1

CHAPTER
A FINANCIAL SYSTEM TESTED BY HIGHER
INFLATION AND INTEREST RATES

Chapter 1 at a Glance
•• Financial stability risks have increased rapidly since the October 2022 Global Financial Stability Report as
the resilience of the global financial system has faced a number of tests. The failures of Silicon Valley Bank
and Signature Bank of New York and the loss of confidence in Credit Suisse are powerful reminders of the
challenges posed by the interaction between tighter monetary and financial conditions and the buildup in
vulnerabilities since the global financial crisis.
•• The forceful responses by policymakers to stem systemic risks reduced market anxiety. Despite some
improvements of late, market sentiment remains fragile, and strains are still evident across a number of
institutions and markets, as investors reassess the health of the financial system.
•• While there is little doubt that the regulatory changes implemented since the global financial crisis
have made the financial system generally more resilient, the fundamental question confronting market
participants and policymakers is whether these recent events are a harbinger of more systemic stress,
as previously hidden losses are exposed, or simply the isolated manifestation of challenges from tighter
monetary and financial conditions after more than a decade of ample liquidity.
•• In the banking sector, recent events in the United States have been a reminder that funding can disappear
rapidly and even events at smaller banks can have systemic implications by triggering widespread loss of
confidence and rapidly spreading across the financial system, amplified by technology and social media.
Shifting patterns of deposits across different institutions could raise funding costs for banks, which could
restrict their ability to provide credit to the economy.
•• The impact of tighter monetary and financial conditions could be amplified because of financial leverage,
mismatches in asset and liability liquidity, and a high degree of interconnectedness within the nonbank
financial intermediation sector and with the traditional banking institutions. This raises the specter of
stress in some sectors—such as venture capital, technology, and commercial real estate sectors—that have
been particularly hit by the removal of ample liquidity spilling over to the rest of the financial system.
•• Looking beyond financial institutions, buffers accumulated by households and corporations during the
pandemic have boosted their shock-absorption capacity, but these buffers are deteriorating, leaving them
more vulnerable to default risk.
•• Large emerging markets have so far avoided adverse spillovers, as many commenced monetary tightening
early. If financial stresses intensify, a significant pullback from global risk taking could trigger capital
outflows. Smaller and riskier emerging market economies continue to confront worsening debt
sustainability trends, with many already facing strains and funding challenges.
•• The prospect of inflation and interest rates being higher for longer after more than a decade of subdued
inflation, low rates, and ample liquidity has profound implications for asset prices, asset allocations, and
the resolution of vulnerabilities that have recently emerged. Poor liquidity in bond markets could sharply
amplify asset price moves and shocks.

Prepared by staff from the Monetary and Capital Markets Department (in consultation with other departments): The authors of this chapter
are Jason Wu (Assistant Director), Nassira Abbas (Deputy Division Chief ), Charles Cohen (Deputy Division Chief ), Antonio Garcia Pascual
(Deputy Division Chief ), Mustafa Oguz Caylan, Yingyuan Chen, Fabio Cortes, Reinout De Bock, Andrea Deghi, Torsten Ehlers, Charlotte
Gardes-Landolfini, Deepali Gautam, Sanjay Hazarika, Shoko Ikarashi, Phakawa Jeasakul, Esti Kemp, Johannes S. Kramer, Harrison Samuel
Kraus, Yiran Li, Corrado Macchiarelli, Sheheryar Malik, Aurelie Martin, Kleopatra Nikolaou, Gurnain Kaur Pasricha, Natalia Pavlovna
Novikova, Thomas Piontek, Silvia Loyda Ramirez, Patrick Schneider, Jeffrey David Williams, Yanzhe Xiao, Ying Xu, Dmitry Yakovlev, and
Aki Yokoyama, under the guidance of Fabio Natalucci (Deputy Director).

International Monetary Fund | April 2023 1

GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

•• The emergence of stress in financial markets complicates the task of central banks at a time when
inflationary pressures are proving to be more persistent than anticipated. Clear communication about
central banks’ objectives and policy functions is crucial to minimize economic and financial uncertainty.
The availability of tools aimed at addressing financial stability risks should help central banks separate
monetary policy objectives from financial stability goals, allowing them to continue to tighten policy to
address inflationary pressures.
•• If financial strains intensify significantly and threaten the health of the financial system amid high
inflation, trade-offs between inflation and financial stability objectives may emerge. Clear communica-
tion about central banks’ objectives and policy functions will be crucial to avoid unnecessary uncertainty.
Policymakers should act swiftly to prevent any systemic event that may adversely affect market confidence
in the resilience of the global financial system. Should policymakers need to adjust the stance of monetary
policy to support financial stability, they should clearly communicate their continued resolve to bring
inflation back to target as soon as possible once financial stress lessens.
•• Bank supervisors should ensure that banks have governance and risk management commensurate with
their risk profile, including adequacy of capital and liquidity stress tests. Adequate minimum capital and
liquidity requirements should guard against hidden losses that materialize abruptly when there are liquid-
ity shocks. Authorities should also strengthen resolution regimes and crisis management frameworks. In
the nonbank financial intermediation sector, policymakers should close data gaps, incentivize proper risk
management practices, set appropriate regulation, and intensify supervision.

Financial stability risks have increased rapidly since between tighter monetary and financial conditions and
the October 2022 Global Financial Stability Report as the buildup in vulnerabilities since the global financial
the resilience of the global financial system has been crisis. The state-supported acquisition of Credit Suisse
severely tested.1 In the aftermath of the global financial by UBS reduced potential risks associated with the
crisis, amid extremely low interest rates, compressed vol- liquidation of a global systemically important bank
atility, and ample liquidity, market participants increased but also created some new risks as investors focused on
their exposures to liquidity, duration, and credit risk, possible contagion channels. Amplified by new tech-
often using financial leverage to boost returns. These nologies and the rapid spread of information through
vulnerabilities have kept financial stability risks elevated, social media, what initially appeared to be isolated
as flagged in previous issues of the Global Financial events in the US banking sector have quickly spread to
Stability Report. These vulnerabilities are being exposed banks and financial markets across the world, causing
in the current high-inflation environment as central a sharp repricing of interest rate expectations and a
banks tightened monetary policy and removed liquidity dramatic sell-off of risk assets.
aggressively to bring inflation back to target. With the The forceful response by policymakers to stem
disinflationary process slower than anticipated, the rapid systemic risks reduced market anxiety. In the United
pace of policy tightening is causing fundamental shifts States, bank regulators took steps to guarantee uninsured
in the financial risk landscape. Asset allocations, asset deposits at the two failed institutions and to provide
prices, and market conditions are adjusting, challenging additional liquidity through a new Bank Term Fund-
market structures, investors, and financial institutions. ing Program. In Switzerland, the Swiss National Bank
Numerous pressure points have emerged. provided emergency liquidity to Credit Suisse. Despite
The sudden failures of Silicon Valley Bank (SVB) some improvements of late, market sentiment remains
and Signature Bank of New York (SBNY)—two fragile, and strains are still evident across a number of
midsized banks in the United States—and the loss of institutions and markets. It remains to be seen whether
market confidence in Credit Suisse, a global systemi- the measures taken so far have been sufficient to fully
cally important bank in Europe, have been a powerful restore confidence in markets and institutions.
reminder of the challenges posed by the interaction Even before the most recent episodes, a number of
stress events over the past year required aggressive inter-
1Unless otherwise stated, the data cutoff date is March 30, 2023. vention by policymakers. In the United Kingdom, forced

2 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

selling by pension funds invested in liability-driven hidden in corners of the financial system that are
investment schemes in the fall of last year led to targeted more opaque and less visible. But they do not disap-
and temporary purchases by the Bank of England to pear. Losses resulting from such exposures need to be
stabilize the gilt market. In Korea, authorities deployed a allocated across the financial system, and complacency
slew of tools, including the reactivation of COVID-era in addressing them tends to amplify the market impact
asset purchase programs, to address strains in the once losses are eventually realized.
asset-backed commercial paper market in October 2022. In the banking sector, recent events in the United
Underlying all these events is a perilous combination States have been a reminder that funding can disappear
of vulnerabilities (liquidity and maturity mismatches, rapidly and events in smaller banks can have systemic
financial leverage, and interconnectedness) that have implications by triggering widespread loss of confidence
been lurking under the surface of the global financial and that fears can spread quickly across the financial sys-
system for years. Market participants failed to adequately tem, amplified by technology and social media. Shifting
prepare for rate increases, possible disruptions in funding patterns of deposits across different institutions could
markets, and links with the rest of the financial sys- raise funding costs for banks, which could restrict their
tem. While risks are obvious in hindsight, the systemic ability to provide credit. Indeed, on the back of rising
implications of the existing weaknesses were largely interest rates, banks were already tightening lending
unanticipated by policymakers and investors alike. When standards to avoid a deterioration in asset quality even
the risks materialized, their systemic implications became before the recent financial stress. These concerns are
clear, requiring immediate policy intervention, and particularly pertinent for US regional banks, especially
private institutions and investors were effectively shielded those with concentrated deposit base and high expo-
from the full impact of their potential exposures. sure to duration risk, which recent events have shown
Before the most recent events, strong liquidity and can be systemic. They could face greater scrutiny with
capital positions at banks, as a result of regulatory respect to their holdings and funding structures and are
reforms after the global financial crisis, had reassured expected by market participants to be subject to more
market participants that the global financial sector, stringent supervision and regulation. Because regional
despite the continued tightening of monetary con- and smaller banks in the United States account for more
ditions, was generally resilient and able to withstand than one-third of total bank lending, a retrenchment
shocks. However, amid significant uncertainty about from credit provision could have a material impact on
the spillover effects of current financial stresses and the economic growth and financial stability. With the recent
effect on the real economy, investors are now reassess- fall in bank equity prices, lending capacity of US banks
ing the health of the financial system. could drop by about 1 percent in the coming year,
The fundamental question confronting market reducing real GDP by 44 basis points, all else being
participants and policymakers is whether these recent equal. This may allow for some recalibration of mon-
events are a harbinger of more systemic stress that will etary policy as central banks have recently indicated.
test the resilience of the global financial system—a Across advanced economies, investor fears about losses
canary in the coal mine—or simply the isolated on interest rate–sensitive assets have led to widespread
manifestation of challenges from tighter monetary and sell-offs, particularly in banks that trade at significant
financial conditions after more than a decade of ample discounts to their book values and long-term challenges
liquidity. While there is little doubt that the regulatory regarding profitability and their ability to raise capital.
changes implemented since the global financial crisis, Emerging market banks appear to have so far avoided
especially at the largest banks, have made the financial the pressures felt by advanced economy banks. They
system generally more resilient, concerns remain about have much less exposure to interest rate risks because
vulnerabilities that may be hidden. Investors appear of lower share of market-to-market securities and
to be looking for stress points, fragilities, and links higher share of funding through retail deposits and also
in the banking and nonbank financial intermediation rely less on short-term debt and non–interest-bearing
(NBFI) sectors that may have been underestimated or deposits, which typically present the greatest flight
missed. Exposures and losses can be masked for a while risks. That said, a number of countries have low levels
because of accounting rules, regulatory ­treatments, of deposit insurance coverage, and many sovereigns
or other factors that do not require some assets to have less fiscal and monetary space to address problems
be held valued at market value, or because they are in the banking sector. Emerging market banks also

International Monetary Fund | April 2023 3

GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

generally have assets with lower credit quality than those fiscal support and monetary easing rolled out during
in advanced economies, suggesting that they are not the pandemic—have boosted the shock-absorption
shielded from a sharp deterioration of confidence in the capacity of the global economy. However, households
banking sector. Finally, emerging market banks typically are facing heavier debt-servicing burdens as interest
play a larger role in the financial system than those in rate rise, while firms are also confronting declin-
advanced economies, so the consequences of banking ing earnings, eroding their savings and cash buffers
sector weaknesses could be more severe. and leaving them more vulnerable to default risk—
The impact of tighter monetary and financial especially if the global economy slows meaningfully.
conditions could be amplified because of financial Large emerging markets have so far managed
leverage, mismatches in asset and liability liquidity, relatively smoothly the sharp tightening of monetary
and high levels of interconnectedness within the NBFI policy in advanced economies, in part aided by the fact
sector and with traditional banking institutions (see that global financial conditions have not matched the
Chapter 2 of this report and Chapters 1 and 3 of extent of global monetary policy tightening. In addition
the October 2022 Global Financial Stability Report). to having generally stronger fundamentals and higher
This raises the specter of stress in some sectors that buffers than in the past, they have benefited from policy
appear to have been particularly hit by the removal of space created by commencing their own tightening
ample liquidity spilling over to the rest of the financial cycles ahead of advanced economies. These countries
system. For example, the deterioration of conditions have so far seen only limited spillovers from the latest
in the venture capital sector and the tech sector more financial strains. However, they could face significant
broadly played an important role in the events sur- challenges should the current situation fail to normalize
rounding the demise of SVB in the United States, and and cause a pullback from global risk taking and asso-
the outlook for those sectors now appears even gloom- ciated capital outflows. International debt issuance has
ier. In addition, SVB’s spillover from the core financial yet to recover from the extremely low levels of 2022 and
sector reverberated across the crypto ecosystem and could face another difficult year if financial conditions
financial institutions exposed to it. Its failure resulted remain tight. In addition, the capital flows from banks
in a depegging of two stablecoins (Circle USDC and and nonfinancial corporations that have compensated
Dai), which held uninsured deposits in the bank, as for lower portfolio investments since the onset of
well as the demise of Signature Bank of New York COVID-19 could now be under pressure.
because investors became concerned about its footprint For smaller and riskier emerging market economies,
in the crypto sector. These events add to questions international market access has become highly
about the viability of digital assets and reinforce the challenging. Sovereign debt sustainability metrics con-
need for appropriate regulation. tinue to worsen around the world, especially in frontier
Concerns have been growing about conditions in markets and low-income countries, with many of the
the commercial real estate (CRE) market, which has most vulnerable already facing severe strains.
been under pressure from a worsening of fundamentals Downside risks to the global economy, as summa-
(driven in part by structural issues and postpandemic rized by the IMF’s growth-at-risk measure, remain
shifts in office and retail space demand; see Chapter 3 elevated. Beyond risks related to financial stress, there
of the April 2021 Global Financial Stability Report) and are several other possible sources of macroeconomic
tighter funding costs. In the United States, banks with risks that could have important macro-financial
total assets less than $250 billion account for about implications. For example, an escalation of Russia’s war
three-quarters of CRE bank lending, so a deterioration in Ukraine or a sharp rebound in economic activity
in asset quality would have significant repercussions in China could spark a sharp rise in energy prices,
both for their profitability and lending appetite. In pushing headline inflation higher again. Rising geopo-
addition, NBFIs play an important role in the real litical tensions could result in financial fragmentation,
estate investment trusts (REITs) sector and commercial causing a sudden reversal in cross-border capital flows
mortgage-backed securities (CMBS) markets, so there (especially for emerging markets and developing econ-
are broader implications stemming from stress in CRE omies), and exacerbate macro-financial volatility (see
market both for financial stability and economic growth. Chapter 3). The recovery in China could stall, causing
Looking beyond financial institutions, buffers held further stress in the property development sector and
by households and corporations—thanks in part to the in real estate markets, resulting in contagion to the

4 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

banking sector and local governments and ultimately investor confidence in the global financial system.
creating more widespread risks to financial stability. If Confidence is at the core of the financial sector and
global financial conditions tighten sharply, refinancing policymakers need to be ready to take all necessary
risks for vulnerable emerging markets may increase steps to maintain it. Should policymakers need to
further, raising the prospect of debt distress. adjust the stance of monetary policy to support finan-
More broadly, the prospect of inflation and interest cial stability, they should clearly communicate their
rates being higher for longer after more than a decade continued resolve to bring inflation back to target as
of subdued inflation, low rates, and ample liquidity has soon as possible once financial stress lessens.
profound implications for asset prices, asset allocations,
and the resolution of vulnerabilities that have recently
emerged. For several years, investors have used invest- Turmoil in the Banking Sector Jolted Markets
ment strategies predicated on low volatility—reaching In response to persistently high inflation across
for yield and using of leverage—and some of them countries, global central banks have raised interest
appear to be unprepared for a world of higher realized rates aggressively over the past two years. In addition
volatility, rising defaults, and falling asset prices. The to traditional channels of monetary transmission, such
risk-management failures that have been unmasked by as through higher cost of capital and credit for firms
the recent episodes are a source of concern. Lurking and households, the speed and magnitude of the rate
in the background is poor liquidity in bond markets, hikes lowered significantly the value of financial assets,
which could sharply amplify asset price moves and particularly bonds with fixed coupons.
shocks. In addition, uncertainty about the resolution After years of subdued inflation and low ­interest rates,
of the US debt ceiling impasse is adding to risks and there is a risk that some investors and ­financial institu-
volatility in short-term US funding markets. tions with concentrated holdings in long-duration assets
The emergence of stress in financial markets is may become complacent and fail to properly manage
complicating the task of central banks at a time when interest rate risks prudently, ­especially when they use
inflationary pressures are proving more persistent than funding sources that are not stable to finance the pur-
anticipated. Prior to the recent stress episodes, interest chases of these assets. The ­failures of SVB and SBNY in
rates in advanced economies had risen sharply and early March serve as a stark reminder of this risk and of
were more aligned with central bank communications the speed at which balance sheets can become severely
about the need to keep monetary policy restrictive strained when interest rates increase at a fast pace.
for longer. Since then, despite the 50-basis-point hike After persistent deposit outflows in recent months,
by the European Central Bank on March 16 and the SVB revealed on March 6 a $1.8 billion loss on sales
25-basis-point increase by the Federal Reserve on of Treasuries and agency mortgage-backed securi-
March 22, investors have sharply repriced downward ties (MBS) and announced on March 8 a plan to
the expected path of monetary policy in advanced raise funds through a $2.25 billion stock offering.
economies. They now anticipate central banks to begin A $42 billion of deposit withdrawals followed on
easing monetary policy well in advance of what was March 9, which led to the Federal Deposit Insurance
previously priced in. Inflation, however, has remained Corporation (FDIC) taking control of SVB on
uncomfortably well above target. March 10. After a withdrawal of 20 percent of its
The availability of tools aimed at addressing financial deposits, SBNY—a bank that focused on technology
stability risks should help central banks separate mon- and crypto clients—suffered the same fate and was
etary policy objectives from financial stability goals, closed on March 12, with the FDIC appointed as the
allowing them to continue to tighten policy to address bank’s receiver (see Box 1.1).
inflationary pressures. If financial pressures intensify The collapse of SVB and SBNY has sparked
significantly and threaten the health of the financial concerns about other US regional banks with similar
system amid high inflation, trade-offs between inflation runnable deposits and interest rate–sensitive securities
and financial stability objectives may emerge. Clear not priced at market value, leading to the sharpest
communication about central banks’ objectives and correction in the regional bank equity index in decades
policy functions will be crucial to minimize economic (Figure 1.1, panel 1). The episode has also adversely
and financial uncertainty. Policymakers should act affected technology firms, which made up much of
swiftly to prevent any systemic event that could shake SVB’s and SBNY’s deposit bases. Many technology

International Monetary Fund | April 2023 5

 GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Figure 1.1. A Banking Turmoil Jolted Markets

The loss of confidence and subsequent runs on Silicon Valley Bank and European banks have sold off dramatically on the back of the US
Credit Suisse quickly reverberated throughout the financial system. regional and European bank turmoil.
1. Performance of Selected US and European Equity Indices and 2. European Bank CDS and Performance of Euro STOXX 600 Banks
Stocks since May 2022 since March 2022
(Prices, indexed, May 1, 2022 = 100) (Basis points, percent)
S&P 500 Euro STOXX 600 Markit iTraxx Europe Subordinated Financial index
US banks European banks Euro STOXX 600 banks’ price in euros (right scale)
SVB Financial Group Credit Suisse 140 35
120 30
130
100 25
120
20
80 110 15
60 100 10
90 5
40 0
80
–5
20 70 –10
0 60 –15
May 2022 Aug. 2022 Nov. 2022 Feb. 2023 Mar. 2022 June 2022 Sep. 2022 Dec. 2022 Mar. 2023

These developments have shaken international dollar funding ... and interbank as well as commercial paper funding markets.
markets ...
3. Cross-Currency Dollar Funding Spreads 4. Interbank Funding Spreads in the United States and the Euro Area
(Basis points) (Basis points)
120
FRA-OIS 3m FRA-ESTR 3m
50 100
CP-OIS, top tier CP-OIS, second tier
80
–50 60
40
–150
20
–250 Swiss franc British pound 0
Euro Japanese yen –20
–350 –40
2008 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Feb. 2022 May 2022 Aug. 2022 Nov. 2022 Feb. 2023

Credit markets came under some pressure. The banking turmoil led to a stark repricing of policy expectations that
resembles moves last seen in 1987.
5. US Corporate Bond Spreads 6. Daily Change in Near-Term Money Market Forward Rates
(Basis points) Nine Months Ahead
(Basis points)
USD high-yield technology, OAS 100
1,000 USD high-yield all sectors, OAS
USD investment-grade technology, OAS 50
800
USD investment-grade all sectors, OAS
0
600
Subprime crisis –50
400 Long-Term Capital
Management
200 Silicon Valley Bank and –100
Black Monday Signature Bank
0 –150
2020 21 22 23 1986 89 92 95 98 2001 04 07 10 13 16 19 22

Sources: Bloomberg Finance L.P.; and IMF staff calculations.

Note: In panel 2, the bubble size represents the equity market capitalization. CDS = credit default swap; CP-OIS = yield spread between commercial paper and
overnight index swaps with the same maturity; FRA-ESTR = forward rate agreement–euro short-term rate; FRA-OIS = forward rate agreement–overnight index swap;
Long-Term Capital Management = Long-Term Capital Management hedge fund crisis; OAS = option-adjusted spread.

6 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

companies have reportedly withdrawn deposits from The decision to fully write down AT1 debt while
other regional banks. allowing equity holders to recover 3 billion Swiss
In Europe, Credit Suisse—a global systemically francs surprised many investors, as such debt was
important institution subject to multiple investiga- widely viewed as senior to equity in the capital struc-
tions, embroiled in scandals, and under long-standing ture.3 AT1 prices declined significantly (Figure 1.2,
pressures on the back of large losses—lost the confi- panel 1) after the announcement. Likely recognizing
dence of investors in the middle of March. European that AT1 is a material component of regulatory capital
bank stock prices collapsed, and credit default swap for European banks—although no major bank used
spreads soared in the days that followed, as global it as much as Credit Suisse did—multiple authorities
banking systems’ financial health became top of mind issued public statements reaffirming that AT1 debt is
for investors (Figure 1.1, panel 2). Strains ensued in senior to bank equity in resolution to calm the market
short-term funding markets, resulting in higher costs and avoid the cost of this source of bank capital from
for international dollar funding, especially with respect surging (Figure 1.2, panel 2). The market remained
to the Swiss franc (Figure 1.1, panel 3), and a notable volatile in the days following the takeover, reportedly
widening of interbank funding spreads in both the leading to losses for certain asset managers and institu-
United States and the euro area (Figure 1.1, panel 4).2 tional investors, before stabilizing.
Dollar funding conditions have similarly tightened in
emerging market economies, with sovereign external
debt spread over US Treasuries widening, reverting Central Banks Responded Quickly, But
the narrowing trend since late last year. In corporate Consequences Were Already in Motion
debt markets, issuance has slowed recently, particularly To cushion the failures of SVB and SBNY, the
for sub–investment-grade firms, as corporate debt US Treasury Department, FDIC, and the Federal
spreads widened (Figure 1.1, panel 5). Amid height- Reserve responded by rolling out an emergency
ened volatility and an unwinding of levered bets that package with two key components to restore investor
central banks would hike policy rates aggressively to and deposit confidence in the banking system: first,
tackle persistent inflation, yields of the two-year Trea- FDIC will protect all SVB and SBNY deposits, not
sury bond and the two-year Bund each collapsed by just FDIC-insured ones. Second, the Federal Reserve
nearly 100 basis points, respectively, between March 9 introduced the Bank Term Funding Program to lend
and 15, as investors sought refuge in sovereign bond to any depository institutions against the par value
markets. The turmoil in the banking sector led to a of US Treasuries, agency debt, and MBS for up to
significant reassessment of monetary policy rate expec- one year at zero margins, allowing banks to generate
tations, with magnitude and scale comparable to that liquidity without selling securities and crystallizing
of Black Monday in 1987 (Figure 1.1, panel 6). mark-to-market losses caused by higher interest rates
On March 19, Credit Suisse was taken over by rival (see Box 1.1 for details).
UBS at a price tag of 3 billion Swiss francs (less than Bank borrowing from the Federal Reserve’s discount
half of the earlier market closing price), with the sup- window’s standing Primary Credit facility surged to
port of the Swiss government. The takeover was com- an all-time high of 153 billion on March 15, while
pleted in an expedited process without shareholders’ the take-up at the new Bank Term Funding Program
approvals. In addition to liquidity support provided by was 12 billion (Figure 1.3, panel 1). Borrowing by
the Swiss National Bank (see the next section), Swiss one regional bank reportedly accounted for the lion’s
authorities provided a guarantee of 9 billion Swiss share of Primary Credit loans on that day.4 In the
francs to UBS to cope with potential losses from the following weeks, usage of the BTFP increased (see red
takeover, in case losses borne by UBS exceed 5 billion diamond in Figure 1.3, panel 1), while take-up at the
Swiss francs. In the process, the authorities completely discount window declined some. Banks also borrowed
wrote down the nominal value of all Additional Tier 1
3The contractual terms of Credit Suisse AT1 debt depart from
(AT1) debt of 16 billion Swiss francs.
practice in other countries, as it is written off, rather than converted
to equity, when the designated capital thresholds are breached.
4The Federal Reserve also had $143 billion in loans outstanding
2Commercial paper issuance for lower-rated financial institutions to the two FDIC-created bridge banks as part of the resolution of
was reportedly paralyzed from March 15 to 20. SVB and SBNY.

International Monetary Fund | April 2023 7

 GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Figure 1.2. Credit Suisse Fallout: Implications for the AT1 Debt Market
AT1 debt instruments underperformed after the Credit Suisse fallout ... ... with implications for the future viability of the AT1 debt market.
1. AT1 Debt 2. Banks Usage of AT1 Debt
(Price index) (Percent)
190 25 10
US dollar Euro British pound CET1/RWA
AT1/RWA
180 9
AT1 share in index (percent, right scale)
20 8
170
7
160
15 6
150
5
140
10 4
130
3
120 5 2

110 1

100 0 0
Jan. 2019 Jan. 2020 Jan. 2021 Jan. 2022 Jan. 2023
Bank 1
Bank 2
Bank 3
Bank 4
Bank 5
Bank 6
Bank 7
Bank 8
Bank 9
Bank 10
Bank 11
Bank 12
Bank 13
Bank 14
Bank 15
Bank 16
Credit Suisse
Bank 18
Bank 19
Bank 20
Bank 21
Sources: Bloomberg Finance L.P.; and IMF staff calculations.
Note: AT1 = Additional Tier 1; CET1 = Common Equity Tier 1 capital; RWA = risk-weighted assets.

heavily from the Federal Home Loan Banks (FHLBs) witnessed strong inflows driving their assets to new
using FHLB advances against mortgages and similar record heights. Some bank deposits reportedly went to
assets to get short-term funding. FHLB advances, government and Treasury MMFs in the week following
which had already risen considerably over the past year SVB’s collapse (Figure 1.3, panel 4). At the same time,
as monetary policy tightening reduced liquidity in money markets continued to see strong take-up in the
the interbank market, surged after SVB and SBNY’s overnight reverse repurchase agreement (ON RRP),
collapse (Figure 1.3, panel 2). The FHLB system funds which increased by 270 billion on net since then. By
these surging advances by issuing discount notes and contrast, prime MMFs saw modest outflows, concen-
other debt securities and by significantly curtailing its trated at the few funds directly or indirectly exposed to
lending in the interbank and repo markets. As a result, SVB’s operations. While deposit outflows from smaller
interest rates of FHLB discount notes and in repo mar- banks appear to have stabilized, resurgence of anxiety
kets moved up noticeably (Figure 1.3, panel 3) on the regarding the prospects of regional banks could drive
days immediately after SVB’s collapse; thereafter, rates deposits into MMFs or to larger banks.
have moved back down.5 After the Credit Suisse fallout, the Swiss authorities
Money market funds (MMFs) appeared to have and the Federal Reserve announced a series of
gained from the stress in the banking sector. MMFs new liquidity measures. The Swiss authorities
announced extraordinary liquidity assistance for Credit
5During the week of March 13, Treasury settlements and Suisse and UBS for a total of up to 200 billion Swiss
corporate-tax day also added to demands for cash and pressures on francs (an amount close to the remaining deposit base
some interest rates. Anecdotal evidence suggests that repo rates were of Credit Suisse)—Credit Suisse and UBS can obtain a
higher in the morning than in the afternoon, as investors were eager
to secure funding early in the day. The moves were more notable in loan (with privileged creditor status in bankruptcy) for
the bilateral and the interdealer markets. a total amount of up to 100 billion Swiss francs and,

8 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Figure 1.3. Federal Reserve Facilities and US Money Markets

Usage at the Federal Reserve’s discount window borrowing reached an ... and the FHLB system issued a record level of debt securities to
all-time high, and banks also tapped the Bank Term Funding Program ... provide liquidity to banks in March.

1. Take-Up at the Discount Window and Bank Term Funding Program 2. FHLB Debt Issuance
(Billions) (Billions)
180 Discount window primary credit 300
160 Bank term funding facility (March 29, 2023)
250
140
120 200
100
150
80
60 100
40
50
20
0 0
Dec. 2002

Dec. 2004

Dec. 2006

Dec. 2008

Dec. 2010

Dec. 2012

Dec. 2014

Dec. 2016

Dec. 2018

Dec. 2020

Dec. 2022

Mar. 2010

Mar. 2011

Mar. 2012

Mar. 2013

Mar. 2014

Mar. 2015

Mar. 2016

Mar. 2017

Mar. 2018

Mar. 2019

Mar. 2020

Mar. 2021

Mar. 2022

Mar. 2023
Increased supply drove overnight rates on FHLB notes above the OIS ... while money market funds saw overall strong inflows.
rate, while funding pressures creeped into repo markets ...
3. SOFR and FHLB Discount Note Rates to OIS 4. Year-to-Date Money Market Fund Flows
(Percentage points) (Billions)
0.3 SOFR FHLB Government Prime Treasury 500

400

0.1 300

200

–0.1 100

–0.3 –100
Feb. 1, 2023

Feb. 8, 2023

Feb. 15, 2023

Feb. 22, 2023

Mar. 1, 2023

Mar. 8, 2023

Mar. 15, 2023

Mar. 22, 2023

Jan. 3, 2023
Jan. 6, 2023
Jan. 11, 2023
Jan. 17, 2023
Jan. 20, 2023
Jan. 25, 2023
Jan. 30, 2023
Feb. 3, 2023
Feb. 8, 2023
Feb. 13, 2023
Feb. 16, 2023
Feb. 22, 2023
Feb. 27, 2023
Mar. 2, 2023
Mar. 7, 2023
Mar. 10, 2023
Mar. 15, 2023
Mar. 20, 2023
Mar. 23, 2023
Mar. 28, 2023
Sources: Bloomberg Finance L.P.; Crane; FHLB; US Federal Reserve; and IMF staff calculations.
Note: Panel 1 shows monthly issuance as reported by FHLBs along with an estimation for March 2023 based on Bloomberg data as of March 31, 2023.
FHLB = Federal Home Loan Bank; GCR = General Collateral Rate; OIS = overnight index swaps; SOFR = Secured Overnight Financing Rate.

in addition, the Swiss National Bank can grant Credit Reserve Board 2023). The relatively muted market
Suisse another loan of up to 100 billion Swiss francs reaction to this announcement reflects the fact that
backed by a federal default guarantee. the cost of international financing in dollars—though
In anticipation of potential stress in US dollar and rising—has remained below the levels during the
other global funding markets, global central banks global financial crisis and the European sovereign
also announced on March 19 coordinated mea- debt crisis. The backstop nature of the facility makes
sures to increase liquidity in the international dollar it comparatively more expensive than the current
funding market to increase the frequency of 7-day financing conditions of international dollar liquidity,
maturity operations from weekly to daily (Federal moderating its usage.

International Monetary Fund | April 2023 9

 GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Figure 1.4. Funding Stress Surging in European Bond Market amid Central Bank Liquidity Contraction

Spreads of sovereign bond relative to European interest rate swaps ... as funding pressure reemerges while jurisdictions with lower excess
significantly widened ... liquidity may experience further strains as central bank liquidity is
shrinking.
1. German and French Two-Year Government Bond Spreads over Swap 2. Jurisdiction Excess Liquidity versus Outstanding TLTROs
(Basis points) (Share of national GDP)
140 250
German Excess liquidity

Silicon Valley Bank and

Credit Suisse episode starts
French TLTRO
80
120
70

100 60

50
80
40

60 30

20
40
10

20 0
Jan. May Sep. Jan.
Luxembourg
Cyprus
Finland
Belgium
The Netherlands
France
Germany
Malta
Euro area
Austria
Estonia
Spain
Greece
Lithuania
Portugal
Ireland
Slovenia
Italy
Slovakia
Latvia
2022 2022 2022 2023

Sources: Bloomberg Finance L.P.; European Central Bank Statistical Data Warehouse; and IMF staff calculations.
Note: Snapshot data for panel 2 correspond to February 28, 2023. TLTRO = targeted longer-term refinancing operation.

In Europe, concerns about the possible economic that do not have enough excess liquidity to repay
impact of stress in the banking sector pushed the (Figure 1.4, panel 2). While the European Central
spread of swaps over French and German short-dated Bank has commenced its quantitative tightening on
bonds sharply higher (Figure 1.4, panel 1). This likely March 1, the contraction of liquidity coupled with
reflected investors’ preference to hold high-quality higher funding needs in 2023 has led to concerns
cash securities in a context of a shortage of such over the possibility of fragmentation resurfacing.
collateral in secured funding markets. To preserve To address these risks, the European Central Bank
the smooth transmission of monetary policy, the established the Transmission Protection Instrument
European Central Bank affirmed at its March meeting last year to ensure that its monetary policy stance is
that it is fully equipped to provide liquidity support transmitted smoothly across all euro area countries
to the euro area financial system if needed (European (European Central Bank 2022).
Central Bank 2023). Additional liquidity support Beyond the immediate market impact, stress in the
may be needed when mandatory targeted longer-term banking sector will likely weigh on broader lending
refinancing operations (TLTRO) repayments come conditions and thus economic growth. Banks in the
due in June. At the country level, looking at the United States, the euro area, and emerging markets
share of TLTROs maturing by June 2023 versus were already tightening lending standards before the
the excess liquidity available for repayment reveals failures (Figure 1.5, panel 1), on the back of rising
potential fragmentation risks—banks in some south- concerns about the economic outlook, borrower risks,
ern European countries that continue to rely heavily and bank funding conditions (Figure 1.5, panel 2).
on short-term TLTROs tend also be the same ones At the same time, loan demand fell sharply because

10 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Figure 1.5. Bank Lending Standards

Global banks in some jurisdictions have already tightened lending ... on rising concerns about economic outlook and borrower risks.
standards considerably ...
1. Lending Survey: Loan Demand and Lending Standards 2. Contributor Factors to Lending Standards
(Index) (Index)
Bank capital Bank funding Economic outlook
United States Japan Euro area Emerging markets
Borrower risk Risk tolerance Competitive pressure
4 300
Loan demand (+ strong, – weaker) (+ looser, – tighter)
2 100
0 –100
–2 –300
United States
–4 –500
4 50
Loan standards (+ looser, – tighter)
2
–50
0
–150
–2
Euro area
–4 –250
2007 09 11 13 15 17 19 21 23 2007 09 11 13 15 17 19 21 23

Bank stock declines could further tighten lending standards ... ... which adversely impacts real GDP growth.
3. Net Share of Banks Tightening Lending Standards and Bank Stock 4. Impact of Bank Lending on Real GDP Level
Returns (Percent, one year ahead)
(Percent)
0.0
SLOOS: net tightening fraction European Central Bank Survey:
Bank stock returns, change in credit lending standards
–0.1
previous quarter Bank stock returns, previous quarter

1.0 United States Euro area 1.0 –0.2

0.5 0.5 –0.3
0.0 0.0
–0.4
–0.5 –0.5
–0.44 –0.45
–1.0 –1.0 –0.5
United States Euro area
1997
1999
2002
2004
2007
2009
2012
2014
2017
2019
2022

2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023

Small and medium enterprises likely affected the most ... ... and commercial real estate, which has large booms and busts.
5. Loan Shares to Small and Medium Enterprises 6. US Banks’ Annual Loan Growth Rate: Total Lending versus
(Percent of total business loans, cumulative since 2019:Q4) CRE Lending
(Percent)
10 16
European Union United Kingdom United States (small business) CRE lending All loans 14
12
10
5 8
6
4
2
0
0 –2
–4
–6
–8
–5 –10
2006 08 10 12 14 16 18 20 22
2020:Q1

2020:Q2

2020:Q3

2020:Q4

2021:Q1

2021:Q2

2021:Q3

2021:Q4

2022:Q1

2022:Q2

2022:Q3

2022:Q4

Sources: Bloomberg Finance L.P.; national central banks; and IMF staff calculations.
Note: In panel 1, data for emerging markets are as of the third quarter of 2022 and for other regions are as of the fourth quarter of 2022. In panel 2, a methodological
change has been made so that interbank spreads are now included in corporate valuations instead of interest rates. In panel 3, US (EU) bank stock returns is
calculated using the KBW Bank Index (STOXX Bank Index). In panel 4, economic impacts are calculated using the four-quarter impulse response of the level of real
GDP to lending standards shocks of Basset and others (2014) for the United States and Altavilla, Darracq Paries, and Nicoletti (2019) for the euro area; these impulse
responses are applied to a prediction of lending conditions based on bank stock price movements from January 1, 2023, to March 15, 2023. CRE = commercial real
estate; SLOOS = Senior Loan Officer Opinion Survey.

International Monetary Fund | April 2023 11

GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

of higher interest rates and the weakening economic collapses, Silvergate, a bank focused on serving the
outlook, particularly for CRE loans and mortgages. crypto market, entered liquidation proceedings.
The IMF staff estimates that declines in bank These collapses likely contributed to deepening the
stock prices are statistically associated with a tight- confidence crisis in digital assets markets following
ening in lending conditions in the following quarter the dramatic bankruptcy of FTX—at the time one
(Figure 1.5, panel 3). The recent sharp fall in bank of the largest crypto exchanges—last November on
stock prices in the United States and euro area account of fraudulent practices and critical failures in
therefore portends even tighter lending conditions in risk management (Box 1.2).
the second quarter of this year, which, all else being
equal, would lead to a decline of one-year-ahead
core lending capacity by almost 1 percent and real Higher Inflation and Tighter Monetary Policy
GDP by 44 basis points in the United States and Are Exposing Fault Lines in Banking Systems
a real GDP decline of 45 basis points in the euro Exposures to interest rates are often hidden until a
area (Figure 1.5, panel 4).6 Further declines in stock shock—namely, a liquidity shock—appears, forcing
prices and those of other financial assets could push investors or financial institutions to raise liquidity.
down bank lending and growth even more (Box 1.3 During the pandemic, US banks accumulated large
in the April 2023 World Economic Outlook). Small amounts of Treasury and agency MBS in their Avail-
and medium enterprises—a key engine of economic able for Sale (AFS) and Held to Maturity (HTM)
growth and employment in most countries—would accounts as they extended the maturities of their
likely be more affected in a lending pullback. Even holdings to earn higher yields in a low-rate environ-
before the current banking turmoil, loans to small ment (Figure 1.6, panel 1). In the United States,
and medium enterprises as a share of overall bank mark-to-market valuation changes for AFS securities
loans were already on the decline (Figure 1.5, do not affect bank profitability and are treated as unre-
panel 5). In the CRE market, for which nonbank alized gains and losses, although for the largest banks,
funding sources like REITs and CMBS are facing these gains and losses must be reflected in regulatory
their own challenges (see the “Commercial Real capital. All other banks, including regional banks, have
Estate Market under Pressure” section), a pullback in the option to opt out of this requirement. Valuations
bank lending could have a disproportionate impact changes of HTM securities affect neither profitability
as CRE lending tends to have larger boom-and-bust nor capital.
cycles (Figure 1.5, panel 6). As interest rates started to rise sharply, the market
In crypto markets, several stable coins came under values of the Treasuries and agency MBS held by
pressure after Circle, the operator for USDC, the banks declined substantially. For most banks, the
second-largest stable coin in the world, revealed that unrealized losses sitting in their AFS and HTM
it held about 8 percent of its total reserves in SVB portfolio would have material but manageable
deposits. USDC and Dai (the fourth-largest stable impact on their Common Equity Tier 1 (CET1)
coin, partly backed by USDC) dropped sharply from capital ratios if they were forced to sell their entire
their par value to the US dollar, before recovering holdings to raise liquidity (even without account-
after the introduction of the Bank Term Funding ing for any Federal Reserve liquidity support).
Program and the FDIC’s protection of uninsured The failed banks SVB and SBNY were among the
SVB and SBNY depositors. USDC shifted its cash outliers, reflecting poor internal interest rate risk
holdings to large, systemic banks, upending plans management practices and presumably supervi-
to expand deposits to smaller community banks.7 sory lapses. They were caught in a “doom loop” of
Broader unease could be permeating in the digital runnable deposits not insured by the FDIC and
assets market, as key infrastructure for the indus- sizable unrealized losses unmasked by sales needed
try is deteriorating. Just before SVB’s and SBNY’s to raise liquidity. Uninsured depositors ran from
the banks out of the fear that these losses would
6Core lending capacity in the United States is core loans plus
materialize; once they started to do so, the banks
unused loan commitments (see Bassett and others 2014).
7Despite the actions, USDC market capitalization remains below had to sell the securities to meet deposit outflows,
pre-SVB levels, with Tether capturing its share. realizing the losses and thus justifying the fear

12 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Figure 1.6. Hidden Interest Rate–Driven Losses Hurt Smaller US Banks

The rise of AFS and HTM securities ... ... helped hide losses until they are sold to Sizeable share of banks have CET1 ratio <7%
meet deposit runs. after AFS/HTM losses.
1. HTM and AFS Securities for All US Banks 2. Share of Uninsured Deposits versus CET1 3. Distribution of CET1 Ratio for US Banks
(Percent of total assets) Impact if AFS/HTM Losses Were to Fully between 10 and 300 Billion after
Materialize for US Banks AFS/HTM Losses
35 0.25
HTM AFS Signature Bank 4.5 regulatory minimum

CET1 ratio impact of AFS/HTM losses (percentage points)

of New York + 2.5% CCB
–1
30
0.20
–3
25

Probability density
–5 0.15
20

15 –7
0.10

10 –9
Silicon 9% of
Valley banks
Assets > 500 billion 0.05
Bank
5 Assets between –11
100 and 500 billion
0 –13 0
0 20 40 60 80 100 0 5 10 15 20
Jan. 2007
Jul. 08
Jan. 10
Jul. 11
Jan. 13
Jul. 14
Jan. 16
Jul. 17
Jan. 19
Jul. 20
Jan. 22

Share of uninsured deposits (%) CET1 ratio after AFS/HTM losses

Sources: SNL Financial; US Federal Reserve; and IMF staff estimates.

Note: In panels 2 and 3, the CET1 impacts and ratios, respectively, are calculated by deducting unrealized HTM losses, for banks with no AOCI filter on capital. For
banks with an AOCI filter, both unrealized AFS losses and unrealized HTM losses are deducted. AFS = Available for Sale; AOCI = accumulated other comprehensive
income; CCB = capital conservation buffer; CET1 = Common Equity Tier 1 capital; HTM = Held to Maturity.

(Figure 1.6, panel 2). In all, almost 9 percent of US less debt securities that are likely sensitive to higher
banks with assets between $10 billion and $300 bil- interest rates than their US counterparts (Figure 1.7,
lion would have CET1 ratios below the regulatory panel 1). Focusing on HTM portfolios, the reported
requirement of 7 percent (4.5 percent regulatory unrealized losses on these portfolios are estimated
minimum plus 2.5 percent capital conservation to have a modest impact on the CET1 ratio for
buffer; Figure 1.6, panel 3) after fully accounting the median bank in Europe, Japan, and emerging
for unrealized losses in AFS and HTM securities. markets, although the impact for some banks could
This suggests that interest rate risks could inten- be material—for example, 5 percent of banks in a
sify for some small banks should interest rates stay select sample from Europe, Japan, and emerging
higher for longer and were they forced to sell these markets could experience impacts of more than 170
securities to raise liquidity. While no comprehensive basis points, 80 basis points, and 100 basis points,
information is available about the use of derivatives respectively, should HTM losses be fully accounted
to hedge interest rate risk, some banks with large for in their CET1 ratios (Figure 1.7, panel 2). The
fixed rate assets in their banking books—such as lower impact for European and Japanese banks likely
mortgages and other fixed rate loans—could also be reflects smaller HTM portfolios.
exposed to interest rate risk. Turning to banks’ funding structure, emerg-
Banks in other advanced economies and emerging ing markets banks appear less reliant on wholesale
markets are also exposed to interest rate risk in an funding but more sensitive to changes in cost of
environment of tighter monetary policy, but they deposits. Less than one percent of emerging market
appear less vulnerable than US banks. While they banks have short-term debt contributing more than
also heavily invest in securities, most appear to hold 15 percent to their total liabilities, compared with

International Monetary Fund | April 2023 13

 GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Figure 1.7. Global Banks: Interest Rate and Funding Risks

Securities holdings account for a large share of banks’ assets, but US Valuation losses on securities holdings are sizable for some banks.
banks appear most exposed to interest rate risks.
1. Banks’ Security Holdings 2. Estimated Impact to CET1 Ratio from Unrealized Gains and Losses
(Percent of total assets) on Held-to-Maturity Securities for a Select Sample of Banks
(Basis points)
40 100
Total securities Debt securities United States Europe Japan Emerging markets
35
0
30
25 –100
20
15 –200
10
–300
5
~700
0 –400
5th percentile Median 95th percentile
United Kingdom

Japan

United States

Euro area

Other advanced
economies

Latin America

Asia

Other emerging
markets

Emerging market banks are less reliant on short-term funding and The level of protection offered by deposit insurance varies significantly
nonstable deposits than advanced economy banks. across countries, especially in Africa.
3. Banks’ Funding Structure 4. Deposit Insurance Coverage Ratio Distribution by Region in 2022
(Percent) (Percent)
<15% ≥15% <50% ≥50%
100 100
90
80 80

Coverage ratio (percent)

70
60 60
50
40 40
30
20 20
10
0 0
Advanced Emerging Advanced Emerging Africa Americas Asia Europe
economies markets economies markets
Short-term debt Interest-bearing deposits

Sources: International Association of Deposit Insurers; national central banks; SNL Financials; and IMF staff estimates.
Note: In panel 2, the estimate is based on banks’ disclosures of unrealized gains or losses on held-to-maturity security portfolios as of 2022:Q3. The analysis covers
about 700 banks in the United States, 40 banks in Europe, 80 banks in Japan, and 60 banks in emerging market economies. In non-US regions, the sample consists
mainly of larger banks because of data availability, which could lead to underestimate of the losses in the lower quantile distribution. Panel 3 shows short-term
liabilities and interest-bearing deposits for 379 banks in 20 countries as of 2022:Q3. Panel 4 shows the minimum and maximum (the “whiskers”) and the 25th
percentile, median, and 75th percentile (the “box”) country in terms of the percent of their median banks’ deposit base covered by deposit insurance. In panel 4, the
dots represent outlier countries. The sample includes 13 countries in the Africa region, 24 in the Americas (North America, Central America, South America, and the
Caribbean) region, 20 in the Asia region, and 31 in the Europe region. CET1 = Common Equity Tier 1 capital.

almost one-eighth in advanced economy banks. insurance coverage and are potentially more prone
However, the share of banks that have at least half to deposit outflows. The median countries in Africa
of their deposit base in interest-bearing deposits— and the Americas have a deposit insurance coverage
including time deposits—is far higher in emerging ratio8 of only 24 percent and 37 percent, respectively;
markets than advanced economies (Figure 1.7, those in Asia and Europe have coverage ratio that are
panel 3), possibly reflecting decades of high inflation somewhat higher (Figure 1.7, panel 4).
and high interest rates. Looking across the globe,
significant numbers of countries have low deposit 8Percentage of insured to total deposits in the system.

14 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Figure 1.8. Vulnerabilities at NBFIs amid Interest Rate Rises and Tighter Financial Conditions

Reaching for yield, insurers have increased their exposure to illiquid ... of which a rising share is invested in structured and private credit
credit investments over the past decade ... while relying more on nontraditional liabilities.
1. Share of Level III Assets in Insurer Portfolios Globally 2. US Insurers Allocation to Illiquid Assets and Share of Nontraditional
(Percent) Liabilities
(Percent)
20 40 4.0
90th percentile Other illiquid assets Private RMBS Private CMBS
75th percentile Mortgage loans Structured credit
Median Nontraditional liabilities (right scale)
15 30
25th percentile
3.5
10th percentile
10 20

3.0
5 10

0 0 2.5
2011 2016 2021 2014 15 16 17 18 19 20 21

Private credit has grown significantly and has become a significant ... with pension funds and insurance companies owning a significant
source of funding for risky firms ... share.
3. Private Credit Assets under Management and US Leveraged Loans 4. Investors in US Private Credit Funds, 2022
and High-Yield Bonds Outstanding (Percent)
(Billions of US dollars)
Middle market collateralized loan obligations
Business development companies
1,800 Private credit funds: dry powder 14 19
1,600 Private credit funds: invested capital Family offices and
Institutional leveraged loans wealth managers
1,400
High-yield bonds 9 Private and public
1,200 pension funds
1,000 Foundations and
800 9 endowments
Insurance companies
600
28 Asset and fund of
400 fund managers
200 Others
21
0
2008
09
10
11
12
13
14
15
16
17
18
19
20
21
22

Sources: Bloomberg Finance L.P.; Goldman Sachs; Haver Analytics; ICE Bond Indices; National Association of Insurance Commissioners; PitchBook Leveraged
Commentary and Data; Preqin; S&P Capital IQ; St. Louis Fed; UBS; US Flow of Funds; and IMF staff calculations.
Note: Panel 1 includes a sample of 50 selected insurance groups from 18 jurisdictions across Europe, North America, Asia, and Australia. Level III assets are those
considered to be the most illiquid and hardest to value. Their values are typically estimated using a combination of complex market prices, mathematical models, and
subjective assumptions. The nontraditional liabilities estimate in panel 2 is calculated as the share of total liabilities for US life insurers. They include funding
agreement–backed securities, Federal Home Loan Bank advances, and cash received through repurchase agreements and securities lending transactions.
CMBS = commercial mortgage-backed securities; NBFIs = nonbank financial intermediaries; RMBS = residential mortgage-backed securities.

Nonbank Financial Intermediaries Levered Up financial leverage, poor liquidity mismatches, and
during the Low Rate–Low Volatility Era high levels of interconnectedness (see the case studies
Although the banking sector was at the center of in Chapter 2).
the recent financial turmoil, stress could also appear In an effort to increase returns, insurance compa-
in other corners of the global financial system where nies, one of the largest NBFI sectors, have doubled
vulnerabilities have built up over the past decade and their illiquid investments over the last decade (see
more of extremely low rates and compressed volatility. the share of Level III assets in Figure 1.8, panel 1),
Fragilities in the NBFI sector stem from the use of including rising exposures to structured-credit

International Monetary Fund | April 2023 15

GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

securities with returns boosted by embedded the more conservative lending posture of banks and
leverage and illiquid private credit (Figure 1.8, weighing on economic activity. If access to private
panel 2). Life insurance companies also make use credit were suddenly restricted in a market stress event,
of leverage to fund illiquid assets, as shown by borrowers could face rollover risks. Because of the low
the increase in nontraditional liabilities such as transparency and limited liquidity in private credit
funding-agreement-backed securities (Figure 1.8, markets, spillovers to other markets could occur during
panel 2, right scale).9 Rising investment in struc- a stress episode, as investors may be forced to sell other
tured and private credit is creating greater liquidity assets with more timely mark-to-market pricing and
mismatches between assets and liabilities, which more liquid secondary markets in order to access cash.
could make liquidating portfolios more challenging
if facing margin calls on derivatives or repo contracts
or policy surrenders should interest rates continue to Various Other Headwinds Could Challenge
rise rapidly.10 Insurers are also more vulnerable to a Investor Sentiments
potential adverse scenario of increases in corporate Financial conditions had eased from October 2022
defaults and credit downgrades should the economy through early March, reflecting elevated corporate
slow down owing to higher interest rates. Such a valuations. Conditions tightened some after recent
scenario could force insurers to liquidate investments stress episodes weighed heavily on bank stocks and
when faced with increasing regulatory capital charges funding spreads despite a decline in risk-free rates
(see Chapter 1 of the April 2019 Global Finan- (Figure 1.9, panel 1). In the days after SVB’s failure,
cial Stability Report). The severity of such scenario stock market volatility surged, credit spreads widened,
could be aggravated by the embedded leverage in and strains were apparent in interbank funding mar-
structured-credit investments, such as collateralized kets. These moves have partly retraced in subsequent
loan obligations (as discussed in more detailed in weeks, although interbank funding spreads remain
Chapter 2). wide (Figure 1.9, panel 2).
Indeed, private credit has grown rapidly over the In addition to the fallout of the banking turmoil, a
last decade, surpassing the size of the US institutional deteriorating corporate earnings outlook could chal-
leveraged loan market (Figure 1.8, panel 3)—a sector lenge investor risk appetite. The strong performance of
in which pension funds and insurance companies the S&P 500 from October last year to January of this
are significant investors (Figure 1.8, panel 4). Partly one was largely supported by a narrowing of the equity
because of increased competition in private credit risk premium, the compensation that investors require
markets, leverage metrics on new transactions have to bear equity risks (Figure 1.10, panel 1), while lower
increased alongside a deterioration in covenant quality. earnings expectations has been a drag.11 Year to date,
In addition, the tech startup firms that ran into liquid- cyclical stocks, which are more sensitive to economic
ity strains and started pulling deposits from SVB were fluctuations, have outperformed defensive stocks. The
generally backed by private equity and venture capital outlook for equities could be challenged by the further
deals and were likely beneficiaries of the strong growth anticipated deterioration of earnings if inflation stays
in private credit markets. Cost of private credit is likely high and recession risks rise. Earnings growth in the
to increase for borrowers in these markets, adding to United States is already slowing more rapidly than
during past tightening cycles that also featured high
9Funding-agreement-backed securities are financial instruments
inflation (Figure 1.10, panel 2). The US Treasury yield
that are backed by a funding agreement, which is a deposit-type curve, however, continues to be inverted—historically
contract, issued by life insurance companies, that promises a a harbinger for recessions (Figure 1.10, panel 3).
stream of predictable fixed payments over a specified period of Equity price volatility could be exacerbated by traders
time. Other nontraditional liabilities include FHLB advances and
cash received through repurchase agreements and securities lending in the zero-day-to-expiration options market, who
transactions. tend to react discretely to earnings and macroeconomic
10Policy surrenders (or lapses) from life insurance policies are
news (Box 1.3).
more likely to occur during periods of rapid increases in interest
rates (see Chapter 1 of the October 2021 Global Financial Stability
Report). This risk may in part be offset by better funded ratios at 11Other equity valuation measures are similarly close to historical

higher rates. average levels.

16 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Figure 1.9. Financial Conditions Indexes

Financial conditions had broadly eased between October 2022 and ... but had tightened sharply driven by higher volatility, wider credit
early March, when the market turmoil began ... spreads, and higher funding costs.
1. IMF Staff Financial Conditions Index 2. Components of FCI: Stock Market Volatility, Nonfinancial Corporate
(FCI, numbers of standard deviations) Bond Spread, and LIBOR T-Bill Three-Month Spread in the United
States and the Euro Area
(Percent, basis points)
2.5 30 355 60
United States Oct 2022 Stock Nonfinancial LIBOR T-Bill
Euro area GFSR volatility corporate three-month
2.0 Other advanced bond spread spread
economies 50
350
China
1.5
Emerging markets
excluding China 25 40
1.0
345

0.5 30
Mar. 15,
Euro area 340
0.0
Mar. 15, 20 20
United
–0.5 States
335
10
–1.0

–1.5 15 330 0
Mar. 2019

Sep. 2019

Mar. 2020

Sep. 2020

Mar. 2021

Sep. 2021

Mar. 2022

Sep. 2022

Mar. 2023

Feb. 1
Feb. 15
Mar. 1
Mar. 15
Mar. 29

Feb. 1
Feb. 15
Mar. 1
Mar. 15
Mar. 29

Feb. 1
Feb. 15
Mar. 1
Mar. 15
Mar. 29
Sources: Bloomberg Finance L.P.; Haver Analytics; national data sources; and IMF staff calculations.
Note: The FCIs are calculated using the latest available variables. The emerging market sample excludes Russia, Türkiye, and Ukraine. Panels 1 show quarterly
averages for 2006–19 and monthly averages for 2020–23. Standard deviations are calculated over the period from 1996 to present. The IMF FCI is designed to
capture the pricing of risk. It incorporates various pricing indicators, including real house prices. Balance sheet or credit growth metrics are not included. For details,
please see the October 2018 Global Financial Stability Report Online Annex 1.1. In panel 2, all series are GDP-weighted averages of the United States and the euro
area. GFSR = Global Financial Stability Report; FCI = financial conditions index; LIBOR = London Interbank Offered Rate.

Poor market liquidity has likely amplified recent volatility to Treasury and funding markets in the
gyrations seen in global markets. This issue is coming months. US Treasury Secretary Janet Yel-
particularly evident in sovereign bond markets, len’s January 19 letter to Congressional leadership
likely reflecting both high levels of uncertainty and stating that the outstanding US debt had reached
the effect of quantitative tightening in the euro its statutory limit on January 19 prompted US
area, the United States, and the United Kingdom credit default swaps, a financial instrument aiming
(Figure 1.11, panel 1). Heightened uncertainties have to protect investors against a US sovereign default,
made already-shallow market depth even shallower to soar to levels seen during past debt ceiling epi-
(Figure 1.11, panel 2). Bid-ask spreads in Treasury, sodes (see US Department of Treasury 2023; Fig-
Bunds, and Japanese government bond markets have ure 1.12, panel 1). Extraordinary measures have
widened sharply as traders have demanded larger since been employed allowing the US government
liquidity premiums, and the yield curve has gotten to defer internal obligations in order to remain
significantly distorted (Figure 1.11, panel 3). current on external ones. However, if Congress fails
Uncertainty about the resolution of the US Debt to agree on raising the debt limit as the so-called
Ceiling12 discussions could add further bouts of “X-date” (estimated as sometime between July to
August) approaches, pressure may intensify in the
12The debt ceiling is the limit on the total amount of federal debt
Treasury market, exposing MMFs to higher liquid-
the government can hold. The debt ceiling is set at $31.4 trillion, ity, operational, and at the extreme credit risks,
which was reached on January 19, 2023. incentivizing them to step away from Treasury bills.

International Monetary Fund | April 2023 17

 GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Figure 1.10. Developments in US Equity and Bond Markets

The US equity rally was powered by During past tightening cycles, corporate The US yield curve has inverted strongly
decreasing risk premiums and interest rates, earnings underperformed in high-inflation signaling recession.
which have more than offset the weakening episodes after the last rate hike.
earnings outlook.
1. S&P 500 Equity Index Returns 2. S&P 500 12-Month Trailing Earnings per 3. US 10-Year Treasury Minus Three-Month
Decomposition Share Growth during Past Tightening Treasury
(Percent) Cycles (Percent)
Equity risk premia (Percent) Recession
Earnings Current cycle 10-year minus three-month Treasury
40 Risk-free rate Ave: high inflation 40 5
Price returns T=0 Ave: low inflation
Last 35
rate 4
30
hike 30
3
25
20
2
20

10 15 1

10
0
0
5
–1
0
–10
–2
–5

–20 –10 –3
Nov. Dec. Jan. Feb. Mar. –12 –9 –6 –3 0 3 6 9 12 15 18 1968
73
78
83
88
93
98
2003
08
13
18
23
2022 22 23 23 23 Months around last rate hike during
tightening cycles

Sources: Bloomberg Finance L.P.; ICE Bond Indices; PitchBook, Leveraged Commentary and Data; Refinitiv Datastream; and IMF staff calculations.
Note: In panel 1, data as of March 15, 2023. Lower equity risk premiums, lower risk-free rates, and higher earnings contribute positively to stock market returns, and
vice versa. US Treasury represents constant maturity securities. In panel 2, the timing of the last hike for the current cycle is based on market expectations (more on
Figure 1.15). Past tightening cycles include 1967, 1972, 1977, 1980, 1988, 1993, 1999, 2004, and 2015. High-inflation cycles are those with core Personal
Consumption Expenditures Price Index above 4.5 percent. For the current cycle, the months to the last rate hike is based on current market expectations.

Indeed, ­investors are already demanding additional improved risk sentiment after China’s reopening. So
compensation for holding Treasury bills with matur- far, ­spillovers from the turmoil in banking markets
ities around the X-date, although the spikes remain into emerging market banks has been contained,
contained so far (Figure 1.12, panel 2).13 with equity prices of the largest banks modestly
In emerging markets, equities fell 4 percent on lower (Figure 1.13, panel 1). However, sovereign
average in ­February through the end of March but spreads for high-yield and frontier countries have
were still up 10 percent, on net, since the October spiked with the recent wave of financial market
2022 Global Financial Stability Report, reflecting stress. Strong differentiation appears to persist
between investment grade, for which spreads are
still below historical averages, and riskier issuers,
13As Treasury bills share the same characteristics apart from their
for which spreads are again near crisis levels
maturity date, the surge in yields linked to the projected timeline for
the US Treasury’s depletion of cash can be viewed as compensation that (Figure 1.13, panel 2).
investors demand for bearing the credit risk. Indeed, Treasury bill yields Issuance conditions for sovereign hard-currency
are pricing in an increased possibility of the United States defaulting debt have deteriorated since January, and many
on its external payment obligations. Nonetheless, the small magnitude
of the yield spike in comparison to yields of adjacent bills suggests that B-rated and lower issuers are facing serious chal-
money markets expect such an outcome to be highly unlikely. lenges accessing the market. Eight emerging m ­ arket

18 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Figure 1.11. Global Market Dynamics and Liquidity Conditions

Market liquidity conditions have deteriorated in bond markets.

1. Global Liquidity Heatmap
Equity markets
Bid-ask spread
Turnover ratio
Return-to-volume ratio
Sovereign bond markets
Bid-ask spread
Turnover ratio
Return-to-volume ratio
Corporate bond markets
Bid-ask spread
Turnover ratio
Return-to-volume ratio
Foreign exchange markets
Bid-ask spread
Trading volume
Return-to-volume ratio

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Treasury market depth became shallower ... ... bid-ask spreads widened and the term structure distorted further.
2. US Treasury Future Market Book Depth 3. Advanced Economy Government Bond Bid-Ask Spread and Yield
(Millions of US dollars) Curve Fitting Errors
(Percentage point)
8,000 0.4 Bid-ask spread Liquidity index (right scale) 4
7,000
6,000 0.3 3
5,000
4,000 0.2 2
3,000
2,000 0.1 1
1,000
0 0 0
Mar. Mar. Mar. Mar. Mar. Mar. Mar. Jan. 2020 Jan. 2021 Jan. 2022 Jan. 2023
2017 2018 2019 2020 2021 2022 2023

Sources: Bloomberg Finance L.P.; JPMorgan Big Data and AI Strategies; JPMorgan Chase & Co.; MarketAxess; Refinitiv Datastream; and IMF staff calculations.
Note: In panel 1, red (green) cells represent the lowest (highest) liquidity levels. For panel 2, market depth is the estimated amount of trading in the US Treasury
futures needed to move the price by 1 percent in a five-minute period. For panel 3, bid-ask spreads are estimated based on Corwin and Schultz (2012) for the
current 10-year government bond in the United States, Germany, and Japan. The yield curve fitting errors are based on the Bloomberg government securities liquidity
index (higher values of the index correspond to worse liquidity), which are the root mean square errors of the yield curve fitting model. The both indicators are
60:20:20 weighted average of the United States, Germany, and Japan.

s­ overeigns are currently in default, the greatest war in Ukraine, and they have been little affected by
number since the global financial crisis. The number the banking turmoil (­Figure 1.13, panel 4).
of nondefaulted, distressed issuers has risen from 11
to 12, and spreads are very high for many countries,
with 18 sovereigns trading at spreads of more than Financial Stability Risks Are Elevated
700 basis points, a level at which market access According to the April 2023 World Economic
has historically been very challenging (Figure 1.13, Outlook, the global growth forecast for 2023 is at
panel 3). Since the October 2022 Global Financial 2.8 percent, with balance of risks around this forecast
Stability Report, many emerging market currencies skewed to the downside, amid banking sector turmoil.
have appreciated back to the levels seen before the In particular, the probability of growth falling below

International Monetary Fund | April 2023 19

 GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Figure 1.12. US Debt Ceiling Debate: How It Affects Short-Term Markets

The US credit default swaps recently soared to levels seen during past ... while the kink in bill yields aligns with the projected date when the
debt ceiling episodes ... treasury is expected to face payment difficulties.

1. Credit Default Swap at the One-Year Maturity Point 2. Term Structure of Treasury Bills
(Basis points) (Percent)
5
S&P downgrade to AA+

Debt limit reached

100
4.9

80 4.8

4.7
60

4.6
40
4.5

20
4.4

0 4.3
2011 12 13 14 15 16 17 18 19 20 21 22 23 Mar. May June Aug. Oct. Nov. Jan. Feb. Apr.
2023 2023 2023 2023 2023 2023 2024 2024 2024

Sources: Bloomberg Finance L.P.; and IMF staff calculations.

Note: Credit default swaps shown in panel 1 based on the contract denominated in euros and the 2014 contract definition by the International Swaps and Derivatives
Association. Snapshot date in panel 2 corresponds to March 31, 2023.

current 2023 baseline of 2.8 percent is estimated percent.15 Importantly, downside risk would increase
around 62 percent, based on the Growth-at-Risk significantly (black dashed distribution in Figure 1.14,
framework (Figure 1.14, panel 1).14 Overall, downside panel 1), with the growth-at-risk metric deteriorating
risks—specifically, as measured by the growth-at-risk to levels comparable to the peak COVID-19 crisis
metric—remain elevated compared with historical (black marker in Figure 1.14, panels 1 and 2).
norms (Figure 1.14, panel 2).
Manifestations of stress on banks’ balance sheets
could lead to severe and persistent credit tightening, Advanced Economies Face the Difficult Task
further lowering global credit supply, resulting in of Ensuring Financial Stability while Bringing
significantly tighter financial conditions. Under the Inflation Back to Targets
severe downside scenario discussed in Box 1.3 of the The market-implied path of monetary policy has
April 2023 World Economic Outlook, global financial gyrated wildly in advanced economies since the October
conditions would tighten significantly and the fore- 2022 Global Financial Stability Report. After moving
cast for global growth would decline to around one sharply higher (with the exception of that for the United
Kingdom) on expectations that monetary policy would
be tighter for longer to tackle persistent inflationary pres-
14The Growth-at-Risk framework assesses downside risks by gaug- sures, the policy path has shifted sharply lower in recent
ing the range of severely adverse growth outcomes, falling within the
lower 5th percentile of the conditional growth forecast distribution
(see the October 2017 Global Financial Stability Report and April 15Assumptions underlying this scenario pertain, broadly, to a

2018 Global Financial Stability Report for details). Because of the widening in corporate and sovereign spreads by varying magnitudes
unprecedented level of volatility at the current juncture, estimates across countries, and decline in equity prices globally. See Box
based on the Growth-at-Risk framework may be subject to larger 1.3 in the April 2023 World Economic Outlook for details of the
than usual uncertainty bands. scenario.

20 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Figure 1.13. Emerging Market Economies’ Financial Market Developments

Emerging market banks have been relatively unaffected by recent International funding costs have spiked again for risky issuers.
events.
1. Bank Equity Excess Returns over Benchmark Index 2. Emerging Market Sovereign Spreads
(Percent) (Basis points)
5 Year to date Since Silicon Valley Bank collapse EMBIG 1,200
EMBIG IG
0 EMBIG HY 1,000
EMBIG HY excluding CCC rating
–5 and below 800

–10 600

–15 400

–20 200

–25 0
Latin America Asia Europe, Middle United States 2014 15 16 17 18 19 20 21 22 23
East, and Africa

The number of distressed and defaulted sovereigns remains high Emerging market currencies have been resilient to recent market
compared with recent history. stress, and most have strengthened on net since the October 2022
Global Financial Stability Report.
3. Number of Sovereigns, by Spread 4. Emerging Market Currency Appreciation and Depreciation
(Percent change)
100
<300 300 to 700 700 to 1,000 Hungary
>1,000 excluding defaulted Defaulted Chile
80 Czechia
Mexico
Romania
Thailand
60 Philippines
Morocco
Peru
40 Brazil
Malaysia
Indonesia Since March 1, 2023
South Africa October 1, 2022, to
20 March 1, 2023
India
Colombia 2022:Q1 to 2022:Q3
Kenya
0
2014 15 16 17 18 19 20 21 22 23 –30 –20 –10 0 10 20 30

Sources: Bloomberg Finance L.P.; JPMorgan Chase & Co.; MSCI; and IMF staff calculations.
Note: Panel 1 is based on a sample 320 listed banks in 18 emerging market countries. Panel 2 uses weights from the previous month for any missing data point. In
panel 3, “>1,000 excluding defaulted” refers to the number of sovereigns trading with spreads over 1,000 basis points that have not defaulted. The defaulted
category includes those sovereigns that were or have been rated in default for more than one month by ratings agencies and have international bond issuances.
EMBIG = Emerging Market Bond Index Global; HY = high yield; IG = investment grade; Q = quarter.

weeks, as investor have priced in significant easing as a swaps, have moved upward in the euro area and the
result of stress in the banking sector (Figure 1.15). Cen- United States, on net, so far this year (Figure 1.16,
tral banks have indicated they have tools to separately panel 1). Pricing from inflation options markets sug-
address financial stability risks, allowing them to con- gests that the probability of inflation being higher than
tinue tightening monetary policy to bring inflation back central banks’ target of 2 percent over the next 5 years
to targets. Investors, however, appear to have concluded remains elevated. Investor disagreement around the
that policymakers will soon end policy tightening. They most likely inflation outcomes continues to be notable
now anticipate policy rate cuts in the United States and for the euro area—as evidenced by the bimodal shape
Europe to start as early as the second half of this year. of the option-implied density—while investors in
One-year-ahead market-based measures of inflation the United States appear to have converged around a
expectations, as implied by the prices of inflation 3 percent outcome (Figure 1.16, panel 2).

International Monetary Fund | April 2023 21

 GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Figure 1.14. Global Growth-at-Risk

On balance, risks to growth are skewed moderately to the downside ... ... but remain somewhat elevated compared with historical norms.
1. Near-Term Growth Forecast Densities 2. Near-Term Growth-at-Risk Forecasts
(Probability density) (Percentile rank)
0.25 Quintiles

100
0.20

80
Probability density

0.15 Density for

year 2023: 60
at 2022:Q3
0.10
Fifth percentile 40
Density for
year 2023:
0.05 Severe at 2023:Q1
20
downside
scenario
Severe downside scenario
0.00 0
–6 –4 –2 0 2 4 6 8
2008
09
10
11
12
13
14
15
16
17
18
19
20
21
22
23
Global growth rate (percent)

Sources: Bank for International Settlements; Bloomberg Finance L.P.; Haver Analytics; IMF, International Financial Statistics database; and IMF staff calculations.
Note: Forecast density estimates are centered around the World Economic Outlook database forecasts for 2023 made at the third quarter of 2022 and the first
quarter of 2023, respectively. In panel 2, the black line traces the evolution of the fifth percentile threshold (the growth-at-risk metric) of near-term growth forecast
densities. The color of the shading depicts the percentile rank for the growth-at-risk metric from 1991 onward. See the April 2018 Global Financial Stability Report
for details.

Figure 1.15. Policy Rate Expectations in Advanced Economies

Market-implied paths for policy rates have shifted significantly lower over recent weeks, driven by investors’ reassessment of the future course of
policy amid turmoil in the banking sector.
1. US Federal Reserve 2. European Central Bank 3. Bank of England 4. Bank of Japan
(Percent) (Percent) (Percent) (Percent)
6.0 4.5 0.7
6.0
4.0 Latest
Oct. 2022 GFSR 0.6
5.0
3.5 March 9, 2023
5.0
0.5
4.0 3.0
4.0
2.5 0.4
3.0
2.0 3.0
0.3

2.0 1.5
2.0 0.2
1.0
Latest Latest Latest
1.0 1.0
Oct. 2022 GFSR Oct. 2022 GFSR Oct. 2022 GFSR 0.1
March 9, 2023 March 9, 2023 0.5 March 9, 2023

0.0 0.0 0.0 0.0

Oct. 2022
Jun. 2023
Feb. 2024
Oct. 2024
Jun. 2025
Feb. 2026
Oct. 2026

Oct. 2022
Jun. 2023
Feb. 2024
Oct. 2024
Jun. 2025
Feb. 2026
Oct. 2026

Oct. 2022
Jun. 2023
Feb. 2024
Oct. 2024
Jun. 2025
Feb. 2026
Oct. 2026

Oct. 2022
Jun. 2023
Feb. 2024
Oct. 2024
Jun. 2025
Feb. 2026
Oct. 2026

Sources: Bloomberg Finance L.P.; European Central Bank; national authorities; US Federal Reserve; and IMF staff calculations.
Note: GFSR = Global Financial Stability Report.

22 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Figure 1.16. Market-Implied Probability of Future Inflation Outcomes

The probability of high inflation outcomes over the next five years has moderated somewhat in the United States and the euro area. Investor
disagreement around the most likely inflation outcomes is still notable in the euro area.
1. Inflation Swap: One Year 2. Option-Implied Probability Distributions of Inflation Outcomes
(Five-day moving average; percent) (Percent over five years; probability density)
9 End of 2018 End of 2021 April 2022
Euro area United States
October 2022 Latest
8 0.6 0.6
United States Euro area
7

6
0.4 0.4
5

3
0.2 0.2
2

0 0 0
Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan. 0.01 0.02 0.03 0.04 0.01 0.02 0.03 0.04
2021 2021 2021 2021 2022 2022 2022 2022 2023

Sources: Bloomberg Finance L.P.; and IMF staff calculations.

Note: “Latest” refers to the time of publishing the April 2023 Global Financial Stability Report. Probability densities shown in panel 2 are derived from inflation caps
and floors.

Despite the recent moderation in some commod- real rates, the median FOMC participant foresees a
ity prices, inflation remains well above target in most significantly tight policy stance over the next three
advanced economies. In addition, core inflation years compared to the longer-term neutral rate of
remains stubbornly high across most regions, if not 0.5 percent (Figure 1.17, panel 2).
rising by some measures, and labor markets are still Central banks in other major advanced econo-
very tight. Furthermore, the global economy could be mies have also continued to tighten monetary policy.
susceptible to further inflation shocks—for example, On March 16, the European Central Bank increased
energy prices may surge again if the war in Ukraine policy rates by 50 basis points, with its communications
were to intensify or if commodity prices rise as a result emphasizing the separation between monetary policy
of a strong reopening of China. used to achieve price stability and other tools used to
In the United States, the Federal Reserve has achieve financial stability. Monetary authorities in other
continued to raise the federal funds rate since the countries have also turned hawkish in recent weeks
October 2022 Global Financial Stability Report, as signs of slower progress on inflation have emerged.
bringing the latest target range to 4.75 percent to Overall, the Bank of England, the European Central
5 percent. In March, the median Federal Open Bank, the Bank of Canada, and the Reserve Bank of
Market Committee (FOMC) participant anticipated Australia have increased rates by 400 basis points, 300
the policy rate to reach slightly above 5 percent basis points, 425 basis points, and 350 basis points,
in 2023, before declining to about 4.3 percent in respectively, since December 2021, and most have
2024 and about 3 percent in 2025 (Figure 1.17, stepped down the pace of increases at recent meetings.
panel 1), although there appears to be significant By contrast, the Bank of Japan has continued to
dispersion in the participants’ assessment of appro- pursue an accommodative stance of monetary policy
priate monetary policy. By contrast, investors have by keeping its policy rate unchanged and reaffirming
priced in some easing of policy this year. In terms of its bond-buying strategy to anchor the 10-year yields

International Monetary Fund | April 2023 23

 GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Figure 1.17. Policy Rates Paths: Nominal and Real

The assessment by the FOMC of appropriate monetary policy has shifted higher since the October 2022 Global Financial Stability Report.
1. US Policy Rate Projections: Nominal Rates 2. US Policy Rate Projections: Real Rates
(End of calendar year; percent) (End of calendar year; percent)
5.5 2.5

5.0 2.0

4.5 1.5

4.0 1.0

3.5 0.5

3.0 0.0

2.5 Real projections: FOMC projections adjusted for –0.5

FOMC projections: median dots (December 2022) expected inflation (December 2022 meeting)
Neutral [nominal] rate estimate (latest) Neutral [real] rate estimate (latest)
2.0 Market expectations of policy rates Real projections: FOMC projections adjusted for –1.0
FOMC projections: median dots (latest) expected inflation (latest)
1.5 –1.5
2022 23 24 25 Longer term 2022 23 24 25 Longer term

Sources: Bloomberg Finance L.P.; US Federal Reserve; and IMF staff calculations.
Note: FOMC policy rate projections in panels 1 and 2, and market expectations of policy rates in panel 1, correspond to the level of the federal funds rate expected at
the end of each calendar year. Real policy rates, in panel 2, are based on FOMC projections for personal consumption expenditures inflation. FOMC = Federal Open
Market Committee.

on Japanese government bonds at about 0 percent Rates in the United Kingdom have also fallen both on
(Bank of Japan 2023). To address the effects of its account of lower real yields as well as lower inflation
bond buying on market functioning and the shape breakevens (market-based proxy for expected inflation).
of the yield curve, the Bank of Japan widened the In Europe, rates have increased somewhat as
band to 50 basis points on either side of its 0 percent higher real yields have more than offset a decline
target in December. The announcement was largely in breakevens.
unanticipated and interpreted by some market partic-
ipants as a possible pivot toward eventual normalizing
of its long era of qualitative and quantitative easing Quantitative Tightening amid High and
rather than purely a technical move to improve mar- Increasing Public Debt
ket functioning. Volatility surged, with the 10-year After having significantly increased their securi-
Japanese government bond yield reaching its highest ties holdings during the pandemic, the US Federal
level since 2015 (Figure 1.18, panel 1, and Box 1.4). Reserve, Bank of England, and European Central
More recently, the 10-year Japanese government bond Bank have started to reduce their balance sheets.
yield moved down. This normalization process could pose challenges for
Medium- and longer-term interest rates have sovereign debt markets at a time when liquidity is
declined, on net, in most advanced economies since generally poor, debt levels are high, and additional
the October 2022 Global Financial Stability Report, supply of sovereign debt will have to be absorbed by
with downward pressure having increased significantly private investors.
following the failure of SVB (Figure 1.18, panel 2). In the United States, net issuance of the US
In the case of United States, the decline in rates across Treasury securities is projected to increase in
all horizons may be attributed to lower real yields, 2023 and 2024, while quantitative tightening is
consistent with expectations of less policy tightening. reducing the share absorbed by the Federal Reserve’s

24 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Figure 1.18. Drivers of Advanced Economy Bond Yields

The unexpected adjustment in the YCC led to higher volatility in the Medium- and long-term interest rates have decreased in most
Japanese government bond market. advanced economies, on net.
1. Ten-Year Japanese Government Bond Yield and Its Realized 2. Change in Yields since the October 2022 Global Financial Stability
Volatility Report
(Percent) (Percentage points)
YCC range band 10-Year Japanese government bond yield Change in real yields
Japanese government bond 10-year yield exponentially weighted Change in breakevens
moving average volatility (right scale) Change in nominal yields
1.5 0.1 1.2
December 2022: YCC
bands at +/–0.5 percent
1
July 2018: YCC bands 0.08 0.7
at +/–0.2 percent
0.5

0.06 0.2
0

September 2016: March 2021: YCC bands

–0.5 YCC introduction at +/–0.25 percent 0.04 –0.3

–1
0.02 –0.8
–1.5

–2 0 –1.3
2013 16 19 22
10 year

5 year

5yr5yr

10 year

5 year

5yr5yr

10 year

5 year

5yr5yr

10 year

5 year

5yr5yr
United States Euro area United Kingdom Japan

Sources: Bloomberg Finance L.P.; and IMF staff calculations.

Note: In panel 1, realized volatility is computed using an exponentially weighted moving average method. The YCC band when YCC was initially introduced in 2016
was markets perception of the meaning of the target of “round zero percent” but not the official announcement. 5yr5yr = five-year, five-year forward; YCC = yield
curve control.

balance sheet (Figure 1.19, panel 1). Assuming the Elsewhere, quantitative tightening is also increas-
same US government debt maturity profile, the ing the government securities that the private sector
private sector will need to absorb more short- and will need to absorb amid higher funding needs. In
medium-term securities, as these are likely to be run the United Kingdom, the net supply of gilts to the
off at a faster pace by the Federal Reserve (Figure 1.19, private sector is set to increase significantly in 2023.
panel 2).16 Other traditional buyers—such as foreign In the euro area, the European Central Bank began
official sector institutions and US banks—have also reducing its securities holdings this March, while
reduced their holdings in recent months (Figure 1.19, the financing needs of European governments are
panel 3), adding pressure on Treasury market expected to remain substantial in 2023 (Figure 1.20,
liquidity.17 panels 1 and 2).18
In this context, while the recent surge of risk
16Projections assume the US Treasury will roll over maturing secu- aversion has led to a compression of term premiums19
rities, which is normally the case. They are based on the US Federal
Reserve (Federal Reserve Board 2022).
17US banks have significantly increased their holdings of US 18See the October 2022 Global Financial Stability Report for

Treasuries since the pandemic. Their current level of Treasury more details.
holdings amid ongoing quantitative tightening could be maintained, 19The term premium is defined as the compensation

for instance, by a shift away from other high-quality liquid assets investors require to bear interest rate risk over the life of a
(for example, reserves) toward Treasuries. fixed-coupon bond.

International Monetary Fund | April 2023 25

 GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Figure 1.19. Quantitative Tightening in the United States and the Additional Supply of US Treasury Securities

With quantitative tightening, the Federal ... particularly in short- and medium-term US banks had been significant buyers of these
Reserve stops absorbing a large share of securities. securities but have recently reduced their
Treasury net issuance ... holdings.
1. Net Issuance of Treasury Debt and 2. Original Maturities of US Treasury 3. US-Chartered Banks’ Holdings of
Absorption by the Federal Reserve Securities Projected to Be Run Off by the US Treasury Securities
(Billions of US dollars, left scale; percent, Federal Reserve (Billions of US dollars, left scale; percent,
right scale) (Billions of US dollars, left scale; percent, right scale)
Net issuance/changes in right scale) US banks’ holdings of
outstanding marketable debt 2023 US Treasuries
Absorption by the Federal 2024 Reserves of US banks
Reserve (negative = purchases) Percent of end-2022 Share of US Treasury holdings
Share of net issuance absorbed outstanding marketable in total US bank assets
3,000 by the Federal Reserve 100 Treasuries (right scale) 3,000 Share of US banks’ Treasury 9
(rolling four-quarter holdings in total outstanding
average, right scale) 600 12

2,000 7
500 10

50 2,000
1,000 400 8 5

300 6
0 3
0 1,000
200 4
Treasury
–1,000 Bills 1
100 2

–2,000 –50 0 0 0 –1
≤2 >2–5 >5–10 >10–30
2013:Q1
2014:Q1
2015:Q1
2016:Q1
2017:Q1
2018:Q1
2019:Q1
2020:Q1
2021:Q1

2008:Q4
2010:Q1
2011:Q2
2012:Q3
2013:Q4
2015:Q1
2016:Q2
2017:Q3
2018:Q4
2020:Q1
2021:Q2
2022:Q3
2022:Q1

years years years years

Sources: US Federal Reserve System Open Market Account data; US Flow of Funds; US Monthly Statistics of Public Debt; and IMF staff calculations.
Note: In panel 1, absorption by the US Federal Reserve is presented as a negative number to visualize the reduction in net issuance to be absorbed by the other
institutions and investors. In panel 3, US banks are US-chartered banks, including US subsidiaries of foreign banks.

Quantitative Tightening Adds Challenges to

in the bond market as investors have rushed toward
Money Markets
safe haven assets, there is a risk of a sharp repricing.
In the United States, term premiums have remained Since the pandemic, G10 central banks have
low despite a 250-basis-point increase in terminal injected massive amounts of liquidity into the finan-
rate expectations since March 2022 (Figure 1.21, cial system, leading to a surge in banks’ reserves,
panel 1). Defying historical correlations, the 10-year a liability item on central bank balance sheets
Treasury term premium has remained negative, at (Figure 1.22, panel 1). As these moves are unwound
about –70 basis points. Similar patterns have pre- by quantitative tightening, reserves are drained from
vailed in the United Kingdom and the euro area the financial system. As reserves decline, there is a
since the start of their hiking cycles. The persistence risk that funding rates could increase markedly as
of compressed term premiums likely reflects inves- market participants compete for increasingly scarce
tors’ preference for holding safe sovereign bonds pools of liquidity in the open market (as seen in
amid still-substantial uncertainty about the economic September 2019 in the United States).20 Before the
outlook, as well as the fact that central banks are still 20Similarly, in Australia, banks will face higher funding costs
holding sizable shares of sovereign bond duration as cheaper funding from the pandemic-era Term Funding Facility
(Figure 1.21, panel 2). expires in 2023–24.

26 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Figure 1.20. Quantitative Tightening in the Euro Area and the United Kingdom amid Additional Supply of European
Government Bonds and Gilts

Gilt and European government bonds net supply to the private sector is European government bonds net issuance is set to increase
set to increase significantly this year. significantly in 2023.
1. European Government Bonds and Gilt Net Supply 2. European Government Bond Issuance versus European Central Bank
(Billions of euros, left scale; billions of British pounds, right scale) Purchases
(Billions of euros)
800 350 Net European Central Bank purchases 2,000
European government bond supply
Redemptions Gross supply
(billions of euros, left scale)
Net supply taking European Central Bank quantitative
600 Gilt supply (billions of British pounds, right scale) 300 tightening/quantitative easing into consideration

1,000
400 250

200 200
0
0 150

–200 100
–1,000

–400 50

–600 0 –2,000
2015 16 17 18 19 20 21 22 23 2015 16 17 18 19 20 21 22 23

Sources: Bloomberg Finance L.P.; and IMF staff calculations.

recent bank turmoil, as quantitative tightening was early March. The banking turmoil in March has
advancing, there were some signs that the funding reversed the decline in reserves by approximately
was getting tighter, particularly for smaller banks, $400 billion, as concerns about deposit outflows
as deposit outflows have led banks to pursue other led banks to bolster liquidity by borrowing from
financing alternatives, including advances from the FHLBs and the Federal Reserve. So far, the
the FHLBs and borrowing in the federal funds $540 billion declines in Federal Reserve assets since
market—the volumes of which reached the highest June 2022 has been associated, on the liabilities side,
point since 2016—as well as from the discount with a decline in the Treasury General Account (the
window. However, reserves were still abundant and US government’s operating account). Reserves and
account for around 14 percent of the assets of the balances in the ON RRP—a Federal Reserve facility
entire banking system. Therefore, with the exception in which MMFs can invest cash—have increased a
of some pressures in funding markets from the tur- bit over the same period (Figure 1.22, panel 2).
moil in the banking sector, money market rates have At the current pace, the Federal Reserve’s balance
adjusted in line with policy rates without major sheet will shrink by about $800 billion in the remain-
distortions. ing months of 2023, further reducing reserves. Assum-
Reserve dynamics have changed substantially with ing total banking system assets stay at early March
the recent turmoil, reversing in part the impact (before the turmoil) levels, reserves could decline to
of quantitative tightening so far. In the United 11.5 percent of bank assets in 2023, all else equal. At
States, bank reserves had declined significantly in that level of projected reserves, funding spreads have
the months before quantitative tightening (about historically been only a bit more sensitive to changes in
$725 billion), and by about $330 billion from reserve balances (Figure 1.22, panel 3). Strains at banks
the beginning of quantitative tightening through could further add to funding higher funding spreads.

International Monetary Fund | April 2023 27

 GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Figure 1.21. Term Premiums Remain Compressed Despite Tightening

Notwithstanding advanced stage of tightening, term premiums at ... even though central banks have started to shrink their bond market
present remain compressed ... presence.
1. US 10-Year Term Premiums and Terminal Policy Rate Expectations 2. US Federal Reserve, European Central Bank, and Bank of England
(Percent) Duration Absorption of Public Sector Securities for Monetary Policy
Purposes
(Percent)
5 1986–2008 45
2009–19 US Federal Reserve
2020–21 European Central Bank 40
4 2022–now Bank of England
Current
35
3
30
10-year term premium

2 25

1 20

15
0
10
–1
5

–2 0
0 2 4 6 8 10 12
Mar. 2008
Mar. 2009
Mar. 2010
Mar. 2011
Mar. 2012
Mar. 2013
Mar. 2014
Mar. 2015
Mar. 2016
Mar. 2017
Mar. 2018
Mar. 2019
Mar. 2020
Mar. 2021
Mar. 2022
Mar. 2023
Terminal policy rate expectations

Sources: Bloomberg Finance L.P.; European Central Bank; Haver Analytics; and IMF staff calculations.
Note: Panel 1 shows term premiums and terminal rates observed daily. Term premiums are based on the Adrian, Crump, and Moech (2013) model and shown for the
10-year tenors. Terminal policy rate expectations reflect the near-term peak forward rate of money market futures curves at a given point in time. Panel 2 shows the
duration risk absorbed, which is defined as the share of central bank holdings divided by the overall sovereign bond market capitalization. Horizontal lines reflect the
start of the US Federal Reserve’s quantitative tightening programs in July 2017 and June 2022. For the European Central Bank, it shows holdings in the asset
purchase program and the pandemic emergency purchase program, government bond holdings relative to the outstanding government debt securities in euro area

Emerging Markets: Higher Rates Pose Debt On net since October, higher-quality emerging mar-
Risks to Vulnerable Countries ket bonds have rallied to levels at which new issuance
High debt levels continue to pose serious in international markets is reasonably easy, whereas
medium-term risks for many countries, as the era frontier and other lower-rated issuers will likely face
of easy international market access for all emerging continued difficulties. Low-income countries, which
markets may be coming to an end. In recent weeks, have been adversely affected by high food and energy
the deterioration in global risk appetite has partially prices, continue to have extremely challenging debt
unwound the easing in financial conditions in situations. Several existing debt distress cases have
emerging markets seen since October, with bond unfortunately already showcased the potential for
yields moving higher and exchange rates depreciating. large spillovers from debt issues to the real economy,
Sovereign and corporate hard-currency spreads also with a disproportionate effect on the most vulnera-
have widened by about 30 basis points, highlighting ble households.
the sensitivity of emerging market assets to global Portfolio flows have stalled since mid-February,
developments. Notwithstanding recent moves, as with modest outflows from local currency bonds
noted in the October 2022 Global Financial Stability and equities resuming after a strong rebound from
Report, market perception of emerging market risks late 2022 through January. Sovereign hard-currency
remain strongly differentiated according to ratings. issuance also has slowed after one of the strongest

28 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Figure 1.22. Quantitative Tightening and the Effect on Reserves

Central banks’ balance sheets have swollen In the United States, the effect of quantitative Upcoming quantitative easing volumes could
during the pandemic, leading to a massive easing on reserves so far has been small, squeeze reserves further, well into the part of
increase of bank reserves. despite reverse repurchases remaining high. the upward-sloping demand curve.
1. Bank Reserves in the United States, 2. Securities Held Outright, Reserves, and 3. Reserve Balance and Federal Funds
the Euro Area, and the United Kingdom Overnight Reverse Repurchase Volumes Interest Rate of Excess Reserves Spreads
(Percent of GDP) (Billions of US dollars) (Basis points; percent of bank assets)
50 Euro area 9,000 Quantitative After 2019 15
United Kingdom tightening Before 2019

Federal Reserve funds and IOR spreads (basis points)

45 United States 8,000 start Latest 10
G3
40 Reserves
7,000
ON RRP 5
35 Treasury General
6,000
Account 0
30 Securities held
5,000
outright
25 –5
4,000
20
–10
3,000
15
–15
2,000
10

1,000 –20
5

0 0 –25
2011 12 13 14 15 16 17 18 19 20 21 22 23 6 8 10 12 14 16 18 20
Mar. 2015
Mar. 2016
Mar. 2017
Mar. 2018
Mar. 2019
Mar. 2020
Mar. 2021
Mar. 2022
Mar. 2023
Reserves (as a percentage of bank assets)

Sources: US Federal Reserve System Open Market Account data; US Monthly Statistics of Public Debt; US Flow of Funds; and IMF staff calculations.
Note: G3 = Group of Three countries; IOR = interest on reserves; ON RRP = overnight reverse repurchase agreement.

months on record in January. Chinese equities Other forms of nonresident capital inflows have
had seen the strongest inflows from nonresidents been fairly resilient since the COVID-19 pandemic.23
over three months since 2019 with $34 billion As demand for emerging market debt in public
through January, whereas local currency bonds,21 markets dropped dramatically starting in 2020, the
which saw large outflows of $84 billion in 2022, supply of private loans (from banks and other financial
had yet to rebound and have seen sharp outflows corporations) and other investment flows24 increased
begin again (Figure 1.23, panel 1). Overall, for- to make up the shortfall, including the use of special
eign portfolio investments in emerging markets drawing rights allocations in late 2021 (Figure 1.23,
have yet to fully recover from 2022 and show signs panel 3). However, these flows could now be at risk if
of remaining vulnerable to shifts in global market conditions in advanced economies, particularly in the
conditions. IMF staff analysis, which is based on the banking sector, remain unstable. In frontier markets,
capital-flows-at-risk methodology,22 suggests that brisk debt issuance evaporated in 2021 and may not
outflows could reach 2.8 percent of GDP, less severe resume at the same scale, given the ongoing challenges
than the 3.2 percent projected in the October 2022
Global Financial Stability Report but still above the
23Findings refer to a sample of 18 emerging and frontier markets
long-term average (Figure 1.23, panel 2). excluding China and Russia.
24Other investment flows are the residual flows not included in

foreign direct and portfolio investment, which can include bank

21Refers primarily to central government and policy bank bonds. loans, currency and deposits, and trade credits. Please see the sixth
22See the April 2020 Global Financial Stability Report. edition of IMF’s Balance of Payments and International Investment
Capital flows at risk are defined as the fifth percentile of the Position Manual (https://www.imf.org/external/pubs/ft/bop/2007/
three-quarters-ahead capital flows probability density. pdf/bpm6.pdf ) for the specific definition.

International Monetary Fund | April 2023 29

 GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Figure 1.23. Emerging Market Capital Flows

Portfolio flows have stalled after rebounding in late 2022. Risks to capital flows have eased but remain somewhat elevated.

1. Portfolio Flow Tracking 2. Capital Flows at Risk

(Billions of US dollars) (Probability, left scale; fifth percentile, percent of GDP,
Sovereign hard currency Local currency bonds right scale)
(net issuance) Equities Probability outflows (left scale)
Local currency bonds Total, 3m sum (right scale) Capital flows at risk (fifth percentile, right scale)
Equities
Total, 3m sum (right scale)
Emerging markets
China 60 0.6 3.5
excluding China
60
40 40 45 0.5 3.0
40
30 2.5
20 20 0.4
20
15 2.0
0.3
0 0 1.5
0 0
–20 0.2
–15 1.0
–20 –20
–40 –30 0.1 0.5
–40 –60 –40 –45 0 0.0
Jan. 2022
Apr. 2022
Jul. 2022
Oct. 2022
Jan. 2023

Jan. 2022
Apr. 2022
Jul. 2022
Oct. 2022
Jan. 2023

2018:Q1
2018:Q2
2018:Q3
2018:Q4
2019:Q1
2019:Q2
2019:Q3
2019:Q4
2020:Q1
2020:Q2
2020:Q3
2020:Q4
2021:Q1
2021:Q2
2021:Q3
2021:Q4
2022:Q1
2022:Q2
2022:Q3
2022:Q4
2023:Q1
Private market and official sector flows have played a larger role in the Frontier markets' access to markets has dried up after a decade, with
latest capital flow cycle. official sector flows playing a larger role.
3. Emerging Market Nonresident Balance of Payments: Capital Flows 4. Frontier Market Nonresident Balance of Payments: Capital Flows
(Four-quarter rolling sum percent to GDP) (Four-quarter rolling sum percent to GDP)
Direct investment Private sector: other financial corporations Direct investment Portfolio investment: debt
Official sector Private sector: other nonfinancial corporations Official sector Portfolio investment: equity
Private sector: Special drawing rights’ withdrawals Private sector Special drawing rights’ withdrawals
depository corporations Portfolio investment: equity
Portfolio investment debt
9 Market access begins Easing of global financial 9
conditions
7
7
5
5 3

3 1
COVID-19 outflows Loss of –1
1 market access –3
–1 –5
2005:Q1 2008:Q1 2011:Q1 2014:Q1 2017:Q1 2020:Q1 2012:Q1 2014:Q3 2017:Q1 2019:Q3 2022:Q1

Sources: Bloomberg Finance L.P.; Haver Analytics; national sources; IMF, World Economic Outlook database; and IMF staff calculations.
Note: In panel 1, local currency bond flows refer primarily to government bonds. Latest data for February and March may be incomplete and preliminary. China's bond
flow data for March had not been released at the time of publication. 3m sum = three-month rolling sum; Q = quarter.

with sovereign defaults and macro-vulnerabilities those in previous tightening episodes in a number of
(Figure 1.23, panel 4). countries, particularly in Latin America, although less
Early and aggressive policy rate hikes have contrib- so in emerging Asia (Figure 1.24, panel 1). Forward-
uted to the resilience of emerging markets since 2022 looking monetary policy expectations for emerging
through large interest rate differentials with respect to markets have generally eased since the October 2022
advanced economies. Real (ex ante) policy rates have Global Financial Stability Report but remain sensitive
tightened substantially and appear restrictive relative to to developments in advanced economies. Recent stress

30 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Figure 1.24. Emerging Market Policy Outlook

Real policy rates have tightened substantially. Recent stress in advanced economies and easing policy expectations
has spilled over into emerging markets.
1. Real Ex Ante Policy Rates 2. Monetary Policy Expectations, Cumulative Change in Market Pricing
(Percent, policy rate adjusted by one-year-ahead inflation surveys, of Policy Rate for December 2023
historical range and latest) (Change in market-implied expectations, median, interquartile range,
basis points)
12 Silicon Valley Bank/Credit Suisse 200
Historical range Latest First half of 2021
bank stress eases policy outlook 150
8
100
4 50

0 0
Median
25th percentile –50
–4 75th percentile
–100
Federal Reserve funds rate
–8 –150
HUN BRA CHL COL MEX PER POL PHL ZAF IND IDN THA MYS Sep. Oct. Nov. Dec. Jan. Feb. Mar.
>1,000 basis points >500 basis <500 basis points 2022 2022 2022 2022 2023 2023 2023
points
Ordered by amount of nominal rate hikes

Inflation remains well above target in many emerging markets. The structure of domestic bond markets varies considerably across
countries.
3. Inflation versus Target: Peak and Latest 4. Domestic Debt Structure and Refinancing Needs
(Core and headline year-over-year inflation versus upper bound of (Percent of GDP; average maturity in years; bubble size scaled by
the target range, cycle peak since 2021 and latest, percentage projected net issuance needs as percent of GDP)
points above target)
30 100
Latest headline Latest core

General government debt to GDP

Peak headline Peak core BRA 90
IND
HUN MYS 80
20
COL 70
THA ZAF 60
10 PHL MEX 50
POL
IDN CHL 40
TUR
30
0 Blue circles indicate if at least 20% of domestic local
20
currency debt is floating and/or inflation linked
10
–10 0
HUN POL ROU COL CHL PER MEX PHL BRA IDN IND ZAF THA 2 5 8 11 14
Average maturity of domestic debt

Sources: Bank for International Settlements; Bloomberg Finance L.P.; BNP Paribas; Haver Analytics; JPMorgan Chase & Co.; IMF, World Economic Outlook database;
and IMF staff calculations.
Note: In panel 2, the median and interquartile range refers to a sample of 11 emerging markets. In panel 3, the upper bound of the target range for headline inflation
is used for both core and headline. In panel 4, net issuance needs are derived from analysts’ projections for 2023. South Africa also has a material share of inflation
linked debt, but does not meet the categorical threshold. Average maturity is based on domestic local currency debt and is derived from national sources, Bank for
International Settlements, or estimated from the stock of outstanding securities. Data labels use International Organization for Standardization (ISO) country codes.

in global banking has driven markets to reprice policy in most emerging markets (Figure 1.24, panel 3).
expectations for 2023 for both advanced economies Premature easing of policy or the market perception that
and emerging markets (Figure 1.24, panel 2). central banks are losing resolve could lead to a deprecia-
Although there are signs that inflation may have tion of the exchange rate, widening of sovereign spreads,
peaked in some emerging markets, bringing inflation and capital outflows. Persistent inflation in advanced
back to target will remain a long journey. Both headline economies also suggests that monetary policy could be
and core inflation remain substantially above target tighter than expected over the short and medium term

International Monetary Fund | April 2023 31

GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

despite recent financial stress. Countries with larger down from about five months in September 2021,
external deficits and weaker policy frameworks could just after the special drawing rights allocations were
be more vulnerable to adverse exchange rate moves or received. Hard-currency bond refinancing needs are
capital outflows in the event of hawkish monetary policy modest in 2023, at $3 billion after March 2023, but
surprises from the Federal Reserve or a renewed deterio- will become more meaningful in 2024 ($12.4 bil-
ration in global risk sentiment. lion). Frontier markets may struggle to meet this level
The interaction of fiscal risks and uncertainty about without a sharp recovery in issuance (Figure 1.25,
the inflation outlook can pose challenges for domestic panel 2). Exchange rates in several frontier markets
bond markets. The structure of domestic debt and (Egypt, Ghana, Pakistan) have weakened substantially
refinancing needs varies considerably, and countries through market pressure or official devaluations, with
with shorter maturity and higher debt levels tend to growing divergence between official and parallel mar-
be more vulnerable to rollover risks.25 Moreover, the ket rates in some cases.
transmission of persistent inflation pressures to fiscal With little to no access to market-based financing,
risks may be greater in countries with a significant more than half (37 out of 69) of all low-income coun-
share of floating rate or inflation-linked debt. Defi- tries are assessed to be at high risk or in debt distress,
cits remain large relative to prepandemic levels amid according to the latest IMF Debt Sustainability Anal-
an uncertain growth outlook, and net domestic debt ysis and World Bank Debt Sustainability Framework.
issuance in 2023 is likely to be substantial in several With reduced international financing, domestic banks
countries (Figure 1.24, panel 4). Markets remain sen- have been left to finance the sovereign, thus strength-
sitive to policy, and several countries have seen a rapid ening the sovereign-bank nexus26 across low-income
sell-off in bond yields at times over the last year amid countries and raising risks of an adverse bank-sovereign
questions about the fiscal framework. feedback loop that could threaten macro-financial
stability.27 Sovereign assets as a fraction of total bank-
ing sector assets more than doubled between 2008 and
Frontier Markets and Low-Income 2022 to reach 13.5 percent in low-income coun-
Countries Face Financing and Debt tries. For one-quarter of low-income countries, the
Sustainability Challenges sovereign-bank nexus has crossed the historically high
For frontier markets, conditions are back near 20 percent mark since the end of 2020 (Figure 1.25,
crisis levels as global financial stress has increased. panel 3). A number of countries are increasingly
Market access remains an issue. International bond relying on monetary financing, financial repression,
spreads for frontier markets remain high at 885 or both, with potentially undesirable macroeconomic
basis points, more than 300 basis points above their consequences in the medium term.
long-term average. More than 40 percent of fron- Five countries (Belarus, Ghana, Malawi, Russia,
tier bonds maturing through 2025 are trading at Sri Lanka)28 defaulted on their sovereign debt during
distressed spreads (above 1,000 basis points), and 2022, bringing the total currently in default to eight.
nearly 80 percent are trading at spreads of more In December 2022, Ghana announced that it would
than 700 basis points. While debt-to-GDP levels restructure its external and domestic debt, seeking an
are high in both frontier and emerging markets after external debt restructuring under the G20 Common
the pandemic compared with those over the last two Framework,29 the fourth country to do so after Chad,
decades, frontier markets have significantly less fiscal
space given much higher interest-to-revenue ratios
26The sovereign debt nexus is computed as the ratio of claims on
(Figure 1.25, panel 1). Frontier external reserves have
the central government to total assets of the banking sector.
fallen to an average of only four months of imports, 27For a detailed analysis of the sovereign-bank nexus in emerg-

ing markets, see Chapter 2 of the April 2022 Global Financial

25In the October 2022 Global Financial Stability Report, IMF Stability Report.
staff highlighted that many emerging markets have increasingly 28Belarus and Russia fell into default as their debt payments

relied on local currency debt issuance. Onen, Shin, and von Peter could not be processed because of sanctions after Russia’s
(2023) of the Bank for International Settlements suggest that the war in Ukraine.
trade-offs between rollover and market risks for issuance maturity 29Sixty-nine low-income countries are eligible under the G20

can be complicated by the structure and behavior of certain foreign Common Framework, for which an IMF-supported program is a
investor types. precondition.

32 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Figure 1.25. Frontier Markets and Low-Income Country Challenges

Frontier markets suffer from high levels of Upcoming maturities for frontier markets are The bank-sovereign nexus is increasing in
both debt and debt service. limited in the remainder of 2023 but will pick low-income countries.
up in 2024.
1. Fiscal Buffers 2. Upcoming Eurobond Maturities (Projected) 3. Banking Sector Claims on the Central
(Public debt in percent of GDP, left scale; (Billions of US dollars) Government
median of interest payments percent of Frontier markets (defaulted) (Percent of total banking sector assets)
fiscal revenue, right scale) Emerging markets, except frontier
70 Public debt/GDP: frontiers 16 markets (defaulted) 18 25
Median
Public debt/GDP: EMBIG Emerging markets, except frontier 25th percentile
except frontier markets markets (current) 16
60 14 75th percentile
Interest/revenue: frontier Frontier
markets (right scale) markets 20
14
Interest/revenue: 12 (current)
50 EMBIG except
frontier markets 12
10
(right scale) 15
40 10
8
30 8
10
6
6
20
4
4 5
10 2 2

0 0 0 0
2002 06 10 14 18 22 Mar. Aug. Jan. Jun. Nov. 2002 04 06 08 10 12 14 16 18 20 22
2023 2023 2024 2024 2024

Sources: Bloomberg Finance L.P.; Haver Analytics; International Financial Statistics database; IMF, World Economic Outlook database; and IMF staff calculations.
Note: EMBIG = Emerging Market Bond Index Global.

Ethiopia (both of which were seeking preemptive debt China’s Reopening Brings Hope of
restructuring and were not in default), and Zambia.30 Economic Recovery although Downside
Sri Lanka defaulted in April 2022 and has been working Risks Remain
to restore debt sustainability in a transparent and timely The reopening of the Chinese economy—with the
fashion, with equitable burden sharing among creditors, steady recovery in mobility—and the announcement
including through a Fund supported program approved of enhanced policy support for the country’s real estate
in March 2023, after the country secured financial sector31 have boosted investor sentiment. Financial
assurances from its major official bilateral creditor. markets staged a sharp rally beginning in October
Malawi, a non–market-access low-income country, has 2022, with domestic market equities up 17 percent
initiated a comprehensive restructuring of both its com- and the renminbi strengthening 5.8 percent against the
mercial and its official bilateral debt. US dollar on the back of a strong rebound in portfolio
flows. Foreign investors bought a record amount of
30Chad, which had not defaulted, became the first country to
Mainland Chinese shares through the Stock Connect
reach a debt treatment agreement under the G20 Common Frame-
work with its official bilateral and private creditors in November programs. The brightening of the near-term growth
2022. In Zambia, the official creditor committee provided financing outlook has boosted prices of some commodities, such
assurances and committed to restructure Zambia’s bilateral debt in as copper and steel. However, downside risks remain
July 2022. Discussions are ongoing to reach an agreement on specific
terms and with private sector creditors. In Ethiopia, which is not in because of uncertainty around the ongoing contraction
default but sought a preemptive debt restructuring, progress has been in the housing market.
more limited because of delays in creditor and development partner
support given internal conflict. Outside of the G20 Common
Framework, Suriname, which defaulted on its Eurobonds in March 31In the fourth quarter of 2022, the Chinese authorities

2021, reached a restructuring agreement with its Paris Club creditors announced 16 measures to support the property sector, including
in June 2022 but has not yet been able to reach an agreement with expanded bond issuance programs, lower mortgage rates, and easing
other bilateral creditors and its bondholders. of home purchase restrictions across the country.

International Monetary Fund | April 2023 33

 GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Figure 1.26. Developments in Chinese Property and Financial Markets

Housing market activities remain weak, and nascent recovery is Strained local government fiscal capacity raises concerns for the
uneven, favoring top-tier cities and state-owned developers. sustainability of debt issued by LGFVs ...
1. Contract Sales of Top 100 Property Developers 2. LGFV Spreads versus Local Government Debt
(Percent; year-over-year change) (Percent; basis points)
State owned Private Distressed
10 600
0

LGFV bonds: weighted average

–10 500
–20 400
–30

spread
–40 300
–50
–60 200
Relatively low income
–70 Midrange income 100
–80 Relatively high income
–90 0
Jul. 2022 Oct. 2022 Jan. 2023 Apr. 2023 Jul. 2023 Oct. 2023 Jan. 2024 0 20 40 60 80 100
Local government debt to GDP

... and indirect exposures to nonbank financial sectors that remain key Small banks are vulnerable through direct loan exposures.
funding sources for the real estate markets.
3. Net Claims on Nonbank Financial Institutions 4. Loan Exposures, by Counterparty Sectors
(Trillions of yuan) (Percent of total loans)
Large banks Medium banks Small banks Mortgage Developer loans
Other Total Inclusive loans Capital (right scale)
14 60 20
12 18
50

(total capital ratio, percent)

10 16
(Percent of total loan)

8 14
40
6 12
4 30 10
2 8
0 20 6
–2 4
10
–4 2
–6 0 0
2010 11 12 13 14 15 16 17 18 19 20 21 22 State banks Joint stock City banks Rural banks
banks

Sources: Bloomberg Finance L.P.; China Banking and Insurance Regulatory Commission; CEIC; JPMorgan Chase & Co.; and Wind Information Co.
Note: LGFV = local government financing vehicle.

Despite a plethora of policy support, the housing from private developers (Figure 1.26, panel 1), under-
market in China remains sluggish. After a 28 percent scoring the limited progress in restoring confidence in
contraction in 2022, home sales remain weak, and the broader housing market.
prices are only starting to stabilize. Lower-tier cities, Concerns about the debt sustainability of local gov-
where stalled presold properties are concentrated, have ernment financing vehicles (LGFVs) have intensified
not shown signs of recovery. Financing conditions for since late 2022. During the fourth quarter, a city-level
some property developers, including state-owned devel- LGFV facing imminent default restructured its debt,
opers, have improved, leading to a strong rebound in coinciding with a sharp widening of lower-rated LGFV
their stock and bond prices. But improvements remain bond spreads. The tightening of financing conditions
uneven, and financially weaker private developers con- later spread across the entire LGFV sector amid the
tinue to face funding challenges. In light of the slow bond market volatility in December. With total LGFV
progress in completion and delivery of stalled presold debt estimated at about 50 percent of China’s GDP,
properties, home buyers continue to avoid purchasing a broadening of LGFV debt distress would impose

34 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

significant losses on some banks, particularly in of risks related to real estate and LGFVs could incur
low-income regions with higher local government debt significant losses to investors’ holdings of wealth
and large stocks of unfinished housing (Figure 1.26, management products and trust products, potentially
panel 2; see also the October 2022 Global Financial triggering runs on these products and resulting in
Stability Report). Some weaker banks have already broader funding market stress. In addition, small banks
suffered from contagion from the LGFV sector, as have been relatively slow to participate in the delever-
evidenced by widening subordinated bond spreads. aging process, and their net exposures to NBFIs remain
The public finances of local governments have sizable (Figure 1.26, panel 3).
become strained as responsibilities for home comple- Beyond exposures to NBFIs, banks face heightened
tions and the pandemic response have increased, while credit risks because of exposures to small and medium
land sale revenues have plummeted. Local government enterprises and the property sector (Figure 1.26,
debt has increased to about 30 percent of GDP after panel 4). A policy directive in place since 2019 that
record issuance in 2022.32 Local governments with urges banks to increase lending to small and medium
weak fiscal positions could be limited in their capacity enterprises has led to increased credit risk, as small
to backstop LGFVs, which may be increasingly needed businesses have been disproportionately affected by the
as LGFVs are constrained from raising additional debt pandemic and economic slowdown. The recent policy
after recent actions by the authorities. support to the property sector, which puts a priority on
Chinese NBFIs are particularly exposed to real estate the completion and delivery of stalled presold housing,
and LGFVs. Trust companies typically provide financ- will likely help contain credit risk of mortgages. Banks
ing at the initial phase of property development—for could still face large losses from exposures to weaker
example, for land purchases—while wealth manage- property developers, which account for 25 percent of the
ment products invest directly in debt securities issued sector. IMF staff analysis in the October 2022 Global
by property developers and LGFVs and indirectly Financial Stability Report suggested the nonperform-
through investments in trust companies. IMF staff ing loan ratio for developer loans could rise to about
estimates show real estate and LGFV exposures 8 percent for the system, a ratio similar to the reported
could amount to 14 percent of wealth management nonperforming loan ratio from listed trust companies
products’ assets under management, or 4.2 trillion in the second quarter of 2022. Given various regulatory
yuan, and 23 percent of trust assets, or 3.3 trillion forbearances on pandemic-related and developer loans,
yuan.33 The financial deleveraging campaign begun in banks’ reported figures on their nonperforming loans
2016 targeting shadow banking has helped improve may underestimate the underlying credit risks, partic-
the health of NBFIs and contain the spillover risk to ularly in the case of smaller banks, which have lower
the banking sector.34 Nonetheless, further escalation capital ratios and comparatively large exposures to local
and smaller borrowers. Distress at smaller banks could
32Local governments issued 2.8 trillion yuan of refinancing bonds, spill over to the larger banks, given interconnectedness of
some of which were used to pay down off-balance sheet financing, the banking system.
and 4.8 trillion yuan of new bonds.
33The estimate is based on the following assumptions. Wealth

management products allocate 53 percent of assets to bonds and

7 percent to nonstandard credit assets. Within bonds, 1.5 percent is The Corporate Sector Is Navigating the
assumed to be developer bonds and 11.2 percent to be LGFV bonds,
proxied by the share of developer and LGFV bonds in the total
Challenges of Higher Interest Rates and a
nonfinancial corporate bond market (6 and 43 percent, respectively) Slowing Economy
multiplied by the share of nonfinancial corporate bonds in the total
onshore bond market (26 percent). All nonstandard credit assets are
The global corporate sector has emerged from the
assumed to be trust products financing the real estate and LGFV pandemic in reasonably good shape—default rates have
sectors. For trust companies, according to the China Trustee Associ- remained low and earnings have generally outper-
ation, 8.5 percent of pecuniary trust assets are allocated to real estate
formed expectations. Corporate spreads widened fol-
and 10.8 percent to infrastructure and 19.7 percent are invested
in bonds. All of the infrastructure allocation is assumed to finance lowing the recent banking turmoil, but remain not far
LGFVs, and the bond allocation follows the same methodology for from their historical average levels. Large cash buffers
wealth management products. the sector has built since the pandemic have cushioned
34For example, by separating banks’ wealth management products’

assets from the banking parent, prohibiting provision of principal it against current conditions. However, looking ahead,
guarantee, and increasing wealth management products’ risk buffers. the sector faces two important headwinds: the decline

International Monetary Fund | April 2023 35

 GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Figure 1.27. Corporate Performance and Default Outlook

Rating agencies have downgraded US corporates more than upgraded Corporate profitability prospects have likely peaked out and are
them. expected to slow down.
1. Upgrade/Downgrade Ratio for the United States 2. Global 12-Month-Forward Earnings per Share Ratios
(Ratio) (Indices, January 2020 = 100)
6 Moody’s S&P Fitch United States 200
India 180
5 More upgrades
Japan
than downgrades
Euro area 160
4 Brazil
China 140
3
South Africa 120
2
100
1 80
0 60
2012 13 14 15 16 17 18 19 20 21 22 23 Jan. Jun. Nov. Apr. Sep. Feb. Jul. Dec.
2020 2020 2020 2021 2021 2022 2022 2022

Liquidity buffers have been eroded relatively quickly, implying a more Foreign currency debt has declined in emerging markets from
challenging environment for corporate borrowers to come. prepandemic levels.
3. Cash-to-Interest Expense Ratio and Cash-to-Debt Ratio 4. Nonfinancial Corporation Bonds and Cross-Border Loan
(Ratio) Denominated in Foreign Currency in Emerging Markets Excluding
China
(Percent of GDP)
Total emerging markets, excluding China
0.26 Latin America 16
Cash buffers have depleted 2021
at a much faster pace than Central and Eastern Europe
14
0.24 debt since 2021 Asia, excluding China
Middle East and North Africa 12
Cash-to-debt ratio

0.22 2020 10
2022:Q2 8
0.20 2019 6
Cash buffers built up
while the total debt 4
0.18 increased by 8.2%
2
relative to 2019
0.16 0
3.6 4 4.4 4.8 5.2 5.6 6 6.4 6.8 7.2 2013: 2015: 2016: 2017: 2018: 2020: 2021:
Cash-to-interest-expense ratio Q4 Q1 Q2 Q3 Q4 Q1 Q2

Sources: Bloomberg Finance L.P.; Fitch Ratings; Moody’s Investors Service; National Bureau of Economic Research; Refinitiv Datastream; S&P Capital IQ; S&P Global
Ratings; and IMF staff calculations.
Note: In panel 1, the ratio is calculated as the number of upgrades divided by the number of downgrades. In panel 3, the sample includes 13,300 firms from 20
countries (see the footnote of Figure 1.24) except for outliers based on cash to interest expense ratio. The size of the bubble corresponds to the aggregated debt
amount.

in revenues—owing to a compression of margins—and interest rates lead to higher borrowing costs, weaker
tighter funding conditions, particularly from banks aggregate demand, and more stringent bank lending
(Figure 1.5). Under such a scenario, large firms could standards. In addition, some companies may find it
be exposed to downgrade risks and hence further difficult to pass higher input costs along to customers.
funding stresses, especially for large firms in emerging In this context, credit agency downgrades have risen in
markets. Lending to small firms, which tend to rely on the United States and Europe (Figure 1.27, panel 1),
bank financing, may be curtailed as lending standards and earnings growth is expected to slow (Figure 1.27,
tighten in a slowing economy, and these firms could panel 2). Cash buffers and other liquid assets that
face a very challenging funding environment. helped firms weather the pandemic over the past few
The resilience of the sector has yet to be fully tested. years have started to erode (Figure 1.27, panel 3).
Corporations emerged from the pandemic with much In emerging markets, the ratio of total foreign
higher debt loads. The ability to service this debt currency debt to GDP of nonfinancial firms has fallen
could weaken in a higher-for-longer environment as 3 percentage points from its prepandemic highs, but
36 International Monetary Fund | April 2023
 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

the level of this debt remains high for several countries. of this fall in interest coverage reveals that, broadly
A large currency depreciation could lead to meaning- speaking, higher interest rates account for more than
ful increases in debt- servicing costs for firms with 60 percent of the change. Higher-graded firms are
significant foreign debt, further deteriorating interest more sensitive to the universal interest rate shock, as
coverage ratios (Figure 1.27, panel 4). For some emerg- they typically have more debts with lower effective
ing market economies, this debt largely rests with funding costs (Figure 1.28, panel 4).37
commodity producers or firms that will benefit from
increased exports because of the depreciated currency,
but for many firms, this is not the case. Housing Markets Are Slowing, Headwinds
To estimate the extent of debt that may not be repaid Picking Up Speed
should earnings decline, and interest expenses rise, IMF The residential real estate market has been directly
staff conducted a scenario analysis on corporate interest and quickly affected as monetary policy has tightened
coverage ratios.35 The share of debt with an interest cov- around the world. The steep increase of residential
erage ratio below 4—a level that typically distinguishes mortgage rates, coupled with stretched house valua-
investment and noninvestment ratings—rises signifi- tions, has generally cooled demand, although to vary-
cantly for all types of firms. In advanced economies, the ing degrees across countries (Figure 1.29, panel 1).
shares of small and medium firms that have interest cov- House prices fell in 65 percent of emerging markets
erage ratios less than 4 rises by 7 percentage points and (on average by 0.7 percent year over year) in the third
17 percentage points, respectively; the changes are simi- quarter of 2022; similarly, prices decreased in nearly
lar for emerging markets excluding China (Figure 1.28, 55 percent of advanced economies.38 Economies with
panels 1 and 2). Although the share of large firms with a larger share of adjustable-rate mortgages—that is,
interest coverage ratios falling below 4 under the sce- those in which borrowing costs track more directly
nario is also significant, they have stronger debt-servicing changes in interest rates—have recorded some of
ability to begin with. For example, 60 percent of large the highest declines in real house prices (such as
firms in advanced economies have an interest coverage in Sweden and Romania).39 That said, valuations
ratio greater than 4, compared with only 21 percent of remain stretched in a number of countries, and
small firms and 44 percent of medium firms. affordability—as measured by the price-to-income
Looking at the firms in advanced economies that ratio—continues to deteriorate amid higher mortgage
have credit ratings,36 more than 75 percent of firms costs, overall increasing the risk of a sharp correction
with a BBB rating would have their interest coverage in prices (Figure 1.29, panel 2).
ratio fall below 4 under the shock scenario, implying Downside risks to house prices remain significant
that many would be at risk of a rating downgrade in the medium term (Figure 1.29, panel 3). With
below investment-grade status, and thereby a sharp
increase in the cost of funding (Figure 1.28, panel 3). 37For higher-rated firms, effective interest rates (EIRs) are broadly

very low before the shock; thus, the impact of a 200 basis points
The rise in debt at risk could potentially result in losses
increase in EIRs on interest expenses, the denominator of the interest
at those bank and nonbank financial institutions with coverage ratio, is proportionally more significant than for lower-rated
significant direct and indirect exposures to highly firms whose EIRs are generally higher in the first place.
38In the third quarter of 2022, the annual growth in real house
indebted nonfinancial firms. Decomposing the sources
prices remained flat globally, although regional differences persisted.
Following widespread price declines, the aggregate real house price
35The analysis is based on corporate data from the second quarter growth for advanced economies was significantly slower than during
of 2022, when inflation was close to peak in several countries. the previous two quarters (0.9 percent year over year). Housing transac-
Earnings and interest rate shocks are applied, and these are calibrated tions also fell much more in the third quarter of 2022, with Denmark
to approximately match those during previous recession episodes, and the United States facing the most significant drops (about
including inflationary recessions and the global financial crisis. In 20 percent year over year). In many emerging market economies, the
general, across firms, earnings before interest and taxes are assumed downturn accelerated, especially in emerging Asia, where home prices
to fall by 20 percent, while the effective interest rate (which accounts dropped on average about 4 percent year over year. There are, however,
for the fact that not all debt is floating) rises by 200 basis points, some exceptions. For example, in Türkiye, house prices increased by
both instantaneously. The extent of the interest rate shock is broadly 60 percent year over year in real terms, primarily driven by surging
in line with that used in the corporate stress test in the 2020 United construction costs, housing demand, and housing supply constraints.
States Financial System Stability Assessment. 39This trend is in contrast with the trends prevailing before the
36Rating information is available for about 11 percent of the COVID-19 pandemic, when house prices in economies with a larger
entire sample (about 1,490 of 13,300 firms), and these firms own share of adjustable-rate mortgages increased on average by 5 percent
70 percent of the entire debt stock; most (about 1,000) firms are each year, whereas house prices in other economies increased by
located in the United States. 3.5 percent.

International Monetary Fund | April 2023 37

 GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Figure 1.28. Corporate Debt Analysis: Debt at Risk

Lower earnings and higher funding costs would further worsen ... with the ratings for the majority of firms facing a risk of rating
leverage metrics, including those for large firms ... downgrade (interest coverage ratios below 4).
1. Share of Debt at Firms by Interest Coverage Ratio by Firm Size in 2. Share of Debt at Firms by Interest Coverage Ratio by Firm Size in
Advanced Economies Emerging Markets Excluding China
(Percent of total debt, average across countries) (Percent of total debt, average across countries)
<1 1 to 4 >4 <1 1 to 4 >4
100 100
13% 12% 18%
21% 18%
27% 30% 32% 27%
80 10% 16% 80
7% 44% 46%
15%
60%
34%
60 24% 60
30% 44%
15% 47%
40 73% 77% 34% 72%
40
67%
27% 49% 48%
20 42% 38% 20
22% 28%
20%
13%
0 0
Small Medium Large Small Medium Large Small Medium Large Small Medium Large
2022:Q2 After the shocks 2022:Q2 After the shocks

In advanced economies, more than 70 percent of triple BBB-rated Higher-graded firms are more sensitive to a shock to effective interest
investment-grade corporations could face a rating downgrade to rates because their funding costs were very low.
speculative grade.
3. Share of Debt at Firms by Interest Coverage Ratio by Rating in 4. Earning and Interest Expense Shocks on Interest Coverage Ratio
Advanced Economies of Firms in Advanced Economies by Rating Group
(Percent of total debt, average across countries) (Ratio, average across countries)
<1 1 to 4 >4
100 1% 1% 16
13% 3%
19% 25% 14
80 35%
53% 12
62%
60 81% 51% 10
96% 8
60%
40 49% 81% 6
38%
29% 4
20 36%
16% 2
3% 16% 15%
9% 9%
0 0
AAA BBB BB CCC AAA BBB BB CCC
ICR: 2022:Q2

ICR: after shocks

ICR: 2022:Q2

ICR: after shocks

ICR: 2022:Q2

ICR: after shocks

Earnings shock
Interest shock

Earnings shock
Interest shock

Earnings shock
Interest shock
to A to B to SD to A to B to SD
2022:Q2 After the shocks

High grade Investment grade Speculative grade

Sources: S&P Capital IQ; and IMF staff calculations.

Note: A partial sensitivity analysis was run to estimate the increase in debt at risk in response to a combined shock to earnings and interest expense. The shock
scenario assumes that earnings before interest and taxes decline by 20 percent, and the effective interest rate on firms’ total debt rises by 200 basis points. The
earnings shock scenario was calibrated to the previous recession episodes. This time, seven more countries were added (Colombia, Hungary, Indonesia, Korea,
Malaysia, South Africa, Thailand). A total of about 13,300 firms in 20 countries were analyzed (Brazil, Colombia, France, Germany, Hungary, India, Indonesia, Italy,
Japan, Korea, Malaysia, Mexico, Poland, Russia, South Africa, Spain, Thailand, Türkiye, United Kingdom, United States). Large, medium, and small firms are defined
as those having assets greater than $500 million, between $500 and $50 million, and less than $50 million, respectively. In panel 4, high grade includes credit
ratings between AAA and A, investment grade includes BBB-rated firms, and speculative grade includes BB- to B-rated firms. The ratings are given by S&P.
ICR = interest coverage ratio.

38 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Figure 1.29. Developments in Residential Real Estate Markets

Housing markets are feeling the effect of the higher interest rate ... but housing supply constraints and affordability pressures persist.
environment ...
1. Real House Price Growth 2. Global Housing Affordability and Supply Conditions
(Distribution of year-over-year changes, 2022:Q3) (Index, 2015 = 100)
50 Advanced economies Price to income 200
Emerging market economies Permits 180
40 Economies with adjustable-rate Mortgage cost index
Percentage of countries

mortgages >40% 160

30 140

Index
120
20 100
80
10
60
0 40
≤–5% –5 to 0% 0 to 5% 5 to 10% 10 to 15% ≥15% 2000 02 04 06 08 10 12 14 16 18 20 22

Downside risks in house prices remain elevated in the medium term ... ... especially in emerging economies in a scenario with tighter-than-
expected financial conditions.
3. Advanced Economies: House-Prices-at-Risk Model 4. Emerging Market Economies: House-Prices-at-Risk Model
(Probability density; house-price-at-risk three years ahead) (Probability density; house-price-at-risk three years ahead)
Baseline Baseline
Scenario with tighter financial conditions Scenario with tighter financial conditions
0.06 0.06

0.05 0.05

0.04 0.04
Density

Density
0.03 0.03
5th percentile 5th percentile
0.02 0.02
–7%
0.01 –9% 0.01
–22% –19%
0.00 0.00
–40 –32 –24 –16 –8 0 8 16 24 32 40 –40 –32 –24 –16 –8 0 8 16 24 32 40
Cumulative house price growth (percent) Cumulative house price growth (percent)

Sources: Bank for International Settlements; Bloomberg Finance L.P.; Haver Analytics; and IMF staff calculations.
Note: In panel 2, all indicators are rebased and averaged across economies with nominal GDP weights. Mortgage cost corresponds to the average rate indexes of
long-term mortgage rates. Panels 3 and 4 show the estimation results from a house-prices-at-risk model. The model allows prediction of house price growth in
adverse scenarios; that is, the range of outcomes in the lower tail of the future house price distribution. Probability densities are estimated for the three-year-ahead
(cumulative) house price growth distribution across advanced economies and emerging markets. The red lines indicate projections in a scenario with tightening
financial conditions as proxied by two standard deviations higher financial condition index (that is, half of the increase occurred during the global financial crisis).
Filled circles indicate the price decline in an adverse scenario with a 5 percent probability (fifth percentile).

5 percent chance, house price decline over the next If financial conditions were to tighten to an extent half
three years could be about 7 percent in advanced as severe as during the global financial crisis—similar
economies and 19 percent in emerging markets.40 to what was assumed in Figure 1.14—the projected
declines could be up to 3 percentage points more,
40Formally, house prices at risk correspond to downside risks
especially in emerging market economies (red density
to house prices, defined as the forecast house price growth at the
5th percentile of the house price distribution. The estimation in Figure 1.29, panel 4).
model is based on Chapter 2 of the April 2019 Global Financial Some fundamental factors could continue to sup-
Stability Report. Note that large heterogeneity is present across port house prices in the short term. Supply constraints
countries. House prices at risk over the next three years could be
about 20 percent for countries with elevated vulnerabilities, such as
in housing availability, including shortages in con-
Canada, Hong Kong SAR, and the United States. struction labor, persist, even though a slight increase in

International Monetary Fund | April 2023 39

GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

inventories and still-robust levels of disposable income sharp drop in housing prices could adversely affect the
help partly offset the effect of the monetary policy economic outlook.
tightening on housing demand, thereby reducing
the extent of house price adjustment so far.41 At
the same time, in economies with a lower share of Commercial Real Estate Market under Pressure
adjustable-rate mortgages or a longer average maturity As central banks continue to tighten their monetary
of household debt, the effect of the ongoing tighten- policy stance, the CRE market is facing significant
ing on household demand could take a while to fully pressures. Global transaction activity has broadly
materialize, given that the outstanding pool of mort- declined (down 17 percent from the previous year).44
gages will be affected by higher rates only gradually. In market-traded REITs, large price corrections have
Mortgage underwriting standards are still conservative already occurred (Figure 1.31, panel 1).45 The value of
relative to those in the mid-2000s, helping to reduce US-listed REITs decreased almost 14 percent year over
leverage and exposure to nonqualified mortgages, year in the first quarter of 2023, whereas in Europe
and debt service ratios for households remain gener- they declined by 13 percent. Losses have been particu-
ally below the levels seen before 2007 (Figure 1.30, larly elevated in the office sector, as pandemic-induced
panel 1). That said, household debt in countries such remote work practices have lowered office demand and
as Belgium, France, Korea, and Sweden has increased occupancy rates.46 Similarly, REIT valuations have also
since the COVID-19 pandemic, which could exacer- declined in many emerging market economies such as
bate household vulnerabilities.42 In advanced econ- Africa (–16 percent) and Asia and the Pacific (–20 per-
omies, banks are comparatively more exposed to the cent). At the same time, the confluence of higher
real estate sector than in emerging market economies, interest rates and structurally lower demand for CRE
as banking systems with lower capital-to-assets ratios raises the risk of a broader correction to commercial
also have more mortgage loans as a share of total loans real estate valuation, including in private, nonlisted
(Figure 1.30, panel 2), indicating a stronger feedback CRE markets.
loop between house price declines and a contraction of Similar to what takes place in residential markets,
mortgage lending. a key driver of the repricing in CRE markets is the
Household excess savings ratios that were built up sharp rise in market interest rates. This in turn raises
during the pandemic partly because of government the required return for real estate, as rising interest
support measures and precautionary motives have
started to fall back to (or below) prepandemic aver- 44Volumes have decreased across all regions, with a 26 percent

decrease in North, Central, and South America and declines of

ages (Figure 1.30, panel 3). Lower saving rates reduce
30 percent and 18 percent in Europe and the Asia and Pacific
households’ buffers and make consumption more region, respectively.
sensitive to a decline in housing wealth should real 45A CRE investment fund trust is a company set up to own,

estate prices fall. IMF staff estimate that a real home operate, and finance (pooling funding from investors) CRE. A real
estate investment fund trust typically specializes in a certain type of
price correction is associated with material declines property (such as office space), although there are also some with
in real consumption across countries, especially ones more diversified portfolios. In general, asset managers are among
with low savings (Figure 1.30, panel 4).43 These factors the top real estate investment fund trust’s owners. However, real
estate remains a key component also of most pension fund port-
complicate policy efforts to tame inflation, given that a folios. In the United States, for example, 87 percent of all public
sector pension funds and 73 percent of all private sector pension
41Pandemic-induced lifestyle changes—work-from-home funds currently invest in the asset class. The share of US pension
arrangements and internal migration—and other temporary supply plans investing in real estate investment fund trusts is also rising,
bottlenecks also help explain why demand outpaced housing supply from 55 percent in 2016 to an estimated 67 percent in the period
in recent quarters. before the pandemic.
42See Box 1.1 of the April 2023 World Economic Outlook. 46The US national office vacancy rate reached a nearly 30-year
43Recent evidence (Harding and Klein 2022) suggests that the high of 17.1 percent in the third quarter of 2022. The use
pass-through of monetary policy tightening tends to be weakened in of subleases is rising as occupiers attempt to shed underused
the presence of high household buffers. However, as excess savings office space. The combination of challenging occupancies for
are eroded, higher interest rates might be felt largely by highly commodity space and the deterioration of liquidity that is
indebted households, whose holdings of savings are generally smaller needed to support office conversions have put significant pressure
(Aladangady and others 2022). High interest rates can also have an on valuations for less competitive and older buildings (class B
impact on housing demand through lower mortgage originations. and class C).

40 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Figure 1.30. Household Vulnerabilities and Risks to the Broader Economy

Debt service ratio of households has decreased since the global ... but banks remain exposed to the real estate sector, particularly in
financial crisis because of lower mortgage costs ... advanced economies ...
1. Debt Service Ratio of Households 2. Banks’ Exposure to Residential Real Estate Sector
(Percent) (Percent)
25 2022:Q2 Emerging market economies Advanced economies 20
2021:Q4

Tier I and II capital over total

20 2007:Q1
15

assets (percent)
15
10
10

5
5

0 0
0 10 20 30 40 50 60 70
Australia
Korea
Netherlands
Canada
Norway

Sweden
United Kingdom
United States
Finland
Belgium
Japan
France
Germany
Portugal
Spain
Italy
Denmark

Residential loans over total loans (percent)

... while households’ saving ratios have continued to decelerate since A shock to house prices could have broader macroeconomic
the COVID-19 pandemic. implications, especially for consumption.
3. Excess Savings Ratio 4. Effect of House Price Declines on Consumption
(Percent of disposable income) (Percentage points)
25
United States Malaysia
Other advanced Hungary
20 economies Finland
Euro area Netherlands
15 Emerging markets New Zealand
excluding China United States
10 Limited data Canada
availability Germany
5 Country-level estimate
Indonesia
Sweden Average effect with
0 Brazil low saving gap
Australia Average effect with
–5 Spain high saving gap
Poland
–10
2018 19 20 21 22 0.00 –0.05 –0.10 –0.15 –0.20 –0.25 –0.30 –0.35 –0.40

Sources: Bank for International Settlements; Bloomberg Finance L.P.; Federal Reserve Bank; Haver Analytics; IMF Financial Soundness Indicators; and IMF staff
calculations.
Note: In panel 2, data refers to the average for 2022. In panel 3, excess savings ratios are calculated as current savings in percent of disposable income in deviation
from a linear trend based on the prepandemic average for 2015–19. In panel 4, the bars represent the estimated effect for selected economies of a one percent
decline in real house price growth on the one-period-ahead private consumption yearly growth based on an IMF staff regression analysis. The specification includes
controls for financial conditions, a proxy for permanent income, the credit-to-GDP ratio, and the real short-term interest rate. The dashed lines indicate the average
effect of house price declines in the presence of a saving gap as computed using a state-dependent panel model. “High” (“low”) saving gap is defined as a value of
the saving gap above 0.8 (below –1.3) percent, corresponding to the last (first) quartile of its historical distribution. The solid bars indicate significance at the 10
percent level or lower.

rates are not accompanied by either higher expec- appear to be significantly ­overvalued across countries
tations for growth or lower perceptions of risk; in based on a CRE misalignment measure derived from
addition, a decade of very low interest rates boosted capitalization rates—defined as the deviation of the
values in the run-up to the pandemic beyond what net-operating-­income-to-property-price ratio from an
was explained by fundamental factors. CRE markets estimated trend. This overvaluation raises the risk of a

International Monetary Fund | April 2023 41

 GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Figure 1.31. Trends and Developments in the Commercial Real Estate Market
The correction in real estate investment fund trusts’ pricing has been Trends in commercial real estate capitalization rates suggest
sizable across sectors. significant overvaluation in some segments of the market.
1. Change in Real Estate Investment Fund Trusts’ Commercial Property 2. Commercial Real Estate Overvaluation across Countries
Price Index (Percent, latest)
(Year over year, percent)
0 0.14
All
–4 0.12
Retail
–8 0.1
Office

Density
Residential 0.08
–12
Industrial 0.06
–16 0.04
–20 Europe United States 0.02
–24 0
All Office Retail Industrial Residential –20 –15 –10 –5 0 5 10 15 20 25
CRE misalignment
Lending standards for real estate collateralized loans have tightened Shifting capital markets amid higher interest rates could create
significantly, increasing the cost of capital. refinancing challenges and lead to borrowers’ insolvencies in a
downside scenario.
3. Credit Standards for US Commercial Real Estate Loans and Funding 4. US Commercial Mortgage-Backed Securities’ Delinquencies
Conditions for Commercial Mortgage-Backed Securities (Percent)
(Percent, left scale; basis points, right scale)
80 1,000 Delinquency rate, 2022:Q3 12
Net percentage of banks Projected delinquency rate, 2023:Q4
60 tightening standards for 10
commercial real estate loans 800
40 Commercial mortgage-backed 8
securities option-adjusted
20 600 6
spread BBB (right scale)
0 4
400
–20 2
–40 200 0
2016 17 18 19 20 21 22 Overall Retail Hotel Office Multifamily Industrial
Small banks have grew their CRE portfolio more aggressively than large The commercial real estate sector represents a sizable share of banks’
banks since the pandemic exposures to firms.
5. Commercial Real Estate to Commercial and Industrial Loan Ratio 6. Commercial Real Estate Loans to Total Loans to
for the Largest 25 Banks and Smaller Banks in the United States Nonfinancial Corporations
(Ratio) (Percent)
Sweden
2.5 Denmark
Smaller banks Largest 25 banks Norway
Finland
Austria
2.0 Estonia
France
Luxembourg
The Netherlands
Germany
1.5 Czechia
Belgium
Lithuania
Slovakia
Poland
1.0 Hungary
Ireland
Portugal
Spain
Italy
0.5 Bulgaria
Slovenia
Malta
2022:Q3
Greece 2014:Q3
0.0 European Union
Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan.
2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 2023 0 10 20 30 40 50 60 70
Sources: Bloomberg Finance L.P.; Commercial Mortgage Alert; European Banking Authority Risk Dashboard, Fitch Ratings; Green Street Advisors; MSCI Real Estate;
Trepp; US Federal Reserve; and IMF staff calculations.
Note: In panel 1, the latest data available are for January 2023 in Europe and February 2023 in the United States. In panel 2, the misalignment refers to the deviation
of the capitalization rate—a traditionally used valuation metric for commercial real estate prices, measured as the ratio of net operating income to property
price—from an estimated trend. The distributions of misalignment are constructed for each commercial real estate segment using country-level observations of a
sample of 31 major economies. In panel 3, lending standard statistics are based on responses in the Federal Reserve’s Senior Loan Officer Opinion Survey on Bank
Lending Practice. “Net percentage of banks tightening standards” refers to the fraction of banks that reported having tightened (“tightened considerably” or
“tightened somewhat”) minus the fraction of banks that reported having eased (“eased considerably” or “eased somewhat”). In panel 4, delinquency forecasts for US
commercial mortgage-backed securities loans are sourced from Fitch. The forecasts assume that the US economy enters a mild recession in the middle of 2023. In
panel 6, commercial real estate exposure is computed as the sum of total loans for construction and real estate activities. Statistics are computed based on the
sample of the largest banks included in the European Banking Authority monitoring exercise. If 2014:Q3 data are missing, the earliest available observation is used.
Q = quarter.

42 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

sharp price correction, especially in the residential and The cost of capital for funding structures related to
industrial segments (Figure 1.31, panel 2).47 Another CRE has increased significantly, along with higher
source of vulnerability stems from the financial (or interest rates and wider spreads from lenders.
balance sheet) health of lenders in the CRE market. More restrictive bank lending and a decline in the
A tightening of financial conditions could create an participation of nonbanks in funding markets could
adverse feedback loop between credit growth and asset exacerbate adverse shocks if the economy slows signifi-
prices, as lower house prices can reduce the demand cantly. Higher interest rate caps (that is, the maxi-
for and supply of credit—because of the role of hous- mum interest expense on a mortgage) could intensify
ing as collateral. debt burdens for borrowers, and lenders could face
In the United States, banks have tightened lending losses because of falling property values and illiquid
standards for CRE, making it more challenging for markets.49 Difficulty refinancing maturing loans and
CRE investors with high debt levels to secure financ- deteriorating property net cash flows may increase
ing (Figure 1.31, panel 3). Spreads of US CMBS over default rates. In such a scenario, the loan delinquency
ordinary Treasury bonds jumped to about 450 basis rate for CMBS is projected to increase significantly
points at the end of 2022. Similarly, financing costs of to between 4 percent and 4.5 percent by the end
senior loans in core offices in Europe rose to about 350 of 2023 given that higher interest rates and weak
basis points in the second quarter of 2022, more than economic growth could contribute to more maturity
200 basis points higher than the previous year. Higher defaults (­Figure 1.31, panel 4). In the third quarter
financing costs and the relatively high-risk weights of of 2022, the share of CRE loans worth less than the
CRE assets are also lowering the loan-to-value ratios at CMBS tranches they are in spiked to 30 percent
which large banks are willing to provide CRE loans. (marking an increase of 25 percentage points from the
Many nonbank lenders, which are typically funded previous year).
by warehouse lines from money center banks, have also After reducing CRE exposures sharply, smaller
curtailed their activity in anticipation of weaker property and regional US banks are increasing them again
markets and a more challenging lending environment.48 at a pace much brisker than the growth rate of
commercial and industrial loans, while the largest
47The estimates also show that prices in the retail sector remain banks are not (Figure 1.31, panel 5). This growing
subdued, given that the rapid onset of the pandemic hastened the CRE-regional bank nexus is at risk of being unrav-
pace of the transition to e-commerce and logistic sectors. There are,
however, some signs of recovery for the sector. Net absorption (that
eled by structurally lower CRE demand and the
is, the change in tenant demand relative to the supply available) financial fragility of banks.50 In Europe, the stock
began to improve for all retail segments after 2021, with the annual of CRE loans also represents a large share of total
net absorption for neighborhood center retail reaching its strongest bank lending to nonfinancial corporations, with
level since 2017. Moreover, although supply growth is historically
low, high population growth could support the demand for modern shares standing at about 30 percent in aggregate and
retail space, especially in suburban locations. above 49 percent in Sweden, Denmark, and Norway
48Although regulators have strengthened regulation and oversight
(­Figure 1.31, panel 6).
to better address risks posed by securitization, investors’ searching
for yield over the past decade has supported the growth of nonbank
leveraged institutions with large liquidity mismatches, such as property
investment funds, that could cause a reversal of capital flows after a
sudden shift in global investor sentiment. For example, a substantial
rise in interest rates could lower the net present value of mortgages,
which could reduce the value of REITs’ assets and lead to margin calls 49In the third quarter of 2022, negative leverage—instances in

(as happened, for example, in the redemption shock that occurred which the interest rate charged by a lender is higher than the capi-
at Blackstone Real Estate Income Trust in 2022; see also Chapter 2 talization rate of the property being financed—spiked to 30 percent,
of this report). The deteriorating financial soundness of REITs could up from only 5 percent from one year earlier. It is notable that the
then force these institutions to deleverage, amplifying a price decline increase in negative leverage was concentrated in industrial and mul-
and possibly leading to substantial losses for a wide range of financial tifamily properties, with shares relative to the total count of about
intermediaries and investors exposed to these markets, including for- 36 percent and 31 percent, respectively.
eign institutions. Based on IMF staff estimates, the median portfolio 50To deal with the expected regulatory scrutiny following the

illiquidity of funds holding REITs is about 30 percent higher than that aftermath of the SVB fallout, smaller regional banks may be
for those holding other equities. At the same time, institutional foreign forced to curtail lending and tighten lending conditions. This
investors headquartered outside the United States own approximately may further tighten financial conditions and provide addi-
16 percent of the total market capitalization of US REITs, which tional balance sheet risk for these banks, exacerbating deposit
could increase the risk of cross-border spillover effects. flight concerns.

International Monetary Fund | April 2023 43

GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Policy Recommendations regimes and preparedness to deploy them. In the

The financial system is being tested by higher infla- current environment of persistent inflation and high
tion and rising interest rates at a time when inflation interest rates, authorities should pay specific attention
in many jurisdictions remains uncomfortably above to bank asset classification and provisions as well as to
central banks’ targets. The emergence of stress in finan- exposures to interest rate and liquidity risks.
cial markets is complicating the task of central banks. Central banks’ liquidity support measures should
Policymakers need to continue to address inflationary aim to address liquidity, not solvency issues. The
pressures and use tools aimed at addressing financial latter should be left to relevant fiscal (or resolution)
stability risks as needed. authorities. Liquidity should be provided to counter-
If financial strains worsen significantly and threaten parties that are compelled by supervision and regula-
the health of the financial system amid high inflation, tion to internalize liquidity risk (the “stick”) so that
trade-offs between inflation and financial stability objec- central banks may need to intervene only to address
tives may emerge. Clear communication about central systemic liquidity risks (the “carrot”). A significant part
banks’ objectives and policy functions will be crucial to of the risk should remain in the marketplace (“partial
avoid unnecessary uncertainty. Policymakers should act insurance”) to minimize moral hazard, and interven-
swiftly to prevent any systemic events that may adversely tions should have a well-defined end date, allowing
affect market confidence in the resilience of the global market forces to reassert themselves once acute strains
financial system. Maintaining confidence is paramount subside. The financial stability intervention should be
for the functioning of the global financial system. If parsimonious to avoid conflicting with the monetary
policymakers need to adjust the stance of monetary policy stance, especially in a tightening cycle. This
policy for financial stability purposes, they should clearly means that liquidity support should be priced relatively
communicate their resolve to bring inflation back to expensive to avoid attracting opportunistic demand not
target as soon as possible once financial stress lessens. in need of support. Finally, central banks should main-
The recent turmoil in the banking sector has high- tain appropriate risk mitigation (for example, haircuts)
lighted failures in internal risk-management practices and agree on loss sharing with fiscal authorities to
with respect to interest rate and liquidity risks at manage risks to their own balance sheets.
some US banks, as well as lapses on their supervisory Taking note of the decisive policy actions taken
oversight. Supervisors should ensure that banks have by authorities in the United States and Switzerland
corporate governance and risk management commen- to preserve financial stability, some of the measures
surate with their risk profile, including in the areas of implemented suggest that further work is needed on
risk monitoring by bank boards and the capacity and the resolution reform agenda to increase the likelihood
adequacy of capital and liquidity stress tests. Adequate that systemic banks can be resolved without putting
minimum capital and liquidity requirements including public funds at risk. While it is a positive development
for smaller institutions that, individually, are not con- that shareholders and holders of other capital instru-
sidered systemic are essential to contain financial stabil- ments incurred losses, allocating more losses across the
ity risks. Policymakers should consider prudential rules creditor hierarchy before public funds are put at risk is
ensuring that banks hold capital for interest rate risk proving harder to deliver. The international community
and guard against hidden losses that could materialize will need to take stock of these experiences and draw
abruptly in the event of liquidity shocks. Financial policy conclusions on the effectiveness of resolution
institutions should have adequate capital conservation reforms after the global financial crisis. Consideration
plans and credible capital restoration plans to address may need to be given to extending the perimeter of
decreases in capital ratios. Similarly, banks need to the international resolution standard to a wider set
maintain a cushion of unencumbered high-quality of banks given that even relatively small banks have
liquid assets and have a formal contingency funding proven to be systemic at times of wider stress, as well as
plan that clearly sets out the strategies for addressing to the appropriate reach of deposit insurance schemes,
liquidity shortfalls in emergency situations. In paral- compensated by commensurate levels of insurance pre-
lel, authorities should be more prepared to deal with miums. In the near term, supervisors should pay close
financial instability, including by early intervention and attention to the risk of potential contagion to other
by strengthening, where needed, their bank ­resolution banks that could occur through various channels.

44 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

While quantitative tightening has so far proceeded Optimal policy combinations depend on the nature
in an orderly manner, central banks should be attuned of the shock and country-specific characteristics.
to the functioning of short-term funding markets, Any response measures should be part of a plan that
avoiding unwarranted strains in financial markets addresses underlying macroeconomic balances and
that would adversely affect their pursuit of price allows for needed adjustments. In light of contin-
stability objectives. If necessary, central banks should ued volatility in financial markets, the use of foreign
adjust how they implement quantitative tightening exchange interventions may be appropriate in the
to address market functioning issues. In the euro presence of frictions, so long as reserves are sufficient,
area, where TLTRO loans are being repaid, authori- and intervention does not impair the credibility of
ties should be attuned to possible disorderly market macroeconomic policies or substitute for their neces-
dynamics or fragmentation risks. Policymakers should sary adjustment. In case of crises or imminent crises,
clearly communicate the objectives of and steps for capital flow management measures may be an option
removing liquidity and reducing their balance sheets, for some countries to lessen outflow pressures.
especially if adjustments are needed in response to Sovereign borrowers in emerging market economies,
the macroeconomic outlook or financial market frontier markets, and low-income countries should
developments. enhance efforts to contain risks associated with their
Monetary policy can get support from tighter fiscal high debt vulnerabilities, including through early
policy in achieving the mandated inflation objective contact with their creditors, multilateral coopera-
(see the April 2023 Fiscal Monitor). In addition, to tion, and support from the international community.
help limit governments’ debt burdens, fiscal consol- Continued use of enhanced collective-action clauses in
idation would ease aggregate demand pressure on international sovereign bonds and the development of
prices, moderating the magnitude of interest rate majority voting provisions in syndicated loans would
increases required to rein in inflation. Within budget help facilitate future debt restructurings. For countries
constraints, governments can reprioritize spending to near debt distress, bilateral and private sector creditors
protect the most vulnerable, for example, from high should find ways to coordinate on preemptive and
food and energy prices. orderly restructuring to avoid costly hard defaults and
Emerging and frontier markets remain vulnerable to prolonged loss of market access. Where market access
a sharp tightening in global financial conditions and still exists, refinancing or liability management oper-
increased capital outflows. Emerging market central ations should be executed to rebuild buffers. Where
banks should be cautious about premature easing of applicable, the G20 Common Framework—including
policy rates despite the challenging trade-offs involved, a reformed quicker and more effective version—should
particularly if continued tightening in advanced be utilized, including in preemptive restructurings.
economies creates widening interest rate differentials Policymakers should promote the depth of local cur-
and capital outflow pressures. Countries with highly rency markets in emerging markets and foster a stable
vulnerable financial sectors, limited or no fiscal space, and diversified investor base. Local currency markets
and significant external financing needs are already continue to be a key funding channel for emerging
under strong pressure and could face further severe markets. Measures should strive to (1) establish a
challenges in the event of a disorderly tightening of sound legal and regulatory framework for securities,
conditions. Countries with credible medium-term (2) develop efficient money markets, (3) enhance
fiscal plans, clearer policy frameworks, and stronger transparency of both primary and secondary markets as
financing arrangements will be better positioned to well as the predictability of issuance, (4) bolster market
manage such tightening. The need to rebuild fiscal liquidity, and (5) develop a robust market infrastructure.
space and buffers remains. Policymakers should continue to increase financial
Countries should integrate their policies, includ- resilience, particularly in areas likely to be strongly
ing, where applicable, within the Integrated Policy affected by the changed macroeconomic environment,
Framework, the IMF’s macro-financial framework for including the increase in the bank-sovereign nexus.
countries to actively manage the risks stemming from Relevant macroprudential tools should be recalibrated
volatile capital flows amid uncertainty in global mon- as needed to tackle pockets of elevated vulnerabilities.
etary policy and the foreign exchange environment. Striking a balance between increasing resilience and

International Monetary Fund | April 2023 45

GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

avoiding procyclicality and a disorderly tightening of (2) access to standing lending facilities (the bar for
financial conditions remains important in light of the such access should be set very high); and (3) central
uncertain economic outlook. bank support, as lender of last resort, of a systemic
Developments and risks in real estate markets during NBFI. Clear communication on such interventions is
the ongoing cycle of monetary tightening should essential. Central banks may be perceived as working
be carefully monitored. National authorities should at cross-purposes, such as needing to purchase assets to
deploy stringent stress tests to estimate the potential restore financial stability while continuing with quan-
effect of rising interest rates on borrowers’ repayment titative tightening to bring inflation back to target.
capacity and a sharp fall in household and CRE prices In addition, communications about central bank
on household balance sheets and ultimately on finan- liquidity support should clearly explain the financial
cial institutions. Some policymakers had previously stability objective and the parameters of the program,
tightened macroprudential tools to address overheating including the timeframe for exit.
conditions. They should consider whether there is a The collapse of multiple entities in the crypto asset
need to revisit that decision to prevent severe mac- ecosystem has again made the call more urgent for
roeconomic implications from a sharp tightening of comprehensive and consistent regulation and adequate
financial conditions amid a drop in house prices, while supervision, with an emphasis on the fundamen-
preserving and encouraging sound credit origina- tals of consumer (and customer fund) protection,
tion practices. financial integrity, and corporate governance.51 The
In China, a robust mechanism to restore confidence regulatory framework should cover all critical activ-
in the real estate sector will be critical to limit risks of ities and entities, including activities related to the
negative macro-financial spillovers. With households storage, transfer, exchange, and custody of reserves.
wary of buying presold housing from weaker develop- Entities carrying out multiple functions should be
ers, proactive measures could help break the negative subject to additional prudential requirements. Stable
feedback loop between developer distress and sluggish coin issuers should be subject to strict prudential
home-buying demand. Use of demand-side measures requirements. The cross-sector and cross-border nature
such as relaxing home purchase restrictions should be of crypto limits the effectiveness of uncoordinated
complemented with timely restructuring or resolution national approaches. Strong international cooperation,
of troubled developers and fiscal reforms that reduce supported by robust, comprehensible, globally consis-
local government’s structural reliance on the property tent crypto regulation, is essential to provide guid-
market. Forbearance policies should be phased out, ance, ensure consistent implementation, and contain
and banks should maintain adequate loss-absorbing spillover risks.
buffers. Contingency planning should be developed to Aligning capital flows on a low-carbon trajectory
manage a situation of materializing credit contagion, has become a critical policy objective, including
which may require system-wide liquidity provision for financial stability, given that current renewable
to contain systemic risk. Upgrades to restructuring energy investment and production fall grossly short of
frameworks are urgently needed to help facilitate the funding needed to meet climate targets (Box 1.5). A
exit of nonviable firms and banks while protecting rapid acceleration of investment in low-carbon energy
financial stability. infrastructure is needed, especially in emerging market
As financial conditions tighten, policymakers need and developing economies. Private finance is key to
appropriate tools to tackle the financial stability achieving these objectives, while climate and financial
consequences of NBFI stress (see Chapter 2). How- policies, such as a transition-oriented climate informa-
ever, it is paramount to guarantee that appropriate tion architecture, are complementary. The new Resil-
guardrails are in place to avoid moral hazard. As a first ience and Sustainability Trust can help eligible IMF
line of defense, it is essential to close gaps in key data members address longer-term structural challenges
about NBFIs, provide incentives for risk management generated by climate change.
by NBFIs, set appropriate regulation, and intensify
supervision. In addition, policymakers may consider
three potential types of central bank liquidity support 51For a more comprehensive set of principles to guide the policy

to NBFIs: (1) discretionary marketwide operations; response to crypto assets, see IMF (2023).

46 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Box 1.1. The Failures of Silicon Valley Bank and Signature Bank
Silicon Valley Bank (SVB) was established in 1983 a sector facing a gloomy outlook. Negative sentiments
with the goal of serving mostly startup and venture about SVB on social media surged, and its stock
capital firms. During the postpandemic venture capital sold off precipitously (Figure 1.1.1, panel 2), likely
boom, SVB’s deposit base grew rapidly, and SVB intensifying the deposit run the bank faced. Deposit
became the 16th-largest bank in the United States withdrawal requests on March 9 alone reportedly
(Figure 1.1.1, panel 1). As venture capital funding reached $42 billion, more than one-fourth of the
reportedly dried up in 2022, depositors began to bank’s deposit base, fueled by electronic withdrawals.
leave the bank. The bank attempted to raise fresh SVB was placed under Federal Deposit Insurance
capital on March 8 and at the same time revealed Corporation (FDIC) receivership on March 10.
that it had incurred a $1.8 billion loss from selling The deposit run on SVB reportedly led to intense
Treasury and agency securities to meet earlier large investor focus on other banks with similar funding
deposit withdrawals. The failed attempt to raise capital profiles also serving the same sectors as SVB. Stock in
quickly led to investor concerns about the bank’s Signature Bank of New York (SBNY), a $110 billion
liquidity position and ultimately its solvency. Liquidity bank that served technology and crypto clients—30 per-
concerns reflected primarily the structure of SVB’s cent of its deposits were from the crypto sector—came
deposit base, as most of its deposits were wholesale under intense pressure, declining by almost 40 percent
and uninsured. Solvency fear was driven by the extent between March 8 and 10. The bank was closed by the
of unrealized losses (about $18 billion) related to the New York State Department of Financial Services on
impact of higher rates on the bank’s large holdings of March 12, with the FDIC appointed as receiver.
fixed income (Treasury and agency) securities as well The strategy for dealing with these bank failures
as its concentrated loan exposures to venture capital, evolved significantly in the days that followed.

Figure 1.1.1. The Predicament of Silicon Valley Bank and Signature Bank
Total deposits grew exponentially postpandemic, until Negative sentiment on Twitter surged and stock prices
they did not. tanked after Silicon Valley Bank announced its securities
losses.
1. US Banks, Deposit Growth, 2018–22 2. Count of Positive and Negative Tweets about Silicon
(Percent) Valley Bank and Stock Price
Silicon Valley 100 300
B1
B2
Signature Bank
B3 0 250
B4
B5
B6
B7
B8 –100 200
B9
B10
B11
B12 –200 150
B12
B13
GSIB_A
B14
B15 –300 100
B16
B17
GSIB_B Twitter positive sentiment
GSIB_C count: real time
B18 –400 50
B19 Twitter negative sentiment
B20 count: real time
B21 Stock price (right scale)
GSIB_D –500 0
0 0.5 1 1.5 2 2.5 3 08 Mar. 09 Mar. 10 Mar.

Sources: Bloomberg Finance L.P.; SVB’s 10-K filings; Twitter; and IMF staff calculations.
Note: In panel 1, “GSIB” denotes a globally systemically bank. The sample includes US banks with assets above $50 billion. In panel 2,
positive and negative tweets are categorized by Bloomberg using their proprietary language model.

International Monetary Fund | April 2023 47

GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Box 1.1 (continued)

After closing SVB on March 10, the FDIC announced March 2024. Banks can obtain funds for up to one year
that it would protect only insured deposits, leaving (as opposed to 90 days for the existing discount win-
those with higher balances (greater than $250,000) dow), equivalent to the full face value (as opposed to
and other creditors facing losses. As evidence of the lower market value) of the securities they hold. This
contagion to the rest of the financial system grew, the offers banks an alternative to sales should they need
Treasury, the Federal Reserve, and the FDIC rolled to raise liquidity. Disclosure is ex post, occurring after
out an emergency package with two key compo- two years, thereby limiting stigma. Any losses from the
nents. First, the authorities triggered the systemic program of up to $25 billion will be absorbed by the
risk exemption. This allows the FDIC to resolve SVB Treasury’s exchange stabilization fund.
and SBNY by protecting all deposits. Any cost to the Outside the United States, authorities in countries
deposit insurance fund will be recovered, if needed, by where SVB operated (including Canada, China,
a special assessment on banks, effectively mutualizing Germany, Hong Kong SAR, Korea, and Thailand)
losses across the banking system. spoke publicly to calm depositors. In the United King-
Second, the Federal Reserve introduced the Bank dom, the authorities facilitated a purchase by HSBC
Term Funding Program to lend to any US bank and of the local SVB subsidiary, protecting all creditors at
foreign branch against the par value of its holdings of no cost to the UK deposit insurance fund. Authorities
US Treasuries, agency debt, and mortgage-backed secu- also intervened in SVB branches in other countries
rities that were owned by the borrower as of March 12, (that is, Canada and Germany, both of which were
for up to one year at zero margins, but with recourse to dependent on parent funding, not deposit taking),
the borrower. The program will be kept in place until which are expected to be wound down.

48 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Box 1.2. The Failure of FTX Unveiled High Interconnectedness in the Crypto Ecosystem
FTX, one the largest trading platforms in the crypto Fraud, lack of transparency, and inadequate risk
ecosystem, filed for bankruptcy in November 2022. management were at the epicenter of the FTX fallout.
The FTX fallout inflicted severe losses on clients The fallout exposed the high dependency of FTX and
and had large spillovers to the crypto ecosystem Alameda Research on the market value of FTT for
(Figure 1.2.1, panel 1). Before the debacle, FTX had their solvency and liquidity, highlighted by the reve-
more than 1 million registered users, an estimated lation that FTX had made an estimated $8 billion in
trading volume of about $600 billion, an estimated loans collateralized by FTT (equivalent to more than
market value of nearly $35 billion, $8.8 billion in half of its customer deposits) to Alameda Research.
liabilities, and $900 million in liquid assets. The FTX also allegedly misused customer funds to help
sudden failure of FTX revealed major shortcomings Alameda Research cover its funding gaps, exempted
in risk management as well as fraudulent practices. Alameda Research from the exchange’s process for
These included a lack of business transparency in the liquidating bad trades, and manipulated the value
corporate structure, inappropriate use of clients’ funds, of FTT to enable Alameda Research to borrow
reliance on self-issued unbacked tokens for solvency against inflated collateral. When FTX failed, FTT
and liquidity, and inadequate financial reporting. became worthless.
The bankruptcy marked the end of a series of The FTX failure created significant contagion in the
events that exposed grave liquidity and solvency crypto ecosystem, including to other crypto exchanges
problems at FTX. Reports that Alameda Research, and crypto lending firms. This contagion caused some
a hedge fund affiliated with FTX, had significant crypto lenders such as Genesis and BlockFi to file for
holdings of FTT, the unbacked crypto token issued bankruptcy because of large exposures. It is notable
by FTX, ignited market pressures on November 2, that at the peak, Genesis reportedly had $6.5 bil-
2022. Subsequently, it was announced that Binance, lion in loans outstanding to Alameda Research, only
FTX’s main competitor, intended to sell off its FTT 50 percent of which were secured. The contagion also
holdings. The price of FTT plummeted, triggering extended through Genesis to another crypto exchange,
a run on the FTX platform and contagion to other Gemini, which also temporarily halted withdrawals.
cryptocurrencies. The run intensified after Binance However, broader contagion outside of the crypto
withdrew its plans to acquire FTX as a result of alle- ecosystem has been limited, except in the case of a few
gations that FTX had mishandled customers’ funds small banks with close ties to crypto and some pension
as well as the potential for investigations of FTX by funds in the United States with investments in FTX
US regulatory agencies. (Figure 1.2.1, panel 2).

Figure 1.2.1. The Fallout from FTX

The crypto market was extremely volatile in 2022 after the fallout of partially backed stable coins and the bankruptcy of
a large crypto exchange.
1. A Rough Year for Crypto 2. Spillover to Banks Specialized in Crypto Clients
(Prices, indexed, January 3, 2022 = 100) (Prices, indexed, December 31, 2021 = 100; index,
left scale; billions of US dollars, right scale)
160 S&P 500 200 Total crypto market cap (right scale) 3,500
140 FTT (FTX token) Crypto composite bank index (left scale) 3,000
120 Bitcoin 150 KBW US Bank Index (left scale)
2,500
100
2,000
80 100
1,500
60
40 50 1,000
20 500
0 0 0
Jan. Mar. Jun. Sept. Dec. Mar. Jan. Mar. Jun. Sept. Dec. Mar.
2022 2022 2022 2022 2022 2023 2022 2022 2022 2022 2022 2023

Sources: Bloomberg Finance L.P.; CoinGecko; and IMF staff calculations.

Note: For panel 1, the crypto index ends on March 10, 2023. The chart has been updated with data up to March 30, 2023. FTT refers to
a self-issued unbacked token.

International Monetary Fund | April 2023 49

GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Box 1.3. The Fast-Growing Interest in Retails’ Trading in the Zero-Day Options Market:
Is It a Hidden Risk?
Retail investor participation in the options markets exchange-traded fund options have been drawing an
has increased dramatically in recent years, espe- increasing amount of retail investment flows. 0DTE
cially since the COVID-19 pandemic. In particular, instruments are used by both retail and institu-
interest is growing in instruments such as zero-day tional investors for hedging or speculative reasons.
to expiry (0DTE) options. These options either offer These investors operate through dealers. The share
potentially large “lottery ticket”–like payoffs or they of retail investors has been growing quickly with the
expire worthless. The options trade only on their day proliferation of retail platforms and amounts to about
of expiration and are usually traded on individual 10 percent of the trading volume in 0DTE options
stocks, stock indices, or exchange-traded funds. They (Figure 1.3.1, panel 1).
provide a right (not the obligation) to purchase or Empirical research shows that retail investors
sell a financial asset at an agreed-on price, thereby generally tend to trade options around important
protecting the investor against a rise or a drop in the announcements (releases of economic data and central
underlying asset. Nearly half the options trading vol- bank decisions), when market volatility is the highest.
ume on the S&P 500 is now attributed to 0DTE,1 They increasingly turn to 0DTE options to leverage
a stark contrast to the 15 percent share of 0DTE their bets during these days, when trading activity
before the pandemic. tends to surge. According to research, retail investors
The participation of retail investors in 0DTE trading in the options market often end with losses
options increased after the Chicago Board Options ranging between 5 and 9 percent, reflective of sub-
Exchange (CBOE) added the short-dated stock stantial transaction costs and slower ability to respond
options on large exchange-traded funds in November to news events than market makers (de Silva, Smith,
2022. Given their relatively small contract size, 0DTE and So 2022).
The trading of 0DTE options could mechani-
cally amplify the volatility of the underlying asset,
10DTE options were originally available only on the last trad-
with a possible ripple effect on broader measures of
ing day of the week. In April and May 2022, the Chicago Board
Options Exchange added new expiration dates, allowing 0DTE
stock market volatility, traditionally measured with
options to be traded throughout the week. This has sparked the the CBOE Volatility Index. Such a scenario could
growth in trading volumes. result from dealers’ hedging strategy. Depending on

Figure 1.3.1. Zero-Day to Expiry Options

In derivatives markets, 0DTE have gained a growing Compared with longer-dated options, the 0DTE offers
market share. potentially large “lottery ticket”–like payoffs, amplifying
dealer hedging flows.
1. Overall and Retail Share of 0DTE in S&P 500 2. Stylized Option Hedging Flows for 0DTE and
Options Trading Three-Month Expiries
(Percent) (Units of SPYs, left scale; option payout in US dollars,
right scale)
Share of 0DTE 0DTE hedging flow
Hedging flow per change in SPY

Estimated share of retail investors in 0DTE 3-month hedging flow

50 (right scale) 10 100 Option payout 5,000
Payout at Maturity

40 8 80 at maturity 4,000
30 6 60 (right scale) 3,000
20 4 40 2,000
10 2 20 1,000
0 0 0 0
Jan. Aug. Mar. Oct. May Dec. July Feb. Sep. 375 400 425 450 475
2018 2018 2019 2019 2020 2020 2021 2022 2022 Price of SPDR S&P 500 ETF (SPY)

Sources: Bloomberg Finance L.P.; JPMorgan Chase & Co.; and IMF staff calculations.
Note: Calculations underpinning panel 2 are done based on using the Black-Scholes model for a stylized call option on the SPDR S&P
500 ETF Trust (SPY). The example rests on the assumption of a strike price of $425, a risk-free rate of 4.58 percent, an annualized
volatility of 20 percent, and a contract multiplier of 100. ODTE = zero-day to expiry options.

50 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Box 1.3 (continued)

the evolution of the price of a stock, a dealer must The popularity of these sophisticated instruments
dynamically adjust its hedging,2 potentially leading poses various policy issues. The active involvement
to higher intraday volatility (Figure 1.3.1, panel 2). of retail investors in this area raises questions about
Recently, market participants have reported higher the disclosures and regulation of retail investor
0DTE volume around the release of consumer price participation in complex financial instruments.
index data and the US job report, as well as Federal In addition, although no financial stability risk is
Reserve meetings, leading to an increased occurrence imminent, the rapid growth of this market among
of intraday fluctuations in the S&P 500 exceeding a wide range of investors raises concerns regarding
1 percent during the first quarter of 2023. Moreover, whether these instruments could amplify market
dealers often also use standard longer-dated equity movements, potentially leading, in the worst-case
options to hedge their 0DTE exposures, which could scenario, to panic selling. Given that these options are
affect the CBOE Volatility Index. often used in directional strategies around important
economic events, hedging 0DTE options could prove
very challenging, particularly when the volume is
2This strategy, known as delta hedging, consists of reducing significant. This could result in higher volatility, which
the directional risk in the underlying asset price. could particularly be amplified if liquidity is poor.

International Monetary Fund | April 2023 51

GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Box 1.4. Potential Spillover Effects of Changes to Japan’s Yield Curve Control Policy
As central banks around the world tighten monetary Ten-year Japanese government bond yields have
policy to tackle high inflation, the Bank of Japan has recently declined in sympathy with global yields as
so far maintained accommodative monetary policy strains have emerged in US and European banking
aiming to achieve a price stability target of 2 percent sectors. Prior to that, the monetary policy tightening
and maintain the target in a stable manner.1 The Bank in other advanced economies and rising domestic
of Japan has resorted to a quantitative and qualitative inflation had put upward pressure on Japanese bond
easing framework with a negative policy interest rate yields, pushing the Bank of Japan to scale up its
and yield curve control, respectively, since January purchases to keep 10-year Japanese government bond
2016 and September 2016—purchasing assets, primar- yields around the target. In this context, the future
ily Japanese government bonds, with the objective of of the yield curve control framework has become a
maintaining within a band centered at 0 percent.2 major focus of market participants. The Bank of Japan
has purchased large amounts of Japanese government
1See also International Monetary Fund, “Japan 2023 bonds in recent months and now owns 70 percent
Article IV Staff Report: Annex XI,” Washington, DC of all outstanding 5-year and more than 80 percent
(forthcoming).
2Under the yield curve control introduced in September
of outstanding 10-year Japanese government bonds
2016, the Bank of Japan aims to maintain a specific range of (Figure 1.4.1, panel 1). To mitigate the sharp deterio-
yields through its commitment to buy an unlimited quantity of ration in the functioning of bond markets and facili-
government bonds to achieve its target. tate the transmission of monetary easing, the Bank of

Figure 1.4.1. Bank of Japan’s Policies, Bond Investments, and the Japanese Government Bond Market

The Bank of Japan has become a Increased Japanese government ... creating the potential for
market maker of last resort amid signs bonds yield and volatility illustrate international spillovers as Japanese
of an increase in Japanese government that adjustments to the yield curve bond holdings abroad remain
bond illiquidity. control in December 2022 came as a substantial.
surprise ...
1. Bank of Japan Purchases versus 2. Japanese Government Bonds 3. Portfolio Investment Assets of
Japanese Government Bonds 10-Year Yield and Option Implied Japanese Investors (Excluding
Illiquidity Volatility Foreign Reserves)
(Billions of Japanese yen, left (Percent; index: (Billions of US dollars)
scale; basis point, right scale) October 1, 2022 = 100)
5–10-year fixed Japanese government bonds Equity and investment funds
Bank of Japan purchases others 10-year yield Debt
Bank of Japan meeting Rates volatility (right scale)
Japanese government bond Foreign exchange volatility
3,500 illiquidity Yield curve 5.0 0.6 (right scale) 150 6,000
(right scale) control Bank of
4.5 140 Quarterly
3,000 moves Japan 5,000
4.0 meeting
2,500 0.5 130
3.5 4,000
3.0 120
2,000
2.5 0.4 110 3,000
1,500 2.0 100
1.5 2,000
1,000 0.3 90
1.0 1,000
500 80
0.5
0 0.0 0.2 70 0
Sep. Oct. Nov. Dec. Jan. Oct. Nov. Dec. Jan. Feb.
2000
04
08
12
14
15
16
17
18
19
20
21
22

2022 2022 2022 2022 2023 2022 2022 2022 2023 2023

Sources: Bank of Japan; Bloomberg Finance L.P.; Haver Analytics; Japanese Ministry of Finance; US Department of Treasury; and IMF
staff calculations.
Note: In panel 1, Japanese government bonds illiquidity is approximated by spline yield curve fitting error. In panel 2, rates volatility is
JPY OIS (Japanese yen overnight indexed swap) swaption one-month into 10-year implied volatility. Foreign exchange volatility is
USDJPY one-month option implied volatility.

52 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Box 1.4 (continued)

Japan announced at its December 2022 meeting the While allowing more flexibility in the yield curve
widening of the target band for 10-year yields from control policy could have some repercussions in global
25 basis points to 50 basis points.3 The announce- financial markets, such a change not only is warranted
ment was unexpected, leading to significant volatil- to meet monetary policy objectives but could also help
ity in Japan’s exchange rate and long-term interest prevent abrupt policy changes later that could trigger
rates (Figure 1.4.1, panel 2). The decision ultimately larger spillovers.
improved demand-supply imbalances but required Security portfolio rebalancing by Japanese investors
that the Bank of Japan increased the pace of its bond is a critical element of the spillovers described earlier.
buying from December to January. This box assesses In 2022, life insurance companies and banks started to
possible spillover effects in the event of a change to the rebalance their portfolios as Japanese government bond
Bank of Japan yield curve control policy. yields and the cost of foreign exchange hedging rose,
The Bank of Japan’s decade-long monetary accom- selling $200 billion of foreign bonds (Figure 1.4.2,
modation has driven significant Japanese portfo- panel 1). However, recent available data point to
lio investments abroad. As institutional investors strong demand by Japanese investors this year. Should
have sought higher-yielding fixed-income assets, domestic long-term interest rates in Japan rise further,
Japan’s portfolio of investment assets abroad reached this trend of repatriation would likely continue (albeit
$5 trillion in the fourth quarter of 2020—double its at a slower pace, as institutional investors are report-
level before the global financial crisis—before declin- edly cautious not to exit foreign markets in ways that
ing somewhat more recently (Figure 1.4.1, panel 3). will lead to large marked-to-market losses).5 The effect
Changes to the Bank of Japan’s yield curve control would likely be larger on sovereign bond yields in
framework may affect international financial markets countries where Japanese investors hold a large market
through three channels: exchange rates, term premi- share—such as Australia, several euro area coun-
ums on sovereign bonds, and global risk premiums. tries, and the United States (Figure 1.4.2, panel 2).
One chain of interlinked spillovers could be as follows. Some emerging markets, such as regional neighbors
A rise in Japanese government bond yields could Indonesia and Malaysia, could also face material
increase Japanese government bond term premiums capital outflows because Japanese investors hold a
(for a given policy rate and expected path of mone- nonnegligible share of their sovereign bonds out-
tary policy), providing incentives for the repatriation standing. The pace and possible effects of repatriation
of Japanese portfolio investments as well as drawing could be larger, however, should market participants
foreign investors into Japanese bonds—pushing up the be surprised by the Bank of Japan’s announcements
foreign exchange value of the yen and putting upward and actions. In such a scenario, even emerging markets
pressures on interest rates. The size of the possible with small direct financial links to Japanese investors
spillovers would vary across countries, depending could potentially see material outflows, because capital
on their financial links with Japan, country-specific flows to emerging markets are sensitive to shocks in
factors, and the broader risk-appetite backdrop.4 global risk premiums (Kalemli-Ozcan 2019). This
points to the crucial importance of clear commu-
3In September 2016, the Bank of Japan implemented its yield nication when announcing and implementing any
curve control policy, which paved the way for two announcements changes in the instruments, framework, or stance of
until the latest adjustment in December 2022. The first occurred
on July 31, 2018, when the bank announced that Japanese gov-
ernment bond yields might move upward and downward in about 5The pace of outflows by pension funds could be slower than

double the range, which was previously around ±10 basis points. that of those by other investors. For example, in the case of the
The second happened on March 19, 2021, when the trading range Government Pension Investment Fund, representing roughly
was clarified to be around ±25 basis points. half of the entire stock of pension funds in Japan, the policy
4Existing literature finds that the spillovers from Japanese mix consists of 25 percent domestic bonds, 25 percent domestic
monetary policy shocks have been modest, especially compared equities, 25 percent foreign bonds, and 25 percent foreign
with those from US monetary policy shocks, and more regional equities. Pension fund managers review the mix in a five-year
in nature (Buch and others 2019; Kearns, Schrimpf, and Xia cycle, suggesting that their investment policy for diversification
2022; Spiegel and Tai 2018). However, these studies examine may not change immediately. As shown in Chapter 2, pension
the spillovers in a period when Japan has been increasingly funds in the Asian region have assumed increasing amounts
monetarily accommodative, rather than spillovers during of foreign exchange risk, which can be linked to the widening
policy tightening. foreign-exchange-hedging costs.

International Monetary Fund | April 2023 53

GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Box 1.4 (continued)

Figure 1.4.2. Japanese Investor Holdings Abroad

Carry sensitive banks and lifers Japanese investors are heavily When Japanese government bond
have already sold $200 billion of positioned, particularly in the euro yields increased in December 2022,
foreign bonds over the past year. area, the United States, and Australia. directional spillover effects from
Japan spiked.
1. Japanese Investors’ Cumulative 2. Outstanding Debt Securities 3. Spillovers from Japan to Four
Flows into Foreign Bonds Investment Balance and Share to Other Advanced Economics,
(Billions of US dollars, trailing Market Cap Estimated Using a 120-Day
12-month sums) (Percent, left scale; billions of Rolling Window
US dollars, right scale) (Index)
Banks Trust banks
Pension Funds 18 1,400 Japanese government bond yield,
Outstanding
Securities firms 16 1,200 250-day change (right scale)
14 (right scale)
300 Share 1,000 Volatility spillover, Japan to others,
200 12 120-day rolling window
10 800
100 100 Dec. 50
8 600 2022
0 6 80 25
400 YCC
–100 4
Lifers Other insurers 2 200 60 move 0
–200 Investment trusts 0 0 40 –25
–300
Ireland
Australia
The Netherlands
Belgium
Great Britain
Spain
Poland
Malaysia
Germany
Canada
Mexico
Indonesia
China
Cayman Islands
France
United States

Italy
Dec. 2005
Dec. 2007
Dec. 2009
Dec. 2011
Dec. 2013
Dec. 2015
Dec. 2017
Dec. 2019
Dec. 2021

20 –50
0 –75
2016 17 18 19 20 21 22 23

Sources: Bank of Japan; Bloomberg Finance L.P.; Japanese Ministry of Finance; Haver Analytics; national sources; US Department of
the Treasury; and IMF staff calculations.
Note: Panel 2 presents a snapshot as of December 31, 2021, of debt securities owned by Japanese investors issued by non-Japanese
entities. For the United States, the light blue bar shows corporate bonds. The share is relative to Bloomberg Global Aggregate Country
Index market capitalization for advanced economies and local bond market capitalization, combined with the JPMorgan EMBI Global
Diversified Index market capitalization for emerging markets. China local market cap includes sovereign and policy bank bonds. In
panel 3, the volatility spillover indices in the spillover analysis capture how changes in Japanese government bond yields affect
changes in the Canadian, German, UK, and US yields. Conceptually, this analysis relies on a statistical procedure by breaking down the
prediction errors into components caused by each individual country yield, following the approach of Diebold and Yilmaz (2008).

monetary policy. As central banks pursue their price meaningfully last year despite higher Japanese
stability mandate, it is ­imperative they clearly tele- government bond yields during 2022 (Figure 1.4.2,
graph their intentions to avoid unwarranted volatility panel 3). Clear communication in the event of
and mitigate spillovers in global financial markets. adjustments to the Bank of Japan’s monetary policy
Until the adjustment in December, spillovers from stance is critical to avoid market volatility (see “Policy
Japan to other advanced economies had not increased Recommendations”).

54 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

Box 1.5. The Impact of the Energy Crisis on the Transition toward a Low-Carbon and Secure
Energy System
Russia’s invasion of Ukraine has exacerbated existing encouraged the expansion of capacity. Prices of minerals
strains in energy markets. The result: A global energy cri- and metals critical to renewables soared in 2021 and
sis has led to an increase in coal production as European 2022, with prices remaining elevated in the first month
countries have moved to reduce their energy dependency of 2023 (Figure 1.5.1, panel 2). Price increases were
on Russia’s energy sources. As Russia curtailed natural gas driven by higher demand, while supply was limited
supply to Europe and sanctions on imports of Russian by production bottlenecks, the shut-in of some metal
oil and coal were introduced, coal and gas prices rose smelters because of high energy prices in Europe, and
(Figure 1.5.1). These increases accounted for 90 percent Russia’s role as a key exporter of certain commodities
of the inflationary pressure on electricity prices worldwide such as aluminum and nickel.1 Even though generation
(IEA 2022). Amid high prices and a tight supply market of wind and solar electricity rose in 2022, average prices
environment, natural gas consumption has declined for onshore wind and solar photovoltaics have risen
across all gas-importing regions. While energy prices have worldwide, reversing a decade-long declining trend.
since eased to fall below levels prevailing before the war Despite positive policy developments,2 current
began, global coal demand and production are set to investments in the low-carbon transition remain insuf-
reach all-time highs in 2022. They are projected to rise by ficient to meet Paris Agreement temperature targets,
1.2 percent and 5.5 percent, respectively, as the world’s thus increasing climate-related financial stability risks.
largest producers (China, India, Indonesia) have set
production records to overcome supply shortages of other 1This is all the more concerning given the capital-intensive

sources of energy (IEA 2022). In the European Union, nature of renewable energy (including grid infrastructure) and
the anticipated emergence of a supply and demand mismatch in
coal production is set to rise by 7 percent in 2022, driven
regard to copper, lithium, and nickel resulting from bottlenecks
by Germany and Poland switching from higher-priced in supplies for these materials (Miller and others 2023).
natural gas and reactivating coal-fired power plants. With 2The upsurge took place amid higher fossil fuel prices—and

improved profitability, the equity value of coal companies subsequent windfall profits for electricity producers—as well
has exceeded that of oil and gas companies since the sum- as policy measures to ensure market resilience and diversifica-
tion and enhance supply security. Policies included the 2022
mer of 2022 (Figure 1.5.1).
REPowerEU and the 2023 Green Deal Industrial Plan in the
Higher prices of critical minerals are adversely European Union; the Inflation Reduction Act of 2022 in the
affecting the cost-competitiveness of renewable energy, United States; and China’s 14th Five-Year Plans on Renewable
while higher fossil fuel prices and policy reforms have Energy Development and Modern Energy System.

Figure 1.5.1. Fossil Fuel Performance and Mineral Price Inflation

Backed by strong demand and prices, coal and oil and ... while price gains in minerals required for renewable
gas equities have rebounded strongly ... energy production exceeded those in fossil fuels in 2022.
1. Stock Prices of Coal and Oil and Gas Companies 2. Price Growth for Selected Energy Transition Minerals,
(Index, January 2020 = 100) Metals, and Fossil Fuels
Coal (Percent)
300 Coal, excluding Russia 150
Oil and gas (right scale) Coal
250 Oil and gas, excluding Russia 130 Crude
200 (right scale) 110 Natural gas
Change in January 2023
150 90 Annual change in 2022
Copper
100 70 Aluminum Annual change in 2021
Nickel Average annual change,
50 50 2010–20
Cobalt
Jan. 2020
Apr. 2020
July 2020
Oct. 2020
Jan. 2021
Apr. 2021
July 2021
Oct. 2021
Jan. 2022
Apr. 2022
July 2022
Oct. 2022
Jan. 2023

Lithium
–100 0 100 200 300

Sources: Bloomberg Finance L.P.; and IMF staff calculations.

Note: In panel 1, stock prices of major coal and oil and gas companies are averaged for the respective commodity. The sample includes
22 companies involved in coal production across Australia, China, India, Indonesia, Poland, Russia, South Africa, and the United States,
as well as integrated upstream and downstream oil and gas companies from China, Norway, Russia, Saudi Arabia, and other major
international players in the sector.

International Monetary Fund | April 2023 55

GLOBAL FINANCIAL STABILITY REPORT: SAFEGUARDING FINANCIAL STABILITY AMID HIGH INFLATION AND GEOPOLITICAL RISKS

Box 1.5 (continued)

Sustainable debt issuance hit more than $1 trillion physical risks.4 While a plateau in global coal-fired
in 2022 but recorded its first annual year-over-year power generation capacity is expected by 2025, short-
decline (19 percent). Performance of renewable energy falls in renewable energy investment remain significant
indices (such as the MSCI Global Green Bond Index) ($1 trillion) compared with investment targets in a
has also deteriorated, while most environmental, social, net-zero scenario (Figure 1.5.2, panel 3), especially in
and governance bond and equity funds have under- emerging market and developing economies.5 In those
performed. Meanwhile, investment in fossil fuels con- economies, natural gas may therefore play a larger
tinues to increase, including in expansion,3 with total dispatchable role in order to satisfy peak demand amid
debt rising by 3.3 percent among companies in the oil potentially limited production of renewable energy in
and gas sector and by 23.3 percent among companies the absence of large-scale storage capacity.
in the coal sector since the start of 2022 (Figure 1.5.2,
panels 1 and 2). These trends substantially increase
4Carbon lock-in risks result from a situation in which
the risks of carbon lock-in and related transition and
fossil fuel–intensive systems perpetuate, delay, or prevent the
low-carbon transition, reinforcing climate-related physical and
3New oil and gas fields, coal mines, and coal-fired power transition risks (including those related to stranded assets).
production. This is contrary to the IEA’s net-zero scenario (2022) 5Calculated using the International Energy Agency database:

allowing investment during the energy transition only in existing “Global Investment in the Power Sector by Technology,
fossil fuel infrastructure. 2011–2022.”

Figure 1.5.2. Debt of Fossil Fuel Companies and Investment in Power Sectors

There is a significant shortfall in the annual investment required to reach net zero by 2050, while investment in fossil
fuel companies continues to see an upward trend, primarily in expansion.
1. Total Debt of Fossil Fuel Companies 2. World Energy Investment to 3. Global Investment in the Power
(Billions of US dollars) Fossil Fuel Sector, by Technology
(Billions of 2021 US dollars, (Billions of 2021 US dollars,
left scale; percent, right scale) left scale; percent, right scale)
Coal Coal Renewable power
Oil and gas Oil and gas Fossil fuel power
Emerging market and Emerging market and Nuclear
developing economy debt developing economy Electricity grids
Advanced economy debt investment flow (right scale) Battery storage
Advanced economy Annual investment requirement
investment flow (right scale) Emerging market, percent of
total investment (right scale)
6,000 1,400 70 2,000 28
5,000 1,200 60
27
1,000 50 1,500
4,000
800 40 26
3,000 1,000
600 30 25
2,000
400 20 500
1,000 24
200 10
0 0 0 0 23
2023–30e
2016:Q1
2016:Q3
2017:Q1
2017:Q3
2018:Q1
2018:Q3
2019:Q1
2019:Q3
2020:Q1
2020:Q3
2021:Q1
2021:Q3
2022:Q1
2022:Q3

2015
16
17
18
19
20
21
22e

2011–15
16
17
18
19
20
21
22e

Sources: Bloomberg Finance L.P.; International Energy Agency 2022; Urgewald 2022; and IMF staff calculations.
Note: Companies in panel 1 include those meeting criteria as set out by Urgewald in the Global Coal Exit List and Global Oil & Gas Exit
List. Total debt includes bonds and loans. The emerging market and developing economies include China. In panel 2, investment flows
include investment in both fuel and power sectors; and e = estimated. The emerging market and developing economies include China.
In panel 3, e = estimated; 2023–30 is the annual investment requirement under the International Energy Agency’s net-zero emissions
scenario. The emerging market and developing economies exclude China. Panel 3 was calculated using the International Energy
Agency database (https://www.iea.org/data-and-statistics/charts/global-investment-in-the-power-sector-by-technology-2011-2022).

56 International Monetary Fund | April 2023

 CHAPTER 1 A Financial System Tested by Higher Inflation and Interest Rates

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