global financial stability · risks: • global growth slowdown • an unexpected monetary policy...
TRANSCRIPT
Global Financial Stability
Fabio NatalucciDeputy Director
Monetary and Capital Markets Department
International Monetary Fund
Risks:
• Global growth slowdown
• An unexpected monetary policy shift
• Trade tensions
• Disorderly Brexit
1
The Credit Cycle is Maturing
Vulnerabilities:
• Rising corporate debt
• Sovereign-financial sector nexus
• Maturity and liquidity mismatches
• House-price misalignments
• Vulnerabilities in emerging markets
Recent Market Developments
Most Markets More Than Retraced Their 2018 Losses
2
Returns by Asset Class
(Percent)
Markets sold off in 2018 on growth concerns, but
have retraced most of their losses …
Implied volatility across assets
(5 day moving average)
… along with a return to the low-volatility regime
-25
-15
-5
5
15
25
35
Oil (
Bre
nt)
Ch
ina e
qu
itie
s
Co
mm
od
itie
s
S&
P 5
00
Eu
rost
oxx
50
EM
eq
uit
ies
To
pix
US c
orp
HY
EM
so
v $
EM
co
rp $
Go
ld
Eu
ro c
orp
HY
US c
orp
IG
EM
go
vts
lo
cal
Eu
ro c
orp
IG
JGB
s
US T
-Bills
2019 YTD
Sep. 30, 2018 to end-2018
Global Financial Conditions Have Eased
3
Financial Conditions Indices
(z-score since 1996)
Financial conditions have eased this year…
Components of the US Financial
Condition Index
(z-score since 1996)
... driven by lower rates and higher corporate
valuations in the US
Central Banks Have Turned More Dovish in the US, Euro Area…
4
US: Market Implied Fed Funds Rate versus FOMC Median
Dots
(Percent)
AE central banks are expected to deliver less tightening or more easing
ECB: Market-Implied Policy Interest Rate
(Percent)
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
Current
Rate
1M 3M 6M 1Y 2Y 3Y
Sep. 28, 2018 (Last GFSR)
Mar. 3, 2019 (day before ECB meeting)
Latest (May 8, 2019)
…and Emerging Markets
5
EM central banks are expected to deliver less tightening or more easing
China: Interbank Interest Rate and Required Reserve
Ratio
(Percent)
EMs: Change in Market Implied Policy Rate, 1-year Ahead
(Basis points)
Hungary
BrazilPoland
Indonesia
Thailand
Malaysia
India
South Africa
RomaniaMexico
Russia
Philippine-50
-30
-10
10
30
50
70
90
-50 0 50 100 150 200
6 months ago
Cu
rren
t
Less tightening or more
easing
45 degrees
12
13
14
15
16
17
18
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
Mar.17 Aug.17 Jan.18 Jun.18 Nov.18 Apr.19
SHIBOR 3m
Required Deposit Reserve Ratio (right scale)
1.9
2.0
2.1
2.2
2.3
2.4
0
5
10
15
20
25
30
35
40
Oct.18 Nov.18 Dec.18 Jan.19 Feb.19 Mar.19
VIX
Standard deviation of global EPS forecasts (right scale)
Powell’s AEA remarks (Jan 4)
… To Counter Downside Risks to Economic Growth
6
MSCI World Index vs Global Forward EPS*
Forecast
(Index, y/y percent change)
VIX and Dispersion of Global Forward EPS*
Forecasts
(Index, y/y percent change)
Corporate earnings growth have revised down
sharply…
… while more dovish monetary policy outlook has
helped suppress market volatility and uncertainty
*EPS= Earnings per share
Medium-Term Financial Stability Risks Remain Elevated
7
Near-term downside risks are somewhat higher,…
Near-Term (1-year Ahead) Global Forecast Densities
(Probability density)
Near- and Medium-Term Risks
(GaR: Fifth percentile of forecast distribution)
… while medium-term risks remain elevated
compared to six months ago
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.8 1.8 2.8 3.8 4.8 5.8
2018:Q3 2018:Q4 2019:Q1
Note: Dots refer to 5th percentile of forecast distribution, GaR.
-1.4
-0.9
-0.4
0.1
0.6
1.1
1.6
2.1
2.6
3.1
Near term Medium term
2018:Q3 2018:Q4 2019:Q1
Growth-at-risk Estimates
8
Near-term GaR forecast signals deterioration from a
recent historically benign peak…
Near-Term (1-year Ahead) Global Forecast Densities
(Percentile Rank)
Medium-Term (3-year Ahead) Global Forecast Densities
(Percentile Rank)
… whereas the medium-term GaR forecast
remains close to historically high risk levels
Vulnerabilities Continue to Build Up in Parts of the Global Economy
9
Proportion of GDP of Systemically Important Countries* with Elevated Vulnerabilities, by Sector
(Share of countries with high and medium-high vulnerabilities by GDP; assets for banks)
Vulnerabilities in sovereign, corporate and nonbank financial sectors are elevated in systemically important economies
*The analysis includes 29 jurisdictions with systemically important financial sectors.
Banks
Sovereigns
Households
Nonfinancial
corporatesInsurers
Shadow
banking
Apr. 2019 GFSR
Oct. 2018 GFSR
Global financial crisis
80%
100%
60%
40%
20%
More
vulnerable
Indicator-Based Framework
10
Financial Vulnerabilities by Sector and Region
Vulnerabilities in the sovereign, corporate, and nonbank financial sectors are elevated by historical standards in
several systemically important countries and regions
Oct.
2018
Apr.
2019
Oct.
2018
Apr.
2019
Oct.
2018
Apr.
2019
Oct.
2018
Apr.
2019
Oct.
2018
Apr.
2019
Oct.
2018
Apr.
2019
Advanced Economies
United States
Euro area
Other advanced
Emerging Market Economies
China
Other emerging
Other
FinancialsSovereigns
Nonfinancial
FirmsHouseholds Banks Insurers
Highest Lowest
Vulnerabilities in a Maturing Credit Cycle
0
20
40
60
80
100
Dec.99 Feb.03 Apr.06 Jun.09 Aug.12 Oct.15 Dec.18
US Euro area
US recessionEuro area
recession
Corporate Debt Has Increased and Market-Based Finance Expanded
11
US and Euro Area Corporate Credit Cycles*
(Percentile rank)
Corporate credit cycle in the US is at its highest
point in recent history
Nonfinancial Business Financing: Loans and Debt
Securities
Nonfinancial business sector reliance on capital-
market financing has increased
*Based on a number of indicators. The late stage of the credit cycle is characterized by
deteriorating underwriting conditions, increased risk taking, easy credit conditions, strong
profit, and high leverage.
0
2
4
6
8
10
12
2005:Q1 11:Q1 17:Q1
$ t
rilli
ons
United States
0
2
4
6
8
10
12
14
2005:Q1 11:Q1 17:Q1
€ t
rilli
ons
Euro Area
Loans Capital market financing
Credit Quality Has Deteriorated
12
BBB-Rated Bonds in Investment Grade Indices
(Percent of total; billions of US dollars)
Stock of BBB corporate bonds has quadrupled
since the crisis…
Evolution of BBB Corporate Bond Universe from 2009
to 2018
…largely driven by new issuance, rating changes,
and new entrants
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
0
20
40
60
2000 2002 2005 2008 2010 2013 2016 2018
US face value ($ billions, right scale)
Euro area face value ($ billions, right scale)
US
Euro area
0% 20% 40% 60% 80% 100%
Europe
BBB outstanding New entrants Rating transitions
Net issuance Other
United
States
Indebted Firms Could Come Under Strain in a Downturn
13
Share of Corporate Debt Owed by Firms with High
(above 0.6) and Moderate (between 0.3 and 0.6)
Debt to Asset Ratios
(Percent)
As firms’ indebtedness remains high…
Share of Corporate Debt Owed by Firms with Low
(below 1) and Subpar (between 1 and 3) Interest
Coverage Ratio
(Percent)
…the debt service capacity could deteriorate quickly in a
significant economic downturn
0
5
10
15
20
25
30
35
2008 2018 2009 2018
United States Euro area
ICR<3 ICR<1
Note: ICR= Earnings before interest, tax, depreciation and amortization (EBITDA)/Interest
expense
0
20
40
60
80
100
2008 2018 2009 2018
United States Euro area
Debt to assets>0.3 Debt to assets>0.6
Shift in Sources of Credit Provision
14
High-Yield Bond versus Leveraged Loan Debt Outstanding
(Billions of US dollars; billions of euros)
The stock of leveraged loans is almost as large as that
of high-yield bonds…
US Leveraged Loan Investor Base: Banks versus Nonbanks
(Percent of primary market issuance)
…while nonbanks have taken a larger role in financing
highly indebted firms
0
50
100
150
200
250
300
350
0
250
500
750
1.000
1.250
1.500
2004 2006 2008 2010 2012 2014 2016 2018
US high-yield bonds (left scale)
US leveraged loans (left scale)
EU high-yield bonds (right scale)
EU leveraged loans (right scale)
0
10
20
30
40
50
60
70
80
90
100
1994 1997 2000 2003 2006 2009 2012 2015 2018
Nonbanks (institutional investorsand finance companies)
Banks and securities firms
Record Global Leveraged Loan Issuance
15
Global leveraged loan issuance reached record highs…(Billions of US dollars)
…with the share of proceeds used to fund acquisitions
and shareholder enhancements still large(Global Leveraged Loan Issuance by Use of Proceeds)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
05 06 07 08 09 10 11 12 13 14 15 16 17 18
M&A
Refinancing
Other
Dividends and
Buybacks
LBOs
0
100
200
300
400
500
600
700
800
900
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
US Issuers
Non-US Issuers
Note: 2019 issuance is through Q1 and annualized to estimate full-year 2019 issuance.
Credit Quality Is Weakening
16
Covenant protections continue to deteriorate…(US Leveraged Loans)
… and new issue loan ratings continue to weaken(US Leveraged Loan Issuance by Ratings)
2,0
2,5
3,0
3,5
4,0
4,5
0
10
20
30
40
50
60
70
80
90
07 08 09 10 11 12 13 14 15 16 17 18
Covenant-lite percent of newissuance (left scale)
Moody's Loan CovenantQuality Index score (rightscale)
Higher
Score
Equals
Weaker
Covenants
0%
20%
40%
60%
80%
100%
2000 2003 2006 2009 2012 2015 2018
Split BBB/BB or higher BB+/BB/BB-Split BB/B B+/B/B- or CCCNot Rated
Nonbank Investor Base Is Growing
17
Nonbanks have increased their exposure in the leveraged
loan market…(US Leveraged Loan Investor Base, Percent of New Issuance)
…alongside robust CLO formation and loan fund growth(Billions of US Dollars)
59%
48%
21%
10%
6%
14%
5%
2%
1%
6%
8%
20%
0% 20% 40% 60% 80% 100%
2018
2006
CLOs
Loan mutual funds
Hedge, distressed and high-yield funds
Insurance companies
Finance companies
Banks and securities firms0
20
40
60
80
100
120
140
160
180
200
220
0
20
40
60
80
100
120
140
02 04 06 08 10 12 14 16 18
CLO issuance (left scale)
Bank loan mutual fund and ETFAUM (right scale)
Sovereign - Financial Sector Nexus
Concerns About Sovereign-Financial Sector Nexus Have Reemerged
18
…and bank market indicators have deteriorated
Sovereign Spreads
(Basis Points)
Italian sovereign spreads have widened since
last year…
Italian Sovereign Spread and Bank Market Indicators
(Basis points; ratio)
Channels of Contagion
19
Some Banks Have Strenghtened Their Links to Sovereigns
20
…and sovereign credit ratings have been
downgraded in some countries
Banking System’s Holdings of Domestic
Government Bonds
(Percent of assets)
Bank holdings of domestic government debt
have increased…
Bank Government Bond Holdings by Rating
(Percent of government bond portfolio)
0
2
4
6
8
10
12
2006 2008 2010 2012 2014 2016 2018
ITA
PRT
ESP
FRA
IRL
DEU
Stock Of NPLs Needs To Be Reduced Further
21
Efforts have been made to dispose off non-
performing loans
Stock of Nonperforming Loans in the Euro Area
(Billions of euros)
But banks need to continue reducing the stock of non
performing loans on their balance sheets
Nonperforming Loan Transactions
(Billions of euros)
Profitability Challenges
22
Bank provisioning is likely to curtail profitability…
Estimated Impact of Provisioning to Fully Cover New
Nonperforming Loans on Profitability, 2019-23
(Percent of 2013-17 pre-provision profits, annualized)
… as would a cleanup of bad loans
Estimated Losses from Reducing Gross Nonperforming
Loan Ratios to 5 Percent by 2023
(Percent of 2013-17 pre-provision profits, annualized)
Capital Ratios Could Come Under Pressure in Some Countries
23
Estimated Impact on Tier 1 Capital Ratios: Adverse Downside Scenario
(Percent)
* Scenario adjustment = impact of mark-to-market change in government
bond values + adjustment for potential loan losses on NPLs
0
2
4
6
8
10
12
14
16
18
20
2010
2018
:Q2
2010
2018
:Q2
2010
2018
:Q2
2010
2018
:Q2
2010
2018
:Q2
2010
2018
:Q2
DEU FRA ESP IRL PRT ITA
Reported
Tier 1 ratio:
2010
Scenario
adjustment *
Post shock
Tier 1 ratio
Current Tier 1 ratio
Insurers’ Exposures to Sovereigns, Banks and Corporates
24
Insurers are important investors in sovereign and
bank debt
Holdings of Euro Area Sovereign and Bank Debt by Issuer
(Percent of total debt stock, 2018: Q2)
Holdings of lower-rated bonds have increased
Sovereign and Corporate Bond Holdings by Ratings
(Percent of total bond holdings)
Asset Allocation Varies Across Countries
25
Asset allocation to lower-rated bonds vary
significantly across countries…
Asset Allocation to Low-Rated Credit
(Percent of corporate bond holdings, 2018: Q2)
… while some also have significant holdings of riskier
bank bonds
Asset Allocation to Bank Subordinated and Hybrid Debt
(Percent of bank bond holdings, 2018: Q2)
Vulnerabilities in Emerging Markets
EM Assets Have Rebounded in 2019
26
Equity benchmarks
(April 1, 2018 = 100)US and EM Credit Spreads
(Basis Points)
Emerging market assets came under pressure in late 2018; but have recovered recently
Flows to Emerging Markets Have Been Generally Resilient
27
Nonresident Portfolio Flows to EMs*
(Billions of US dollars, three-Month Moving Sum)
Portfolio flows have rebounded in recent
months…
* Last 3 months are estimates based on higher frequency data from the IIF
Estimated Cumulative Impact of External Factors on
Emerging Market Portfolio Flows
(Billions of US dollars)
… as the drag from external factors has partially
receded
Benchmark-driven Investors Are Increasingly Important
28
Assets Benchmarked to JP Morgan EM Indices and
Market Capitalization
(Billions of US dollars)
Benchmark-driven investors have a larger presence
in hard currency debt than in local currency
sovereign debt markets
Assets Benchmarked against JPMorgan Emerging Market
Indices
More fund managers are tracking emerging market-
dedicated fixed income benchmark indices
0
100
200
300
400
500
600
700
800
2007
08
09
10
11
12
13
14
15
16
17
18
Asia credit
Hard currency corporate debt
Hard currency sovereign debt
Local currency sovereign debt
Potential Increase in the Amplification of Shocks
29
Sensitivity of Debt Flows to External Shocks
(Percent of invested assets)
Benchmark-driven flows are highly sensitive to external
factors, such as global risk appetite and US interest
rates
Correlations between Flows to a Particular Emerging
Market Country and Overall Emerging Market Flows
Benchmark-driven flows are highly correlated
across countries
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
Risk shock: VIX Interest rate shock: US 10-
year
Benchmark driven (EPFR) Overall portfolio flows (BoP)
Risk shock: VIX
Interest rate shock: US
10-year
Treasury yield
China: Impact of Regulatory Tightening
30
Contribution to Bank Asset Growth
(Percent, year-over-year growth)
Regulatory tightening has succeeded in reducing links
between financial institutions
Net Increase in Bank Credit
(Trillions of renminbi)
…along with curbing shadow credit,
especially from smaller banks
China: Impact of Regulatory Tightening
31
Wealth Management Product Yield and Three-Year
Corporate Bond Yield
(Percent, basis points)
Yields on WMPs remain high, indicating continued
use of leverage and risky assets to boost returns
Investment Vehicle Borrowing in Interbank
Market and from Sponsor Banks
(Trillions of renminbi)
Investment vehicle short-term borrowing
continues to rise
Vulnerabilities Remain High, Especially Outside Big 5 Banks
32
Core Tier 1 Capital Ratio
(Percent)
Capital levels remain weak in the small and
medium-sized banks
Faster credit growth may delay bank balance sheet
repair
Share of Small and Mid-size Banks by Assets and Time
Needed to Repair Balance Sheets
Structural Issues
Market Liquidity Risks in Capital Markets
33
Proportion of Jumps versus Liquidity Strain
(Index and percent; September 2018-March2019)
The frequency of liquidity strained days has been
higher in emerging markets
Proportion of Intraday Price Variability Explained by
Jumps: EM and AE Average
(Percent; 10 day moving average)
EM Sovereign bond markets seem to be more
prone to liquidity strains than equity markets
0
10
20
30
40
50
Sep.18 Oct.18 Nov.18 Dec.18 Jan.19 Feb.19 Mar.19
AE equities EM equities AE sov. bonds EM sov. bonds
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
0 10 20 30 40 50 60
Higher proportion of all jumps
Hig
her
liq
uid
ity s
train
AE Treasuries
EM Treasuries
AE equities
EM equities
Downside Risks to House Prices Are Elevated in Some Economies
34
Economies with Three-Year-Ahead House Prices-at-Risk
Below -10% in 2017
(Percent)
Downside risks to house prices shift in time and
have recently increased in the US…
United States: Three-Year-Ahead House Prices-at-Risk
(Fifth percentile of forecast density)
…and remain elevated in several advanced and
emerging market economies
-10
-8
-6
-4
-2
0
2
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
Higher Risk
Qo
Q, an
nu
alize
d in
perc
en
t
0
10
20
30
Advanced economies Emerging markets
Note: The sample includes 22 advanced economies and 10 emerging markets.
Availability of Macroprudential Tools
There are few macroprudential tools for nonbanks
35
Availability/Use of Macroprudential Tools to Address Vulnerabilities
Based on the sample of 29 jurisdictions with systemically important financial sectors. Elevated vulnerabilities refer to countries/sectors with a percentile rank in the respective
vulnerability exceeding 60 percent according to our indicator based framework. Cells highlighted in blue have entries below 50 percent, which should be interpreted to mean
that 50 percent or more of systemically important countries do not have any prudential tools to address specific vulnerabilities.
Global Financial Stability
Fabio NatalucciDeputy Director
Monetary and Capital Markets Department
International Monetary Fund