Transcript The Quest for Lasting Financial Stabilityx

The Quest for Lasting Financial Stability
Centre International d'Etudes Monétaires et Bancaires
José Viñals
Financial Counsellor
International Monetary Fund
May 8, 2012
Global Situation
Global Financial Risk Indicators Have Improved
Risk Indicators
8
10
Credit
9
7
8
6
7
6
5
Risk Appetite
Improvement
5
Market and
Liquidity
4
4
3
Improvement
3
2
2
1
0
Lehman
1
Lehman
0
1
But Markets Are Volatile And Stability Is Fragile
(September 2011 = 0)
60
40
Euribor-OIS
Spread
(negative)
VIX
(negative)
15
European
Equities
EM Equities
Peripheral
Sovereign CDS
Peripheral
Bank Equities
(negative)
10
5
20
0
0
-5
-20
-10
-15
-40
-20
-60
-80
-25
-30
2
Not Out Of The Crisis Yet
Sovereign and Bank Spreads
(in basis points)
400
350
300
250
200
Current
Buildup of Stress
European Financial CDS (left scale)
High Yield Euro-Area Sovereign Bond Spreads
(right scale)
PostGreece
Lehman
Program/
SMP
Crisis Begins
Ireland
Program
Policy Response
Bear
Stearns
150
Relief
100
50
0
2007
Political Resistance
and/or Complacency
2008
2009
2010
2011
2012
3
Deleveraging Scenarios
Further Efforts Needed To Achieve Lasting Stability
In The Euro Area And Avoid Downside Risks
Complete
Policies
Current
Policies
Weak
Policies
Fundingfunding
markets
normalize
• Market
strains
• Escalating funding pressures
• Credit squeeze
• Credit crunch
• Home
Smooth
deleveraging
bias
• Falling growth
• Low growth
• Global contagion
Higher growth
• Negative
spillovers
4
Drivers of Bank Deleveraging
Structural
Shed Legacy Assets
Cyclical
Earnings Pressures
Better Capitalization
Funding Pressures
Reduce Reliance on
Wholesale Funding
5
European Banks Need To Reduce Leverage
And Shrink Balance Sheets
Bank Leverage
Bank Loan-to-Deposit Ratios
(Adjusted tangible assets to Tier 1 common capital)
(Loans as a percentage of deposits)
40
150
35
140
30
130
120
25
110
20
100
15
10
5
Euro area
90
Euro area
United Kingdom
80
United Kingdom
United States
70
United States
0
Nov-11
Jul-11
Mar-11
Nov-10
Jul-10
Mar-10
Nov-09
Jul-09
Mar-09
Nov-08
Jul-08
Mar-08
Nov-07
Jul-07
Mar-07
Nov-06
Jul-06
Mar-06
Nov-11
Jul-11
Mar-11
Nov-10
Jul-10
Mar-10
Nov-09
Jul-09
Mar-09
Nov-08
Jul-08
Mar-08
Nov-07
Jul-07
Mar-07
Nov-06
Jul-06
Mar-06
60
6
What Are The Effects Of Deleveraging
On The Region…
2012-2013
(in percent of end-2011 stock, deviation from baseline growth)
2
+0.6%
0
0.0%
-2
-1.4%
-0.6%
-1.7%
-4
-4.4%
-6
-$2.2 tn
-$2.6 tn
-8
Bank Assets in EU Banks
-$3.8 tn
Credit Supply in Euro Area
-10
Economic Growth in Euro Area
-12
Weak Policies
Current Policies
Complete Policies
7
..And On Credit In The Rest Of The World?
Impact of EU Bank Deleveraging On Global Bank Lending Supply
(in percent of total bank credit)
0
-1
-2
Weak Policies
-3
Current Policies
-4
Complete Policies
-5
Emerging
Europe
Latin America
European
Union
United States
United
Kingdom
Emerging Asia
Other
advanced
8
U.S./Japan Public Debt: Latent Risk To Stability
Required Fiscal Adjustment and Interest Rate
Historical Volatility in One-Month U.S. Treasury
Bills During Debt Ceiling Negotiations
Average 10-year Sovereign Bond Yield
in April 2012 (in percent)
(in percent)
7
18
6
16
Spain
14
Italy
5
12
4
10
Belgium
France
Canada
3
2
Germany
8
U.S.
U.K.
6
4
1
Japan
2
0
0
5
10
15
Required Fiscal Adjustment, 2011-2020
(in percent of nominal GDP)
20
0
9
EM Risks
Capital Flows Have Become More Volatile
And Less Predictable
Emerging Market Portfolio Flows
(in billions of U.S. dollars, 3-month moving average)
5
120
Emerging Market Asset Performance 40
115
60
(January 1, 2010=100)
110
80
4
105
100
3
2
1
100
120
95
0
90
-1
85
-2
80
140
EM equities (left scale)
EM currencies (left scale)
EMBIG Spreads (right scale, inverted)
160
180
-3
10
What Happens If Bank And Portfolio Flows Reverse?
0.0
-2.5
-5.0
% Points
Credit to GDP Ratio
GDP Growth Rate
Russia
China
Indonesia
India
Peru
South Africa
Brazil
Mexico
Korea
Turkey
Poland
-7.5
11
EMs Have Policy Room To Buffer Shocks
But Homegrown Vulnerabilities Remain
Hungary
Poland
Russia
Turkey
South Africa
China
India
Indonesia
Korea
Brazil
Mexico
Peru
Credit Policy
Room
Monetary Policy
Room
Fiscal Policy
Room
-0.794832851
3.1
10.7368405
36.57098271
6.11615086
39.78204563
5.5
23.29249406
7.027696688
3.5
8.549267935
23.5610262
30.28578836
63.97290738
21.60017491
9.433981925
3.2
11.03613394
5.003352744
3.345152851
4.465779187
2.499537501
7.12925671
12
Policies
Policy: The Quest For Lasting Stability
Euro Area
Breathing Space Limited And Shrinking; Use It Wisely
National:
• Implementation key
Banking:
•Recap/restructure/resolve; use public money if needed
“More & Better
Europe”:
• Roadmap to further integration:
- Financial: Pan-European supervision and resolution
- Fiscal: Ex-ante risk sharing (central financing mechanism)
13
Policy: The Quest For Lasting Stability
U.S., Japan
Start Addressing Medium-Term Challenges Now
• Keep sovereign bonds safe: Fiscal consolidation strategies
Emerging Markets
Do Not Take Stability For Granted
• Preserve policy space and buffers
• Macro + prudential + liquidity instruments
Global
The World Needs More Collaboration
• IMF resources
• Regulatory reform
14
No Time to Pause or Relax: This Time Must Be Different
Together:
Strong, Sustainable,
Balanced Global Growth
Advanced
Economies:
Achieve
Lasting
Stability for
Stronger
Growth
Financial
Stability
Emerging
Markets:
Maintain
Stability for
Continued
Growth
15