Global Financial Stability Report: Grappling with Crisis Legacies

Transcription

1 Global Financial Stability Report: Grappling with Crisis Legacies Seminar for Senior Bank Supervisors from Emerging Economies Laura E. Kodres /International Monetary Fund October 17, 2011

2 Chapter 1 Overcoming Political Risks and Crisis Legacies

3 A Growing Crisis of Confidence Private debt Subprime crisis originates in US banks Banking Systemic banking crisis spreads from US to Europe Sovereign Problems in euro periphery sov. debt Medium-term debt burdens in core AE Political Difficulty in reaching political consensus on fiscal consolidation and adjustment 2

4 Stability risks have risen across all risk metrics Risks Emerging market risks Credit risks April 2009 GFSR April 2011 GFSR September 2011 GFSR Macroeconomic risks Market and liquidity risks Away from center signifies higher risks, easier monetary and financial conditions, or higher risk appetite. Monetary and financial Conditions Risk appetite 3

5 Italian Greek WE sovereign Spanish Irish Greek Italian French Spanish US Oil Commodities Vix Eurofirst 300 EM Equities S&P 500 Swiss franc 10-year bund 10-year treasury Gold prompting a flight to safe assets Asset Price Performance since April GFSR (percent, VIX in percentage points; VIX and sovereign CDS inverted) 20 Sovereign CDS Bank equities Commodities Risk assets Safe-haven assets

6 What s different from Lehman? Interbank funding stress is less, while Libor OIS Spreads (bps) Lehman Current Euro area United States partly due to sovereign strains Sovereign CDS Spreads (bps) Euro area United States risk perceptions are greater for European banks Bank CDS Spreads (bps) Euro area United States with stress rising on broad markets Broad Equity Markets (indices, 9/15/08 = 100) Euro area U.S. Volatility index index index 5

7 Sovereign strains becoming more widespread Greece Ireland 500 Portugal 0 Jan-11 Apr-11 Jul-11 Credit Default Swap Spreads (basis points) Spain Jan-11 Apr-11 Jul-11 Italy Belgium France 140 United Kingdom United States 20 Germany 0 Jan-11 Apr-11 Jul-11 6

8 ... threatening a shift towards a bad equilibrium Bad Equilibrium Inadequate Policy Response Increased Volatility Weaker Investor Base Shock to Debt Dynamics for Vulnerable Sovereign Reduced Volatility Good Equilibrium Adequate Policy Response Stronger Investor Base Higher Spreads Weaker Growth Worse Debt Dynamics Lower Spreads Stronger Growth Better Debt Dynamics 7

9 Euro area risk-free debt has shrunk by half Sovereign CDS spreads Spreads as of April 2010 (end-2009 debt) Spreads as of August 2011 (end-2010 debt) Over 200 bps Under 200 bps Netherlands 5% Greece 5% Ireland 2% Portugal 2% Netherlands 5% Greece 4% Ireland 1% Portugal 2% Germany 22% Spain 9% Germany 24% Spain 9% Finland 1% Austria 3% France 21% Belgium 5% Italy 26% Finland 1% Austria 3% France 20% Belgium 5% Italy 25% 8

10 Euro area sovereign risks have spilled over to the EU banking system... Cumulative Spillovers from High-Spread Euro Area Sovereigns to the European Banking System ( bn) Spillovers from... Greek sovereign Irish & Portuguese sovereign Belgian, Spanish & Italian sovereign High-spread euro area banking sector 9

11 but the impact has varied greatly by country Spillovers from High-Spread Euro Area Sovereigns to Country Banking Systems (percent of assets) Greece Cyprus Portugal Italy Spain Belgium Ireland Luxembourg France Germany Slovenia Netherlands Austria United Kingdom Malta Denmark Sweden Finland Poland Hungary Sovereigns Banks

12 Core Tier 1 Ratio and some banks are under substantial pressure Distribution of Spillovers from High-Spread Euro Area to European Banks High-spread euro area Other Europe Spillover greater than... (percent of capital) 9 percent of all banks 7 percent of total assets 7 percent of all banks 4 percent of total assets 50 percent 75 percent 100 percent percent of all banks 1 percent of total assets Spillover (in percent of risk-weighted assets) 11

13 Sovereign Stress Has Spilled Over to Bank Equity 13

14 But Capital Buffers Do Matter! 14

15 Impact of Economic Slowdown and Sovereign Stress European Bank Equities (7/1/2011=100) for Bank Equities Germany June IP UK 95 lower than expected 300 France Germany Spain Italy Greece GIIPS Sov Spreads Spanish PMI fell in July fell while Italian increased German Q2 GDP came in significantly lower

16 Euro Area Banks Vulnerable to Wholesale Funding Pressures Euro Area Banks Liability Profile (% of total Liabilities) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% IE FR GR AT IT PT BE DE ES FI NL Capital Other Liabs Other Deposits LT Debt Short-Term Liabs 16

17 Jan-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Real Economy Impact From Deleveraging? Bank Credit to the Nonfinancial Private Sector Under a Deleveraging Scenario (In percent year-on-year) Belgium Greece Ireland Italy Portugal Spain 17

18 EU Banks Capital: Current Situation European Bank Core Tier 1 Ratios (percent of risk-weighted assets) 63% of banks 70% of total assets Individual Banks 18% of banks 19% of total assets 0% of banks 0% of total assets 10% 8% 6% 18

19 Advanced economies are stuck between repair and expansion phase of the credit cycle Phases of the Credit Cycle REPAIR RECOVERY Households Banking sector Valuation Asset quality Credit conditions Corporate fundamentals DOWNTURN EXPANSION 18

20 U.S. Household Balance Sheets and Housing Still Weak U.S. Housing Inventories and Foreclosures (millions of units) Delinquencies and Foreclosures Underwater Mortgages 1/ Actual Inventories Q

21 Low policy rates encourage a search for yield : mispricing credit? Fed Funds Rates, BBB-rated Corporate Credit Spreads, and U.S. Real GDP Cumulative Growth U.S. Fed Funds Rates (percent) Past Current Past cycles U.S. BBB-rated Corporate Spreads (100 = beginning of each cycle) Past Current Current cycles U.S. Real GDP Cumulative Growth (100 = beginning of each cycle) Past Current

22 Emerging economies are further along in the credit cycle Phases of the Credit Cycle REPAIR Latam RECOVERY Households Banking sector Valuation Asset quality Credit conditions Corporate fundamentals DOWNTURN EXPANSION 21

23 Emerging markets are in the expansion phase (standard deviations from mean, z-scores) Total Credit 1/ (RHS) Real equity prices Portfolio Flows / In percent of GDP 22

24 Credit growth Rapid Credit Growth Can Lead to Rising Nonperforming Loans in EMs 0 Credit and GDP Growth (cumulative percent change; ) Turkey Brazil Poland Colombia Peru Morocco Mexico Russia Hungary Philippines Malaysia Thailand South Africa Chile India China Argentina Indonesia Nominal GDP growth Predicted NPL Ratios in 2011 and 2012 (percent, no shock) 2010 (Actual) Emerging Asia EMEA Latin America 24

25 An external shock would test the resilience of emerging market banks 1 Absolute Change in Capital Adequacy Ratios Under Combined Macro Shocks (percentage points) Latin America EMEA Emerging Asia

26 Consequences of the Political Phase of the Crisis Economically Viable Feasible Set is Shrinking Over Time Economically Viable Politically Feasible Politically Feasible 26

27 New, dangerous, political, phase of the crisis The risks to global financial stability and growth have increased. With limited room to deploy further monetary and fiscal stimulus, easy policy responses have been largely exhausted. Policymakers face hard choices, but markets confidence in their ability to resolve problems has weakened. The need is now for coordinated, timely, bold, action. 26

28 Advanced Economies avoid near-term crisis Sovereign risks Public (US, EU, Japan) medium-term credible fiscal consolidation Balance sheet repair Private (Households, US) mortgage debt - banks Banks Banks (EU) more capital (private, public, EFSF) funding structures Complete financial reform agenda 27

29 Emerging Economies avoid future crisis Contain buildup of macrofinancial vulnerabilities macro (monetary, fiscal) macro-prudential and CFM Enhance macro-financial resilience to cope with external shocks structural financial reform 28

30 Chapter 2 Long-Term Investors and Their Asset Allocation: Where Are They Now?

31 Focus of chapter: Institutional investors Real-money investors, unleveraged, long-term horizon. Mainly pension funds and insurance companies. $70 trillion in assets; mostly equities and bonds (> 80 percent) 31

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33 We use detailed data on mutual fund flows into equity and bond funds by destination country to run regressions Complementary data also from IMF Survey on Global Asset Allocation 33

34 Asset allocation driven by (i) Growth prospects (ii) Country risk (iii)macroeconomic stability (inflation, exchange rates) (iv)global risk NOT driven by (i) Interest rate differentials BUT the latter may still matter for leveraged investors 34

35 Asset allocation behavior affected by (i) Crisis Greater risk consciousness: liquidity, credit risks (including sovereign) Can be seen in data: break in regressions (ii) Low-interest-rate environment Pension funds, insurance co s are hurting Pressure to increase yields, but biding time; interest rate differentials may matter in future (iii)regulation Aims to make financial institutions safer, but shifts them away from longer-term risky assets 35

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37 Emerging market flows are resumption/ acceleration from trend before the crisis In line with empirical results: flows respond to good growth prospects and lower country risk But risk of reversal; seen in August, mostly as a result of increased global risk; in line with our simulations 37

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39 Sovereign asset management becoming more important: SWFs $4.7 trillion International reserves $10 trillion, in some cases more than necessary: some reserve managers are establishing investment tranche 39

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41 Chapter 3 Towards Operationalizing Macroprudential Policies: When to Act? 41

42 Road Map Good shocks: healthy fluctuations Bad shocks: rise in systemic risks Dampen effects of bad shocks. Structural analysis: Macroeconomicfinancial model Econometric analysis: Slow-moving indicators Fast-moving indicators Operationalize macroprudential tools Identify systemic risk Distinguish healthy fluctuations from rise in systemic risk Determine robust systemic risk indicators

43 Deviations of credit-to-gdp ratio from baseline Credit Growth: Rapid in many scenarios Ratio of Credit to GDP (In percentage points) Bad Shock: Asset Bubble Good Shock: Healthy Productivity Increases Quarters

44 Banking Soundness Indicators Differentiate

45 Event Study: 3 years before to 2 years after financial crisis Contd

46 Event Study: 3 years before to 2 years after financial crisis

47 Sounding the alarm: policymakers preferences? Noise-to-Signal Ratios for Different Credit Indicators

48 Sounding the alarm: Other indicators? Receiver Operating Characteristics for other indicators

49 Credit and Asset Prices: Powerful together Crisis probability >5 pp 20-25% >15%

50 Short-term alarm for imminent crisis Comparison of various market-price based near-coincident indicators for the U.S.

51 Indicators and policies A stitch in time

52 Policies costly if source of shocks mistaken (ex: Squashing healthy growth with time-varying capital requirements)

53 Practical Guidelines Know sources of shocks Credit growth central, but cannot be used to distinguish good from bad shocks Combine credit growth with other indicators: asset prices, foreign liabilities, direct cross-border lending to private sector Thresholds reflect policymakers preferences Near-coincident indicators: LIBOR-OIS and yield curve Policies universal in use, country-specific in design Case for coordination among policy makers especially: To understand the source of shocks In managed exchange rate regimes with fx-denominated loans (the effects of any shock get amplified). 53

54 International Monetary Fund October 17, 2011 GFSR Challenges to Global Financial Stability