International finance stability - 金融行业 - ITPUB论坛－专业的IT技术社区

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The resilience of the global financial system has further improved in the past six months, largely because of solid global economic growth, buoyant financial markets, and continued improvement in the balance sheets of the corporate, financial, and household sectors in many countries. The ongoing improvement in the economic fundamentals of many emerging market countries－including efforts to enhance the credibility of their policy framework and the quality of their debt structure－has led to a string of upgrades of sovereign credit ratings, contributing to the benign financial market conditions.
In particular, the overall excellent profitability of the corporate and financial sectors over the past few years has been an important factor in strengthening their balance sheets. The ratio of liquid assets to debt in their balance sheets has risen and stayed at a relatively high level for some time now. So far, the preference for liquidity reflects the caution exercised by corporate executives in making investments－also mergers and acquisitions have picked up only quite recently. This cautious approach has contributed to the slow growth in employment in many countries. By the same token, it has helped to contain the risk of creating investment excesses that in the past have helped trigger sharp market corrections.
At the same time, financial institutions have improved their profitability and strengthened their capital base as well as their risk management systems. In particular, the insurance sector in many countries has improved its solvency ratio. These developments have made financial institutions better prepared to cope with potential future shocks, and have significantly improved the health of the financial system up to the early part of 2005.
Risks in the Period Ahead
If history is any guide, the single most important risk factor for financial markets in good times is complacency. As discussed below and more extensively in Chapter II, current risk premiums for inflation and credit risks leave little or no margin for error in terms of financial asset valuations. The combination of low risk premiums, complacency, and untested elements of risk management systems dealing with complex financial instruments could ultimately become hazardous to financial markets.
At present, it is not easy to see which single event, short of a “major devastating geopolitical incident or a terrorist attack” as highlighted in the September 2004 issue of the Global Financial Stability Report (GFSR), could possibly trigger a sharp and abrupt reversal of this positive assessment. However, because we are more advanced in the economic, profit, and credit cycles, disappointments or negative surprises are more likely to occur. Possibly, a combination or correlation of several less spectacular events might cause markets to reverse their course, and create a less hospitable environment for investors and borrowers who have become accustomed to low rates. Such risks include disappointing developments as to the narrowing of the U.S. current account deficit, continuing rises in commodity and oil prices feeding through to inflation, larger-than-expected rises in interest rates, as well as negative surprises for corporate earnings and credit quality.
Currency adjustments to address the growing global imbalances have taken place in an orderly fashion in the past two years. So far, there is no visible sign of a sustained decline in capital flows into the United States. There is an emerging view among market participants that currency adjustments on their own are insufficient to reduce the global imbalances and that some reduction in growth differentials between the United States and several of its major trading partners is needed. However, market participants are also acutely aware that the financing of the U.S. current account deficit－at least for the time being－ hinges, to a certain degree, on the willingness of central banks, especially in Asia, to accumulate further dollar assets. Undue delays in addressing the global imbalances through adjustments in domestic policies or any serious doubts about the willingness of central banks to accumulate dollars could s park strong incentives for investors, private and possibly even public, to reduce future dollar purchases or even reduce their existing dollarholdings. This could trigger a further significant decline of the dollar and an increase in U.S. interest rates that might reduce U.S. domestic demand. The sharp dollar depreciation could also have a negative effect on European and Japanese growth. These developments could lead to weaker economic growth worldwide.
While financial markets have largely priced in a moderate and gradual monetary tightening, they might be less prepared if market interest rates－especially long-term rates－ were to go up more abruptly, either because of a sharp decline of the dollar or worse-than expected inflation data. This would lead to the unwinding of many investment positions predicated on low or gently rising rates, leading to corrections in many asset markets.
After growing strongly in the past two years, corporate earnings growth is likely to decelerate in the future. In a similar vein, banks may not be able to count on a reduction in credit provisions to increase their reported profit. Earnings disappointments relative to market expectations are likely to occur and may cause equity markets to decline, perhaps together with rising volatility. Such corrections in major equity markets could weaken a stabilizing factor that has helped improve the solvency of many financial institutions, such as insurance companies in several countries.
Another possible source of concern could be a confluence of credit events, such as a downgrading of a major global company to subinvestment grade for reasons that may not be linked to negative events in the global economy. Such a credit event could burden the high-yield market investor base, leading to a widening of high-yield credit spreads.
The growing sophistication of financial market participants over the past years has largely reduced the risk of “knee-jerk contagion” that characterized previous crises. Despite low credit spreads, markets have demonstrated their ability to restrict their pricing reactions to several specific credit events of last year, without spillover effects on the credit markets at large. However, it is also clear that a general reassessment of riskappetite of large investors and intermediaries, due to a worsening of the general economic and financial situation, could have knock-on effects for related asset classes due to relative value considerations.
Developments such as those described above would not be entirely unexpected: similar scenarios have been used in stress tests conducted by many financial institutions and their supervisors. However, the resulting marketcorrections could be amplified by interactions between these risks in unanticipated ways that could change the general perception of risk.
Moreover, otherwise normal market fluctuations could be amplified through liquidity problems. An increasingly relevant contributor to this liquidity risk is the recent proliferation of complex and leveraged financial instruments, including credit derivatives and structured products such as collateralized debt obligations (CDOs). While secondary trading for these products exists, these instruments still rely on quantitative models for relative value assessment, investment decisions, and pricing. Therefore, there is a risk that models that are overly similar in their construction could cause investors to rush to exit at the same time, leading to market liquidity shortages.
While risk management at many financial institutions has been strengthened and become more sophisticated in recent years, the risk management process still hinges, to a crucial extent, on the ability of market participants, in times of market stresses, to execute trades quickly without having prices move too much against them. However, most recent risk management models dealing with the new and complex credit instruments have not yet been put to a live test, that is, whether in time of need, the anticipated counterparties will stand ready to absorb the additional market and credit risks from those who would like to shed it. This issue is becoming more relevant given the recent trend of concentration in the financial sector that reduces the number of large intermediaries in various markets.
The question of a liquidity shortage as a potential amplifier for market price shocks is still one of the major “blind spots” in our financial market landscape. The interactions of liquidity risk and other potential amplifiers of market shocks with changes in global capital flows will have to be at the forefront of all future effort to further improve the global financial architecture.
Financing Prospects and Risks Facing Emerging Market Countries
Emerging market sovereign borrowers have enjoyed much-improved financing conditions in the past two years. The favorable environment can be attributed to improvements in economic fundamentals in emerging markets, a reduction in external borrowing requirements, the abundant global liquidity that has allowed many sovereigns to prefinance their 2005 external financing needs, and more reliance on domestic capital markets. International investors’acceptance of local currency bonds, either issued internationally (Colombia) or domestically,1 is an important and positive development in helping emerging market countries better manage their debt. Sovereign borrowers, except for some countries still burdened by a large debt overhang, are thus in a better position than in the past to cope with the potential market corrections discussed above. Nevertheless, they should not be complacent and should use the currently favorable financial conditions to implement strong economic policies and deepen reforms, so as to enhance their resiliency to future shocks.
Despite an overall improvement in their credit quality since 2000, corporate sectors in many emerging markets continue to face considerable maturity and currency mismatches on their balance sheets. Chapter IV documents this trend, using a new comprehensive database, which combines balance sheet data for emerging market companies and financing flow data. Emerging market corporates, therefore, remain vulnerable to interest rate and foreign exchange risks, which so far have tended to materialize together: when the exchange rate is under pressure, local interest rates also rise sharply.
Another salient fact is that corporate borrowers in 2004 accounted for 60 percent of international bond issuance by emerging market borrowers－the third year in a row that corporate issuance exceeded sovereign issuance. This phenomenon has reflected a strengthening of the balance sheets of emerging market corporates, and their desire to borrow at lower rates (compared with domestic rates), as well as international investors’ search for yield.
Taken together, these developments suggest that there is a need to closely monitor emerging market corporate sector vulnerabilities in order to achieve a more fully informed assessment of overall financial stability. To be effective, such monitoring should follow an integrated approach, which takes into account the interaction between interest rate, foreign exchange, and credit risks. Even though international bond investors may have held more credit risk recently, emerging market corporate insolvencies that could be triggered by a major devaluation of the local currency still present significant credit risks and costs to the domestic banking sector. The fact that some international investors may be new to the emerging market corporate sector could also amplify the volatility of such a potential sell-off.