safe assets, and investigates the growing public and private costs of increased longevity risk from aging populations.

Contents

Front Matter

Executive Summary
Preface

I- Global Financial Stability Assessment

This chapter assesses changes in the global financial stability map, and lays out three different scenarios for responses to existing policy challenges, notably those associated with the sovereign debt crisis.
Boxes
    1.1 Addressing the Euro Area Crisis and Moving Toward a More Integrated Union
Tables
  Data 1.1 Indebtedness and Leverage in Selected Advanced Economies
  Data 1.2 Impact of European Bank Deleveraging under Three Policy Scenarios, through End-2013
  Data 1.3 Three Past Episodes of Household Deleveraging Associated with a Banking Crisis
Figures
  Data 1.1 Global Financial Stability Map
  Data 1.2 Global Financial Stability Map: Assessment of Risks and Conditions
  Data 1.3 Central Bank Balance Sheet Expansion
  Data 1.4 Asset Price Performance since September 2011 GFSR
  Data 1.5 WEO Projections of 2012 GDP Growth in Selected Euro Area Countries
    1.6 Policy Action to Entrench Stability and Avoid Downside Risks
  Data 1.7 External Positions and Gross Debt in Selected Euro Area Countries
  Data 1.8 Debt Burdens in Selected Advanced Economies, 2011
  Data 1.9 Household Net Financial Assets and Gross Debt, End-September 2011
  Data 1.10 Two Household Credit Cycles: 1980s and 2000s

II- Sovereigns, Banks, and Emerging Markets: Detailed Analysis & Policies

This chapter provides a detailed analysis of the challenges facing sovereigns, banks, and emerging markets, with a particular focus on bank deleveraging – assessing the likely degree of deleveraging, evaluating the probable consequences, and prescribing appropriate policy responses.
Boxes
    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
Tables
  Data
 Data		 2.1 Sovereign Debt: Market and Vulnerability Indicators
  Data 2.2 Share of Foreign Investors in Gross Refinancing Needs of Selected Euro Area Sovereigns under Three Policy Scenarios
  Data 2.3 Amount of Additional Funding from Domestic Investors Required by Selected Euro Area Sovereigns under Three Policy Scenarios, 2012
  Data 2.4 Capital Flow, Banking, and Policy Indicators in Selected Emerging and Other Markets
    2.5 Selected Bank Balance Sheet Items
  Data 2.6 Weights used in Calculation of the Net Stable Funding Ratio
  Data 2.7 Average Rollover Rates for Bank Funding under Three Policy Scenarios, by Funding Source
    2.8 Bank Deleveraging Strategy
Figures
  Data 2.1 Credit Default Swap Spreads in Selected Euro Area Government Bond Markets
  Data 2.2 Ten-Year Government Bond Yields and Trading Ranges, Selected Euro Area Countries, 2011–12
  Data 2.3 Daily Trading Volume of Italian Sovereign Bonds
  Data
Data
 Data		 2.4 Changes in the Sovereign Investor Base
  Data
Data
Data
 		 2.5 Custodial Holdings of Selected Euro Area Sovereign Bonds, 2011
  Data 2.6 Cumulative Change in Foreign Bank Holdings of Sovereign Debt of Selected Euro Area Countries, 2010:Q1–2011:Q3
  Data 2.7 Returns and Volatility of U.S. and European Sovereign Bonds, 2011
  Data 2.8 Ten-Year Peripheral Euro Area Government Bond Spreads over AAA Core
  Data 2.9 ECB Purchases of Government Bonds under Its SMP
  Data 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
  Data 2.13 Scenarios for Ratio of Government Interest Expenditure to GDP, Selected Advanced Economies
  Data 2.14 Foreign Investor Share of Total Sovereign Debt, 2009–11, Selected Euro Area Economies
  Data 2.15 Bank Leverage
  Data 2.16 Bank Loan-to-Deposit Ratios
  Data 2.17 Bank Price-to-Tangible Book Value
    2.18 Bank Five-Year Credit Default Swap Spreads
  Data 2.19 U.S. Prime Money Market Fund Exposures to Banks
  Data 2.20 Bank Debt Issuance
  Data 2.21 Cumulative Euro Area Deposit Flows, 2011–12
  Data 2.22 ECB Liquidity Facilities and Interbank Market Spreads
  Data 2.23 Credit Growth to the Nonfinancial Private Sector
  Data 2.24 Contributions to Euro Area Bank Lending Conditions for Companies
  Data 2.25 Change in Banks' Foreign Private Sector Claims, 2011:Q3
  Data 2.26 Contributions to Reduction in Aggregate Bank Leverage Ratio, Current Policies Scenario
  Data 2.27 Contributions to Aggregate Reduction in Bank Assets, Three Policy Scenarios
  Data 2.28 Factor Contributions to Aggregate Reduction in Bank Assets, Three Policy Scenarios
  Data 2.29 Reduction in Supply of Credit by Sample Banks, Three Policy Scenarios
  Data 2.30 European Banks: Composition of Assets, 2010
  Data 2.31 Reduction in Supply of Credit, by Banking System, Current Policies Scenario
  Data 2.32 Euro Area Credit Supply Shock: Three Scenarios Relative to Historical Episodes
  Data 2.33 United States: Nonfinancial Corporate Borrowing and Return on Assets
  Data 2.34 Euro Area: Nonfinancial Corporate Borrowing and Return on Assets
  Data 2.35 Reliance on Bank Financing by Nonfinancial Corporations
  Data 2.36 Change in Nonfinancial Corporate Debt, 2000–10
  Data 2.37 Nonfinancial Corporations: Interest Coverage Ratio and Implied Ratings
  Data 2.38 Corporate Credit Quality in Western Europe, 2007–12
  Data 2.39 Euro Area Bank Deleveraging in Emerging Markets, 2008 and 2011
  Data 2.40 Deleveraging in Emerging Markets by Selected Advanced Economy and EM Local Banks, 2011:Q3
  Data 2.41 Emerging Market Credit Cycle for Euro Area Banks and Other Banks, 2010–11
  Data 2.42 Long-Term Specialty Finance in Emerging Markets
  Data 2.43 Emerging Europe: Cross-Border Bank Flows and Foreign Exchange Funding Costs
  Data 2.44 Reduction in Supply of Credit by Sample Banks to Emerging Europe: Current and Weak Policies Scenarios
  Data 2.45 Loans Denominated in Foreign Currency as a Share of GDP, Selected Countries in Emerging Europe, 2007 and 2011
  Data 2.46 Emerging Europe: Reserve Coverage of Short-Term External Debt, Selected Countries, 2007 and 2011
  Data 2.47 Emerging Europe: Sovereign Gross Financing Needs, Selected Countries, 2012
  Data 2.48 Net Flows in Emerging Market Funds, 2011–12
  Data 2.49 Performance of Emerging Market Assets, 2011–12
  Data 2.50 Changes in Residential Property Prices and Sales in China, 2011–12
  Data 2.51 Ratio of House Price to Annual Household Income for Selected Cities, 2011
  Data 2.52 China: Projected Nonperforming Loan Rates under Adverse Macroeconomic Scenarios
  Data 2.53 Annual Change in Private Credit, 2009–11
  Data 2.54 Capital Generation under Three Policy Scenarios
    2.55 How Can Banks Improve Capital and Liquidity Ratios?
  Data 2.56 United States: Sovereign Market Indicators, March 2012
  Data 2.57 Germany: Sovereign Market Indicators, March 2012
  Data 2.58 Japan: Sovereign Market Indicators, March 2012
  Data 2.59 ECB LTROs and Bank Term Funding
    2.60 Sovereign Bond Yields for Italy and Spain

III- Safe Assets: Financial System Cornerstone?

This chapter examines the various roles of safe assets, the effects of different regulatory, policy, market distortions, and potential future pressure points that may arise from these.
Boxes
    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
Tables
    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
Figures
    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
  Data 3.8 Official Reserve Accumulation, by Instrument
  Data 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
  Data 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

IV- The Financial Impact of Longevity Risk

This chapter highlights the potentially very large financial implications of longevity risk—that is, the risk that people may live longer than expected.
Boxes
    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
Tables
    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
Figures
  Data 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
  Data 4.4 Increase in Actuarial Liabilities from Three-Year Increase in Longevity, by Discount Rate
  Data 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 Transaction
    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

Statistical Appendix

  Figures
  Data 1. Major Net Exporters and Importers of Capital in 2011
    2. Sovereign Credit Default Swap Spreads
    3. Selected Credit Default Swap Spreads
    4. Selected Spreads
    5. Implied Volatility Indices
  Data 6. Twelve-Month Forward Price/Earnings Ratios
  Data 7. United States: Corporate Bond Market
  Data 8. Euro Area: Corporate Bond Market
  Data 9. United States: Commercial Paper Market
 
  Tables
  Data 1. Selected Indicators on the Size of the Capital Markets, 2010
  Data 2. MSCI Equity Market Indices
  Data 3. Emerging Market Bond Index: EMBI Global Yield Spreads
  Data 4. External Financing in Emerging and Developing Economies: Total Bonds, Equities, and Loans
  Data 5. External Financing in Emerging and Developing Economies: Bonds
  Data 6. External Financing in Emerging and Developing Economies: Equities
  Data 7. External Financing in Emerging and Developing Economies: Loans
  Data 8. Equity Valuation Measures: Dividend-Yield Ratios
  Data 9. Equity Valuation Measures: Price/Earnings Ratios
  Data 10. Emerging Markets: Mutual Funds
 
(*)Please note that effective with the April 2011 issue, the IMF’s Statistics Department has assumed responsibility for compiling the Financial Soundness Indicators tables and they are no longer part of this appendix. However, these tables will continue to be linked to the GFSR Statistical Appendix on the IMF’s public website.
 
 
The following symbols have been used throughout this appendix:

. . . 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 and 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 are equivalent to ¼ of 1 percentage point).

“n.a.” means not applicable.

Minor discrepancies between constituent figures and totals are due to rounding.

 
Disclaimer: 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.

 
 

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