Next-Generation System-Wide Liquidity Stress Testing

The global financial crisis has shown that neglecting liquidity risk comes at a substantial price. This column presents a new framework to run system-wide, balance sheet data–based liquidity stress tests. The liquidity framework includes a module to simulate the impact of bank-run type scenarios, a module to assess risks arising from maturity transformation and rollover […]

Global Market Conditions and Systemic Risks After Greece and Ireland’s Financial Crises

This column examines recent events to assess the risk of systemic risk in advanced economies based on  Markov-switching techniques used to examine equity, interbank spreads, sovereign CDS and foreign exchange markets. The methodology employed examines the volatility state of several market indicators and asset classes since the beginning of the global financial crisis in a number of advanced countries. The results suggest a recent diverging behavior among asset classes and across countries, suggesting that volatility pressures have become more ‘localized’ in recent months. In particular, while the overall market stress emanating from interbank and foreign exchange markets has largely subsided, pockets of high volatility states remain especially in sovereign CDS markets in some advanced economies.

Quo Vadis Credit Growth in the MENA Region?

This blog examines the recent credit slowdown among Middle Eastern and North African (MENA) countries from three analytical angles. First, it finds that, similar to other regions and to its past history, a credit boom preceded the current slowdown, and that a protracted period of sluggish growth is likely going forward. Second, it uncovers a key role played by bank funding (deposit growth and external borrowing slowed considerably) but whose effect was frequently dampened by expansionary monetary policy. Third, bank-level fundamentals—capitalization and loan quality—helped to explain differences in credit growth across banks and countries. The blog concludes on what policy measures can be taken to revive credit growth in the MENA region.

Gulf Cooperation Council Local Currency Bond Markets and Lessons from East Asia

The countries of the Gulf Cooperation Council were hit hard by declining oil prices during the global crisis. This column argues that East Asia has shown how viable local bond markets are essential to weather future crises when bank lending collapses. While it will be a long process requiring strong political will, the time for the “plumbing” work is now.    

Debriefing Nakheel – Wider Implications for the Sukuk Market

The recent debt restructuring of Dubai World and the last minute rescue of property subsidiary Nakheel, which issued one of the largest Islamic bonds three years ago, has shaken the confidence in Islamic finance owing to growing controversy about the interaction of shari’ah compliance and principles of investor protection in times of distress. As creditors are about to sign their settlement agreements in late April 2010 there remains general concern about whether shari’ah compliance might hamper an orderly dispute resolution under conventional law and about the legal enforceability of asset claims under the current Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) recommendations on sukuk structures. With the clear benefit of hindsight, this brief note speculates on possible outcomes of legal proceedings if the Nakheel sukuk had defaulted and discusses some potential implications for the wider sukuk market. The note also briefly touches upon the recent UK ruling in the Investment Dar case.

Asset Price Co-Movements and the Dollar Carry Trade

The ongoing dollar carry trade has recently come to the forefront of the international policy debate (Roubini, 2009). Capital inflows to emerging market countries have put pressures on some currencies, and authorities have responded by slowing the pace of appreciation, in some cases by capital controls. This short article uses a GARCH framework to examine […]

Oil Prices and Bank Profitability: Evidence from Major Oil-Exporting Countries in the Middle East and North Africa

Bank balance sheets in oil-exporting economies have been hard hit recently. This column provides the first empirical evidence linking oil prices to bank performance in such economies. It suggests that easily observed oil prices could inform macro-prudential regulation in these countries and mitigate pro-cyclical bank lending. The recent economic and financial crisis and the sharp […]

Rapidly Growing Local-Currency Bond Markets Offer a Viable Alternative Funding Source for Emerging-Market Issuers

By Ismail Dalla and Heiko Hesse

As the financial crisis has curtailed the ability of borrowers in emerging markets to find funds abroad, they have turned to raising capital in domestic markets. Local-currency bond markets had already grown tremendously since the crises of the 1990s. This column says that deepening local-currency bond markets should now be a top priority for emerging economies.    

Local-currency bond markets are becoming an alternative funding source in several emerging economies. These markets have grown rapidly, doubling in size from $2.2 trillion in 2003 to $5.5 trillion at the end 2008 (Figure 1). These markets are playing an important role in the provision of finance to emerging-market governments and corporations, which were largely shut out of international financial markets during the global financial crisis, and in reducing their dependence on the banking sector. In many emerging markets, they are also helping to correct currency and maturity mismatches, thus contributing to financial stability.

Figure 1. Trends in local currency bond markets in emerging markets by region

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Source: BIS and authors’ calculations.

Emerging markets’ governments have sought to develop local-currency bond markets to help prevent a rerun of the string of financial crises that occurred during the 1990s, particularly the 1997 Asian financial crisis. East Asian countries have been at the forefront of bond market development. At the end of 2008, East Asia accounted for 55.4% of total outstanding value of local-currency bonds in emerging markets (see EAP in figure 1), followed by Latin America (24.3%, LAC), Eastern Europe (10.2%, ECA), South Asia (8.4%, SA), and Sub-Saharan Africa (1.7%, SSA).

Local-currency bond markets in emerging market countries are diverse in their size, issuers, liquidity, supporting infrastructure, and degree of openness to foreign investors. In 2008, top ten markets were China, Brazil, India, Mexico, Malaysia, Poland, Turkey, Thailand, and South Africa. Together, these countries accounted for 85% of the value of local bonds outstanding at the end of 2008 (Figure 2).

Financial crisis, global conditions, and regime changes

This column examines the use of key global market conditions to assess financial volatility and the likelihood of crisis. Using Markov regime-switching analysis, it shows that the Lehman Brothers failure was a watershed event in the crisis, although signs of heightened systemic risk could be detected as early as February 2007.

The international community has called for the IMF to deepen its work on systemic risks and early warning signals. While there are currently many different research strands, this short column empirically examines the role that global market conditions play in detecting systemic risk. We adopt regime-switching models using variables that proxy for global market conditions – Chicago Board Options Exchange Volatility Index (VIX), TED spread (the difference between LIBOR and Treasuries), and US dollar-euro foreign exchange swap rate. For instance, the Lehman Brothers collapse on 15 September 2008 was a watershed event that rapidly spilled over to emerging market countries, sharply increasing uncertainty across asset markets, a scramble for US dollars with the breakdown of the carry trade, and the need for financial institutions to refinance their US dollar positions. The regime-switching models indicate a move towards a high volatility state before the Lehman episode, which are consistent with elevated systemic risks in the financial system. We first look qualitatively at the behaviour of some global market variables during the financial crisis before presenting the formal findings of the regime-switching models.

Sovereign wealth funds and financial stability

The present financial crisis has placed financial stability at the forefront of policy discussions. At the same time, sovereign wealth funds have become much more significant players over the past two years. This column summarises the results of some recent studies about sovereign wealth funds and their implications for financial stability. Overall, the existing research […]