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Global Financial Stability Report, October 2014
The October 2014 issue finds that six years after the start of the crisis, the global economic recovery continues to rely heavily on accommodative monetary policies in advanced economies. Monetary accommodation remains critical in supporting economies by encouraging economic risk taking in the form of increased real spending by households and greater willingness to invest and hire by businesses. However, prolonged monetary ease may also encourage excessive financial risk taking. Analytical chapters examine (1) the growth of shadow banking around the globe, assessing risks and discussing regulatory responses, and calling for a more encompassing (macroprudential) approach to regulation and for enhanced data provision; and (2) how conflicts of interest among bank managers, shareholders, and debt holders can lead to excessive bank risk taking from society’s point of view, finding no clear relation between bank risk and the level of executive compensation, but that a better alignment of bankers’ pay with long-term outcomes is associated with less risk.
Bank Profitability in Europe: Not Here to Stay
Slower passthrough of policy interest rate hikes to deposit rates relative to their loan rates has led to sharply wider bank net interest margins. Combined with resilient asset quality, wider net interest margins supported record profits for European banks in 2023. Drawing on historical data from the balance sheets and income statements of over 2,500 European banks, this paper shows that abnormally high profits are expected to fade soon as interest income will decline, once policy rates start being lowered, while higher impairment costs historically have weighed on profits with a lag. Moreover, a number of structural factors that have eroded the performance of European banks in the past two decades have largely remained unaddressed and will continue being a drag on profits and capital. Therefore, policymakers should encourage banks to preserve capital buffers and build resilience to future shocks, while exercising caution when considering taxes on profits or other measures that could divert potential sources of capital from banks.
Global Financial Stability Report, October 2018
In the 10 years since the global financial crisis, regulatory frameworks have been enhanced and the banking system has become stronger, but new vulnerabilities have emerged, and the resilience of the global financial system has yet to be tested.
Euro Area Policies
This technical note consists of five chapters focusing on various aspects of systemic risk analysis across the euro area financial system. The chapters cover bank profitability, balance sheet- and market-based interconnected analysis, contingent claims analysis, and a brief discussion of data gaps in the nonbank, non-insurance (NBNI) financial sector. The ongoing economic recovery will support euro area bank profitability in general, but it is unlikely to resolve the structural challenges faced by the least profitable banks despite some recent improvements. This is important because persistently weak bank profitability is a systemic financial stability concern. Empirical analysis of 109 majo...
Is Banks’ Home Bias Good or Bad for Public Debt Sustainability?
Motivated by the recent increase in domestic banks’ holdings of domestic sovereign debt (i.e., home bias) in the European periphery, this paper analyzes implications of banks’ home bias for the sovereign’s debt sustainability. The main findings, based on a sample of advanced (AM) and emerging market (EM) economies, suggest that home bias generally reduces the cost of borrowing for AMs and EMs when debt levels are moderate to high. A worsening of market sentiments appears to dimish the favorable impact of home bias on cost of borrowing particularly for EMs. In addition, for AMs and EMs, higher home bias is associated with higher debt levels, and less responsive fiscal policy. The findings suggest that home bias indeed matters for debt sustainability: Home bias may provide fiscal breathing space, but delays in fiscal consolidation may actually delay problems until debt reaches dangerously high levels.
Global Financial Stability Report, April 2021
Extraordinary policy measures have eased financial conditions and supported the economy, helping to contain financial stability risks. Chapter 1 warns that there is a pressing need to act to avoid a legacy of vulnerabilities while avoiding a broad tightening of financial conditions. Actions taken during the pandemic may have unintended consequences such as stretched valuations and rising financial vulnerabilities. The recovery is also expected to be asynchronous and divergent between advanced and emerging market economies. Given large external financing needs, several emerging markets face challenges, especially if a persistent rise in US rates brings about a repricing of risk and tighter fi...
New Challenges for Macroeconomic Policies
This book examines the economic policies that will underpin the evolution of growth in industrialised economies in coming decades. The change in focus of policymakers away from short-term regulation and policies towards problems of structural change is discussed in relation to the Taylor rule and Fisher relationship. Both empirical observations and quantitative analyses are utilised to explore diverse but interrelating topics, including interest rates dynamics, macroeconomic equilibrium, economic vulnerability, poverty and inequality, environmental sustainability, and monetary and fiscal policies. This book aims to propose policies that can produce economic growth without compromising social stability and environmental balances. It will be of interest to researchers and policymakers working within economic development and policy.
COVID-19: How Will European Banks Fare?
This paper evaluates the impact of the crisis on European banks’ capital under a range of macroeconomic scenarios, using granular data on the size and riskiness of sectoral exposures. The analysis incorporates the important role of pandemic-related policy support, including not only regulatory relief for banks, but also policies to support businesses and households, which act to shield the financial sector from the real economic shock.
International Financial Connection and Stock Return Comovement
This paper studies whether bilateral international financial connection data help predict bilateral stock return comovement. It is shown that, when the United States is chosen as the benchmark, a larger U.S. portfolio investment asset position on the destination economy predicts a stronger stock return comovement between them. For large economies such as the United States and Germany, the portfolio investment position is also the best predictor among other connection variables. The paper discusses with a simple general equilibrium portfolio model that the empirical pattern is consistent with the behavior of index investors who trade in response to risk-on/risk-off shocks.
