With financial markets worldwide facing growing turmoil, internationally coherent and decisive policy measures will be required to restore confidence in the global financial system. Failure to do so could usher in a period in which the ongoing deleveraging process becomes increasingly disorderly and costly for the real economy.

In any case, the process of restoring an orderly system will be challenging, as a significant deleveraging is both necessary and inevitable. It is against this challenging and still evolving backdrop that the Global Financial Stability Report (GFSR) frames the recent events to suggest potential policy measures that could be helpful in the current circumstances.

Confidence in global financial institutions and markets has been badly shaken. Threats to systemic stability became manifest in September with the collapse or near-collapse of several key institutions. The October 2008 World Economic Outlook notes that the strains afflicting the global financial system are expected to deepen the downturn in global growth and restrain the recovery.

Moreover, the risk of a more severe adverse feedback loop between the financial system and the broader economy represents a critical threat. The combination of mounting losses, falling asset prices, and a deepening economic downturn, has caused serious doubts about the viability of a widening swath of the financial system.

The ongoing deleveraging process outlined in the April 2008 GFSR has accelerated and become disorderly—marked by a rapid decline in financial institutions’ share prices, higher costs of funding and credit default protection, and depressed asset prices. One result has been sudden failures of institutions as markets have become unwilling (or unable) to provide capital and funding or absorb assets. Piecemeal interventions to address the attendant liquidity strains and resolve the troubled institutions did not succeed in restoring market confidence, as they have not addressed the widespread nature of the underlying problems.

The intensifying worries about counterparty risks have created a near lock-up of global money markets. Chapter 1 provides the basis for a more comprehensive policy approach—as is now being considered in some countries. It evaluates how far the deleveraging process has progressed and how much lies ahead. It also suggests a comprehensive set of measures that could arrest the currently destructive process. ...

Visit Global Financial Stability Report 2008: Financial Stress and Deleveraging Macro-Financial Implications and Policy Website

You can download full publication in PDF format.

© 2008 International Monetary Fund
ISBN: 978-1-58906-757-8

CONTENTS
Preface ix
Executive Summary xi
Chapter 1. Assessing Risks to Global Financial Stability 1
Global Financial Stability Map 2
The Default Cycle 10
Financial System Deleveraging 18
Systemic Implications 32
Emerging Market Resilience Is Being Tested 44
Financial Stability Policies 49
Annex 1.1. Global Financial Stability Map: Construction and Methodology 56
Annex 1.2. Financial Investment in Commodities Markets 62
Annex 1.3. Loss Estimates on U.S. Credit Instruments 66
Annex 1.4. Factors Influencing the Pace and Level of Bank Capital Rebuilding 69
References 71
Chapter 2. Stress in Bank Funding Markets and Implications for Monetary Policy 73
The Microstructure of Bank Funding Markets 74
The Causes of Elevated Interbank Spreads 78
Implications for the Interest Rate Transmission Mechanism of Monetary Policy 85
Policy Recommendations 96
Conclusions 100
Annex 2.1. Empirical Framework: The Causes of High Interbank Spreads 100
Annex 2.2. Empirical Framework: Monetary Transmission 103
References 105
Chapter 3. Fair Value Accounting and Procyclicality 109
Fair Value Accounting Through the Business Cycle 110
Modeling Fair Value Accounting Through the Business Cycle Using Simulations 117
Conclusions and Policy Recommendations 127
Annex 3.1. Data and Modeling Assumptions 131
References 133
Chapter 4. Spillovers to Emerging Equity Markets 135
Performance of Emerging Market Equity Markets 136
Cross-Country Equity Price Correlations 138
Determinants of Emerging Market Equity Prices 140
Spillovers and Their Impact 144
The Role of Local Institutional Investors 145
Key Results and Conclusions 145
Annex 4.1. Panel Estimation Specification and Results 152
Annex 4.2. Vector Autoregression Model Results 155
References 155
Glossary 157

PREFACE
The Global Financial Stability Report (GFSR) assesses key issues in global financial market developments with a view to identifying systemic vulnerabilities. By calling attention to fault lines in the global financial system, the report generally seeks to play a role in preventing crises and, when they occur, helping to mitigate their effects and offer policy advice, thereby contributing to global financial stability and to sustained economic growth of the IMF’s member countries.

The analysis in this report has been coordinated in the Monetary and Capital Markets (MCM) Department under the general direction of Jaime Caruana, Counsellor and Director. The project has been directed by MCM staff Jan Brockmeijer, Deputy Director; Peter Dattels and Laura Kodres, Division Chiefs; and Brenda González-Hermosillo and L. Effie Psalida, Deputy Division Chiefs. It has benefited from comments and suggestions from Jonathan Fiechter and Christopher Towe, both Deputy Directors, and Mahmood Pradhan, Assistant Director.

Primary contributors to this report also include Sergei Antoshin, Elie Canetti, Sean Craig, Phil de Imus, Kristian Hartelius, Heiko Hesse, Andy Jobst, John Kiff, Rebecca McCaughrin, Paul Mills, Ken Miyajima, Christopher Morris, Alicia Novoa, Mustafa Saiyid, Jodi Scarlata, Miguel Segoviano, Seiichi Shimizu, Juan Solé, Mark Stone, Tao Sun, Rupert Thorne, and Christopher Walker. Other contributors include Ana Carvajal, Antonio Garcia-Pascual, Geoff Heenan, Xiongtao Huang, Michael Moore, Aditya Narain, Silvia Ramirez, and André Santos. Kenneth Sullivan provided consultancy support and Vance Martin provided empirical support. Martin Edmonds, Oksana Khadarina, Yoon Sook Kim, Alin Miresteam, Jean Salvati, Xiaobo Shao, Narayan Suryakumar, and Kalin Tintchev provided analytical support. Caroline Bagworth, Shannon Bui, Christy Gray, and Aster Teklemariam were responsible for word processing. David Einhorn of the External Relations Department edited the manuscript and coordinated production of the publication.

This particular issue draws, in part, on a series of discussions with accountancies, banks, securities firms, asset management companies, hedge funds, auditors, standard setters, financial consultants, and academic researchers, as well as regulatory and other public authorities in major financial centers and countries. The report reflects information available up to September 25, 2008.

The report benefited from comments and suggestions from staff in other IMF departments, as well as from Executive Directors following their discussion of the Global Financial Stability Report on September 15, 2008. However, the analysis and policy considerations are those of the contributing staff and should not be attributed to the Executive Directors, their national authorities, or the IMF.

Comments (0)

Show/Hide comments

Name

Email

Website

Title

Comment

smaller | bigger

Add Comment