Wednesday, April 18, 2012


IWS Documented News Service


Institute for Workplace Studies----------------- Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor---------------------- Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau



International Monetary Fund (IMF)


World Economic and Financial Surveys




[full-text, 192 pages]


The April 2012 Global Financial Stability Report assesses changes in risks to financial stability over the past six months, focusing on sovereign vulnerabilities, risks stemming from private sector deleveraging, and assessing the continued resilience of emerging markets. The report probes the implications of recent reforms in the financial system for market perception of safe assets, and investigates the growing public and private costs of increased longevity risk from aging populations.



[full-text, 26 pages]



Preface ix

Executive Summary xi

Chapter 1 Global Financial Stability Assessment 1

Status of Stability Indicators 1

The Policy Challenges 4

Annex 1.1. Why Is Deleveraging so Challenging? 12

References 14

Chapter 2 S overeigns, Banks, and Emerging Markets: Detailed Analysis and Policies 17

The Sovereign Debt Crisis—Shifting From a Bad to a Good Equilibrium 17

Bank Deleveraging—Why, What, by How Much, and Where? 25

Emerging Markets—Still Resilient? 42

The Quest for Lasting Stability 54

Annex 2.1. Methodology for the EU Bank Deleveraging Exercise 64

Annex 2.2. Sovereign Risk in the United States, Japan, and Germany—

Signals from the Markets 70

Annex 2.3. Developments in U.S. Housing Markets 75

Annex 2.4. The ECB’s LTROs: Keeping the Benefits and Avoiding the Pitfalls 77

References 79

Chapter 3 S afe Assets: Financial System Cornerstone? 81


The Safe Asset Universe

Roles of Safe Assets for Various Participants

The Supply of Safe Assets

Financial Stability Implications

Key Conclusions and Policy Implications

Annex 3.1. Exposures to Common Risk Factors

Annex 3.2. Central Bank Securities Policies since 2007

Annex 3.3. Collateral Requirements of CCPs for OTC Derivatives


Chapter 4 T he Financial Impact of Longevity Risk


Longevity Risk

The Impact of Longevity Risk

Mitigating Longevity Risk

Conclusions and Policy Considerations

Annex 4.1. The Impact of Longevity Risk on U.S. Defined-Benefit Plans



Annex: Summing Up by the Acting Chair

Statistical Appendix

Available online at


1.1. Addressing the Euro Area Crisis and Moving Toward a More Integrated Union 9

2.1. What Explains the Performance of European Bank Equities? 27

2.2. European Banks’ Business Plans 32

2.3. A Comparison of the GFSR Approach with the European Banking Authority’s Bank

Capital Strengthening Exercise 34

2.4. How Derivatives Markets Link U.S. Banks and European Counterparties 40

2.5. What Happens in Emerging Markets if Recent Bank and Portfolio Inflows Reverse? 51

2.6. Eurobonds and the Future of the Economic and Monetary Union 56

2.7. Update on Regulatory Reforms 61

3.1. The Size of Sovereign Wealth Funds and Their Role in Safe Asset Demand

3.2. The Impact of Changes in the OTC Derivatives Market on the Demand for Safe Assets

3.3. Regulatory Risk Weighting of Banks’ Government Debt Holdings: Potential Bias

in Capital Adequacy Ratios

3.4. Impact of the Basel III Liquidity Coverage Ratio on the Demand for Safe Assets

3.5. The Impact of a Further Loss of Sovereign Debt Safety Illustrated in a Mean-Variance Framework

3.6. Conventional Monetary Policy and Its Demand for Safe Assets under Normal Conditions

4.1. The Evolution of Life Expectancy in the Twentieth and Twenty-First Centuries

4.2. Forecasting Longevity

4.3. An Example of a Longevity Shock

4.4. The Impact of Aging on the Macro Economy and on Financial Stability

4.5. Pension Reform in the Netherlands: Proactively Dealing with Longevity Risk

4.6. Recent Activity in the Dutch and U.K. Buy-Out, Buy-In and Longevity Swap Markets



1.1. Indebtedness and Leverage in Selected Advanced Economies 7

1.2. Impact of European Bank Deleveraging under Three Policy Scenarios, through End-2013 8

1.3. Three Past Episodes of Household Deleveraging Associated with a Banking Crisis 14

2.1. Sovereign Debt: Market and Vulnerability Indicators 23

2.2. Share of Foreign Investors in Gross Refinancing Needs of Selected Euro Area Sovereignsunder Three Policy Scenarios 25

2.3. Amount of Additional Funding from Domestic Investors Required by Selected Euro Area Sovereigns under Three Policy Scenarios, 2012 25

2.4. Capital Flow, Banking, and Policy Indicators in Selected Emerging and Other Markets 47

2.5. Selected Bank Balance Sheet Items 64

2.6. Weights used in Calculation of the Net Stable Funding Ratio 65

2.7. Average Rollover Rates for Bank Funding under Three Policy Scenarios, by Funding Source 66

2.8. Bank Deleveraging Strategy 68

3.1. Historical Overview of S&P Sovereign Debt Ratings of Selected OECD Countries, 1970–January 2012

3.2. Long-Term Senior Sovereign Debt Ratings and Implied Probabilities of Default

3.3. Demand and Supply Factors and Their Anticipated Impact on Safe Asset Markets

3.4. Top Five Financially Deep Worldwide Economies, as Share of Own GDPand of World GDP, 1989 and 2009

3.5. Central Bank Changes in Policies on Collateral and Purchases of Nongovernmental Securities since 2007

3.6. Collateral Requirements of the Big Three CCPs Handling OTC Derivatives

4.1. Pension Estimates and Population Estimates of Male Life Expectancy at Age 65 in Selected Advanced Economies

4.2. Longevity Risk and Fiscal Challenges in Selected Countries

4.3. Mortality Tables Used by Reporting Pension Plans

4.4. Corporate Pension Funding Ratios and Discount Rate Assumptions for Selected Countries

4.5. The Impact of Longevity Risk on Pension Liabilities



1.1. Global Financial Stability Map 2

1.2. Global Financial Stability Map: Assessment of Risks and Conditions 3

1.3. Central Bank Balance Sheet Expansion 4

1.4. Asset Price Performance since September 2011 GFSR 5

1.5. WEO Projections of 2012 GDP Growth in Selected Euro Area Countries 6

1.6. Policy Action to Entrench Stability and Avoid Downside Risks 6

1.7. External Positions and Gross Debt in Selected Euro Area Countries 12

1.8. Debt Burdens in Selected Advanced Economies, 2011 13

1.9. Household Net Financial Assets and Gross Debt, End-September 2011 13

1.10. Two Household Credit Cycles: 1980s and 2000s 14

2.1. Credit Default Swap Spreads in Selected Euro Area Government Bond Markets 18

2.2. Ten-Year Government Bond Yields and Trading Ranges, Selected Euro Area Countries, 2011–12 18

2.3. Daily Trading Volume of Italian Sovereign Bonds 18

2.4. Changes in the Sovereign Investor Base 19

2.5. Custodial Holdings of Selected Euro Area Sovereign Bonds, 2011 19

2.6. Cumulative Change in Foreign Bank Holdings of Sovereign Debt of Selected Euro Area Countries, 2010:Q1–2011:Q3 19

2.7. Returns and Volatility of U.S. and European Sovereign Bonds, 2011 20

2.8. Ten-Year Peripheral Euro Area Government Bond Spreads over AAA Core 20

2.9. ECB Purchases of Government Bonds under Its SMP 21

2.10. ECB Lending and Bank Holdings of Euro Area Sovereign Bonds, December 2011–January 2012 21

2.11. Yields on Government Bonds of Italy and Spain, November 2011 and March 2012 21

2.12. Projections for Government Debt and Average Interest Rate in Selected Advanced Economies, 2011–16 22

2.13. Scenarios for Ratio of Government Interest Expenditure to GDP, Selected Advanced Economies 24

2.14. Foreign Investor Share of Total Sovereign Debt, 2009–11, Selected Euro Area Economies 24

2.15. Bank Leverage 26

2.16. Bank Loan-to-Deposit Ratios 26

2.17. Bank Price-to-Tangible Book Value 26

2.18. Bank Five-Year Credit Default Swap Spreads 28

2.19. U.S. Prime Money Market Fund Exposures to Banks 29

2.20. Bank Debt Issuance 29

2.21. Cumulative Euro Area Deposit Flows, 2011–12 29

2.22. ECB Liquidity Facilities and Interbank Market Spreads 30

2.23. Credit Growth to the Nonfinancial Private Sector 30

2.24. Contributions to Euro Area Bank Lending Conditions for Companies 30

2.25. Change in Banks' Foreign Private Sector Claims, 2011:Q3 30

2.26. Contributions to Reduction in Aggregate Bank Leverage Ratio, Current Policies Scenario 34

2.27. Contributions to Aggregate Reduction in Bank Assets, Three Policy Scenarios 35

2.28. Factor Contributions to Aggregate Reduction in Bank Assets, Three Policy Scenarios 35

2.29. Reduction in Supply of Credit by Sample Banks, Three Policy Scenarios 35

2.30. European Banks: Composition of Assets, 2010 36

2.31. Reduction in Supply of Credit, by Banking System, Current Policies Scenario 36

2.32. Euro Area Credit Supply Shock: Three Scenarios Relative to Historical Episodes 37

2.33. United States: Nonfinancial Corporate Borrowing and Return on Assets 37

2.34. Euro Area: Nonfinancial Corporate Borrowing and Return on Assets 38

2.35. Reliance on Bank Financing by Nonfinancial Corporations 38

2.36. Change in Nonfinancial Corporate Debt, 2000–10 38

2.37. Nonfinancial Corporations: Interest Coverage Ratio and Implied Ratings 39

2.38. Corporate Credit Quality in Western Europe, 2007–12 39

2.39. Euro Area Bank Deleveraging in Emerging Markets, 2008 and 2011 43

2.40. Deleveraging in Emerging Markets by Selected Advanced Economy and EM Local Banks, 2011:Q3 44

2.41. Emerging Market Credit Cycle for Euro Area Banks and Other Banks, 2010–11 44

2.42. Long-Term Specialty Finance in Emerging Markets 44

2.43. Emerging Europe: Cross-Border Bank Flows and Foreign Exchange Funding Costs 45

2.44. Reduction in Supply of Credit by Sample Banks to Emerging Europe: Current and Weak Policies Scenarios 45

2.45. Loans Denominated in Foreign Currency as a Share of GDP, Selected Countries in Emerging Europe, 2007 and 2011 46

2.46. Emerging Europe: Reserve Coverage of Short-Term External Debt, Selected Countries, 2007 and 2011 46

2.47. Emerging Europe: Sovereign Gross Financing Needs, Selected Countries, 2012 49

2.48. Net Flows in Emerging Market Funds, 2011–12 49

2.49. Performance of Emerging Market Assets, 2011–12 50

2.50. Changes in Residential Property Prices and Sales in China, 2011–12 52

2.51. Ratio of House Price to Annual Household Income for Selected Cities, 2011 52

2.52. China: Projected Nonperforming Loan Rates under Adverse Macroeconomic Scenarios 53

2.53. Annual Change in Private Credit, 2009–11 53

2.54. Capital Generation under Three Policy Scenarios 66

2.55. How Can Banks Improve Capital and Liquidity Ratios? 67

2.56. United States: Sovereign Market Indicators, March 2012 71

2.57. Germany: Sovereign Market Indicators, March 2012 72

2.58. Japan: Sovereign Market Indicators, March 2012 73

2.59. ECB LTROs and Bank Term Funding 77

2.60. Sovereign Bond Yields for Italy and Spain 78

3.1. Ten-Year Government Bond Yields in Selected Advanced Economies

3.2. Asset Exposures to Common Risk Factors before and after Global Crisis

3.3. Volatility of Excess Returns in Debt Instruments before and after Crisis

3.4. Outstanding Amounts of Marketable Potentially Safe Assets

3.5. Holdings of Government Securities Worldwide, by Investor Type, End-2010

3.6. Sovereign Debt Holdings, by Type and Location of Investor

3.7. Banks’ Holdings of Sovereign Debt, by Selected Country, End-September 2011

3.8. Official Reserve Accumulation, by Investment

3.9. Government Securities Purchases and Holdings by Sectors

3.10. U.S. and U.K. Central Bank Holdings of Government Securities, by Remaining Maturity

3.11. Distribution of Selected Advanced and Emerging Market Economies, by Sovereign Debt Rating

3.12. OECD Countries: General Government Gross Debt Relative to GDP, End-2011

3.13. OECD Countries: General Government Gross Debt, 2010–16

3.14. Private-Label Term Securitization Issuance

3.15. Selected Advanced Economies: Changes in Central Bank Assets and Liabilities since the Global Crisis

3.16. Government Bond Holdings and Risk Spillovers between Sovereign and Banks

4.1. United Kingdom: Projected Life Expectancy at Birth, for Males, 1966–2031

4.2. Increases in Costs of Maintaining Retirement Living Standards due to Aging and to Longevity Shock

4.3. Life Expectancy at Age 63, by Year of Mortality Table

4.4. Increase in Actuarial Liabilities from Three-Year Increase in Longevity, by Discount Rate

4.5. Index of Share of Pension Entitlements Linked to Life Expectancy in Selected Countries

4.6. Structure of Pension Buy-Out and Buy-In Transactions

4.7. Structure of Longevity Swap Transactions

4.8. Structure of Longevity Bond Transactions

4.9. Attitudes of Pension Plan Sponsors toward Hedging Pension Risk, by Type of Risk

4.10. Attitudes of Potential Sellers of Longevity Risk toward Hedging



This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.


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