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April 10, 2018

The Global Financial Stability Report (GFSR) provides an assessment of the global financial system and markets and addresses the emerging market financing in a global context. GFSR focuses on the current market conditions, highlighting systemic issues that could pose a risk to financial stability, and sustained market access by the emerging market borrowers. The report contains, as special features, analytical chapters or essays on structural or systemic issues relevant to international financial stability.

The April report focuses on credit allocation as a source of financial vulnerability and the role of house price synchronization for financial factors. Chapter 2 of the report takes a comprehensive look at the riskiness of corporate credit allocation—the extent to which riskier firms receive credit relative to less risky firms, its relationship to the size of credit expansions, and its relevance to the financial stability analysis. It constructs four measures of the riskiness of credit allocation across a broad set of advanced and emerging market economies. The riskiness of credit allocation is cyclical at the global and country levels and rises when financial conditions and lending standards are looser. Taking it into account helps better predict full-blown banking crises, financial sector stress, and downside risks to growth at horizons up to three years. Since it is a source of vulnerability and may threaten financial stability, policymakers and supervisors should keep close watch on its evolution. This chapter also finds that a period of credit expansion is less likely to be associated with a riskier credit allocation if macro-prudential policy has been tightened, the banking supervisor is more independent, the government has a smaller footprint in the nonfinancial corporate sector, and minority shareholder protection is greater.

Chapter 3 of the report analyzes whether and how house prices move in tandem across countries and major cities around the world. The chapter finds an increase in house price synchronization, on balance, for 40 advanced and emerging market economies and 44 major cities. Policymakers cannot ignore the possibility that shocks to house prices elsewhere will affect markets at home. House price synchronization may not warrant policy intervention, but the heightened synchronicity can signal a downside tail risk to real economic activity. Macro-prudential policies seem to have some ability to influence local house price developments, even in countries with highly synchronized housing markets, and these measures may also be able to reduce a country’s house price synchronization. Such unintended effects are worth considering when evaluating the trade-offs of implementing macro-prudential and other policies.

 

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Keywords: International, Banking, Securities, Insurance, GFSR, Financial Stability, IMF

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