Professor Wouter den Haan

Transcription

1 Department of Economics and the Centre for Macroeconomics Assessing Global Financial Stability: where do we stand? Tobias Adrian Financial Counsellor and Director of the Monetary and Capital Markets Department of the International Monetary Fund (IMF) Professor Wouter den Haan Chair, LSE Hashtag for Twitter users: #LSEeconomics

2 A Framework for Assessing Global Financial Stability LONDON SCHOOL OF ECONOMICS FRIDAY, OCTOBER 27, 2017 TOBIAS ADRIAN, FINANCIAL COUNSELLOR AND DIRECTOR, MONETARY AND CAPITAL MARKETS DEPARTMENT

3 Outline The GFSR o The IMF s assessment of risks to global financial stability Growth-at-Risk o Mapping financial stability risks into macroeconomic performance Going forward o Strengthening the analytical framework for financial stability

4 Fall 2017 GFSR IS GROWTH AT RISK?

5 Near term global financial stability risks are improving Emerging market risks Risks Credit risks 1 Apr 2017 GFSR Oct 2017 GFSR Global Financial Crisis Macroeconomic risks Market & liquidity risks Away from center signifies higher risks, easier monetary and financial conditions, or higher risk appetite Monetary & financial Conditions Risk appetite 1

6 to 0 0 to 1 1 to 2 2 to 3 3 to 4 4 to 5 5 to 6 6 to 7 7 to 8 >8 Percent Basis Points Too much money chasing too few yielding assets Fewer Yielding Assets (Global Investment-Grade Fixed Income Instruments) Compressing Premiums As Credit Quality Worsens (Market Risk Premium, Share of IG BBB Bonds) 2 US $tn Credit Quality $2tn $16tn Market Risk Premium Yield (Percent) 4

7 Standard deviations from mean Credit Gap (percentage points) The volatility paradox: low volatility breeds complacency 3 Low Volatility and Rising Valuations (AE Assets, Percentile Rank) Volatilities Govt bond Corp bond Leading to Rising Leverage And Complacency Model-based probability of default (left scale) Financing conditions (left scale) Housing Equities Credit gap (right scale)

8 Higher leverage and debt service challenges Debt Continues To Rise (Average Debt-to-GDP Ratios for G20 Economies, Percent).. Increasing Debt Service Burdens (Deviation From Mean, Percentage Points, 2016) General Government Non-Financial Companies Households Debt service ratio CHN 6 TUR 5 4 RUS CAN 3 BRA 2 FRA IND AUS 1 MEX KOR 0 IDN ZAF ITA -1 GBR -2 USA JPN DEU Debt-to-GDP 3

9 Benign external conditions; EM vulnerabilities remain 5 Risk Premiums Have Compressed (Market Risk + Term Premium, Basis Points) Portfolio Flows Have Rebounded (Billions of USD, Four-quarter Rolling Sum) Corporate Leverage Remains High (Total Debt to EBITDA, Multiple) 75 th percentile Mean 25 th percentile 4

10 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 China: A delicate balancing act Regulatory Tightening of Small and Medium Sized Banks (Monthly Change, Three Month Average, Billions of RMB) 1,200 1, On-balance sheet shadow credit Could Impact Credit Growth (Credit Growth Under Shadow Credit Growth Assumption; Percent) Unsecured interbank borrowing E Zero shadow credit growth 5

11 Probability Growth-at-Risk Rising Leverage Foresees a Riskier Outlook (Probability Density Forecasts for GDP Growth Made One Year Earlier) With asset prices and leverage With asset prices Without asset prices and leverage Annualized GDP growth (percent) 11

12 Rising household debt could challenge growth 8 Short Term Expansions May Pose Future Risks to Growth (Growth Effect of a 1 Percent Increase in HH Debt to GDP, Percent) Effective Policies & Institutions Could Mitigate These Risks (Growth Effect at t+3 of a 1 Percent Increase in HH Debt to GDP, Percent) Macroprudential Policies Can Curb Household Credit Growth (Impact of a Tightening on Real Household Credit Growth, Percentage Points) Advanced Economies Emerging Economies 0.50 Least Effective Average Most Effective 0.00 Advanced Economies Emerging Economies t t+3 Years

13 Current Monetary policy support: Still needed Gradual Central Bank Balance Sheet Reduction (Central Bank Outstanding Assets, Trillions of USD) Aggregate United States Analysts Projections Japan Euro Area UK Prolonged Low Policy Rates (Market Implied Policy Rates, Percent) United States Japan United Kingdom 9 Euro Area

14 Growth at Risk A CONCEPTUAL FRAMEWORK FOR FINANCIAL STABILITY RISKS AND MACROECONOMIC PERFORMANCE

15 Thinking through financial stability Defining financial stability Measuring financial stability

16 Rising leverage signals higher downside growth risks at longer time horizons 10 Advanced economies: three years ahead Emerging market economies: three years ahead Quantile Quantile -0.4

17 Percent Standard Deviations Tighter financial conditions forecast greater downside tail risk to global growth FCI (RHS) Downside and upside risks (5 th and 95 th percentiles) Median Lower growth and tighter financial conditions

18 One-period-ahead output One-period-ahead output One-period-ahead GDP and financial conditions 12 Increasing risk premia signal a more pessimistic growth outlook. as does elevated leverage Risk Premium Risk premium (percent) Credit-to-output ratio Credit-to-output ratio Source: IMF staff estimates. Note: Values are normalized with steady state = 1.

19 Simple debt tax ameliorates risk of leverageinduced recessions 13 Baseline Simple Output t - 4 t - 3 t - 2 t - 1 t t + 1 t + 2 t + 3 t Asset Prices t - 4 t - 3 t - 2 t - 1 t t + 1 t + 2 t + 3 t Credit - to - Output Ratio Inflation (percent) t - 4 t - 3 t - 2 t - 1 t t + 1 t + 2 t + 3 t t - 4 t - 3 t - 2 t - 1 t t + 1 t + 2 t + 3 t Source: IMF staff estimates. Note: Values are normalized with steady state = 1, except for inflation (in percent).

20 Thank you

21 Department of Economics and the Centre for Macroeconomics Assessing Global Financial Stability: where do we stand? Tobias Adrian Financial Counsellor and Director of the Monetary and Capital Markets Department of the International Monetary Fund (IMF) Professor Wouter den Haan Chair, LSE Hashtag for Twitter users: #LSEeconomics