suerf webinar

SUERF WEBINARKey Takeaways From the ECB’s November 2020 Financial Stability Review

November 25, 2020

Discussant’s contribution on the

Key Vulnerabilities and Policy Trade-offs

Anna Ilyina

Monetary and Capital Markets Department

International Monetary Fund

The views expressed in this presentation are those of the author and do not necessarily represent the views of the IMF

Unprecedented policy support has:

➢ Kept markets functioning

➢Maintained the flow of credit

➢ Helped avoid adverse macro-financial feedback loops…

➢…and widespread bankruptcies

A Bridge to Recovery

This presentation will focus on:

➢ Key vulnerabilities

➢ The role of policy support

➢ Policy trade-offs going forward

Strong Policy Responses Have Helped Ease Financial Conditions

Global Financial Conditions Indices

(Standard deviations from mean)

-3

-2

-1

0

1

2

3

4

5

6

07 08 09 10 11 12 13 14 15 16 17 18 19 20

April 2020

GFSR

TighteningUnitedStates

China

Euroarea

Other emergingmarket economies

Otheradvancedeconomies

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Dec

Mar

Jun

Sep Oct

Dec

Mar

Jun

Sep Oct

Dec

Mar

Jun

Sep Oct

Dec

Mar

Jun

Sep Oct

Dec

Mar

Jun

Sep Oct

Interest rates House prices Corporate valuations

EM external costs Index

UnitedStates

Euroarea

Otheradvanced

ChinaOther

emerging

Global Financial Conditions Indices

(Standard deviations from mean)

Source: IMF October 2020 Global Financial Stability Report, and IMF staff calculations.

Financial Stability Risks Are Contained, but Not Out of the Woods Yet

Near-Term Growth Forecast Densities

(Probability Densities)


Financial vulnerabilities are rising…


Many Countries Entered the Pandemic with Pre-existing Vulnerabilities

Proportion of Systemically Important Countries with Elevated Vulnerabilities, by Sector

(Percent of countries with high and medium-high vulnerabilities, by GDP [assets for banks, asset

managers, other financial institutions and insurers]; number of vulnerable countries in parentheses)


Rising Public Debt and Fiscal Deficits May Limit Policy Space

Public Debt

(percent of GDP)

Fiscal Deficit

(percent of GDP)

Source: IMF October 2020 Fiscal Monitor and IMF staff calculations.

From

“whatever it

takes”…

…to

“as long as

needed”

Corporate Sector: Policy Trade-offs

Extraordinary policy support

➢ Allowed firms to offset cash shortfalls

via increased borrowing…

➢ …and delay debt service payments

Exit from extraordinary support

➢ Type 1 error: premature withdrawal

of support, incl. to viable firms

➢ Type 2 error: overextending

support, incl. to nonviable firms

➢ Lower liquidity risks

➢ Fewer bankruptcies

➢ Higher indebtedness

➢ Type 1 error:

A spike in bankruptcies

➢ Type 2 error:

Debt overhang;

zombification;

resource misallocation

Policy Support Led to A Decline in Corporate Bond Yields…

US and Euro Area Corporate Bond Yields and

US HY Default Rate

(Percent)

US Investment-Grade Corporate Bond Yields:

Decomposition of Changes since Jan. 2020

(Basis points, left scale;

percentage points, right scale)

2.0

3.0

4.0

5.0

6.0

7.0

8.0

0

2

4

6

8

10

12

14

Feb.20 Apr.20 Jun.20 Aug.20 Oct.20

US HY EA HYUS IG, rhs EA IGUS HY 12m trailing default rate, rhs


Intensity of Policy Measures

(Index)

… and Mitigated Liquidity and Solvency Pressures on Firms

Distribution of Firms by Liquidity and Solvency:

Firms that were solvent pre-COVID 19;

Conditional distribution post-COVID-19

(Percent)

Source: October 2020 IMF Regional Economic Outlook (Europe).

Note: The intensity of policy measures is the principal component of each policy

measure, taking into account information on the size of the budgetary envelope,

the duration of the measure, and the coverage of firms. The bar represents the

interquartile range, median (dash), mean (cross), and the minimum and

maximum values excluding outliers (whiskers).

Source: October 2020 IMF Regional Economic Outlook (Europe).

Note: the chart shows the ex-post (conditional) distribution of those firms

that were solvent pre-COVID-19. The original sample includes 4 million

firms in 17 advanced and 9 emerging market European economies; the

data are sourced from the Orbis database.

Defaults Are On the Rise, but Future Path of Defaults is Uncertain

US Speculative-Grade Default Rate: Actual and Forecasts

by Credit Rating Agencies

(Trailing 12-month rate, percent)

0

5

10

15

20

25

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

Jan-

16

Jan-

17

Jan-

18

Jan-

19

Jan-

20

All sectors

All sectors excluding energy and consumer services

Consumer services

Energy

Global Speculative Grade Corporate Default Rates

(12-Month Trailing, Percent)


From

“whatever it

takes”…

…to

“as long as

needed”

Banks: Policy Trade-offs


➢ Borrower support policies

➢ Strong bank buffers and full use of

flexibility in regulatory framework



of accommodation

➢ Type 2 error: overextending support

to nonviable or insolvent firms

➢ Lower bank credit losses

➢ Increased capital space

➢ Delayed loss recognition

➢ Type 1 error:

Higher bank losses;

credit crunch

➢ Type 2 error:

Debt overhang;

weak growth;

bank profitability pressures

Global Bank Solvency Scenario Analysis (October 2020 GFSR)

• Scenarios: October WEO, baseline and adverse

• ~350 banks in 29 jurisdictions (73% of global bank assets)

• Publicly available annual consolidated data (1995-2019)

• Stress test horizon: 2020-2022

100

94

97.8

100.8

93.294.6

98.3

85

90

95

100

105

2019 2020 2021 2022

Baseline Adverse

Source: IMF staff estimates, October 2020 GFSR Source: IMF staff estimates, October 2020 GFSR

Scenarios: Global GDP under the October WEO

Baseline and Adverse Scenarios

AU

S

BE

L

BR

A

CA

N

FIN

FR

A

DE

U

HK

G

IND

IDN

IRL

ITA

JP

N

KO

R

ME

X

NLD

NO

R

PR

T

SG

P

ZA

F

ES

P

SW

E

CH

E

GB

R

US

A

Borrower Support

New Loans 0 0 # 8 0 3 1 1 8 1 1 0 7 9 2 2 1 0 1 1 3 1 0 0 6

Loan Guarantees 1 3 1 3 2 3 9 4 0 1 1 5 2 1 0 4 2 2 1 1 6 1 1 5 3

Repayment Relief 4 2 4 0 5 3 7 2 # 6 # 7 2 9 6 4 1 # 7 6 # 6 0 # 5

Loss Recognition 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

IFRS/CECL Relaxation 0 0 0 2 0 0 0 1 0 0 0 0 0 0 1 0 0 0 0 1 0 0 0 1 0

Recognition Deferral 2 0 2 2 0 1 0 1 2 1 0 0 1 1 0 0 0 0 0 1 1 0 0 0 1

Capital Adequacy

Lower Buffers 1 4 5 5 4 1 3 2 2 1 2 1 3 2 1 1 2 1 3 3 2 5 2 3 3

Lower RWA and Leverage Exposures 0 0 3 0 0 0 0 1 0 1 0 0 1 1 0 1 0 0 0 0 0 0 3 0 4

Lower Capital Deductions 2 1 4 0 1 0 1 1 1 1 2 3 0 0 2 2 2 2 0 1 1 1 2 1 3

Number of policy announcements: >25 6-10 2-5 1 011-25

Mitigation Policies Announced in Response to

COVID-19

(Number of Policy Announcements)

Policy Support Has Mitigated Potential Bank Losses

Bank Capital Shortfall under Adverse Scenario

(Billions of US dollars)

Source: IMF October 2020 Global Financial Stability Report and IMF staff estimates,

Note: Sample ~350 banks in 29 jurisdictions. The shortfall (RHS chart) is measured against bank-specific and fully loaded capital requirements, including a minimum CET1

of 4.5%, a GSIB buffer, a systemic risk buffer, a stress capital buffer, a conservation capital buffer, and a countercyclical capital buffer.

Distribution of Bank Assets by Capital Ratio under

Adverse Scenario, with Policy Mitigation:

(CET 1 ratio, percent)

From

“whatever it

takes”…

…to

“as long as

needed”

Non-Bank Financial Institutions: Policy Trade-offs


➢ Stabilized funding markets and

market liquidity conditions

➢ Put a floor under risk asset prices



of the central bank support

➢ Type 2 error: maintaining support for

an extended period

➢ Outflows from investment

funds reversed &

stabilized

➢ Vulnerabilities remain

➢ Type 1 error:

abrupt market re-pricing

➢ Type 2 error:

rising liquidity & credit risks

excessive risk taking;

financial re-leveraging

Inflows Return to Investment Funds, but Vulnerabilities Remain Elevated

Cumulative Fund Flows

(Percent of assets under management)

Cumulative Returns and Bid-ask Spreads of Fixed-

Income funds

(Percent)



Interconnectedness and Policy Roadmap

Policy Roadmap (October 2020 GFSR)

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