Global Financial Stability Report 2009
CONTENTS
Preface ix
Joint Foreword to the World Economic Outlook and the Global Financial Stability Report xi
Executive Summary xv
Chapter 1. Stabilizing the Global Financial System and Mitigating Spillover Risks 1
Summary 1
A. Global Financial Stability Map 2
B. Global Deleveraging and Its Consequences 5
C. The Crisis Has Engulfed Emerging Markets 10
D. The Deteriorating Outlook for Household and Corporate Defaults in Mature Markets and
Implications for the Financial System 25
E. Stability Risks and the Effectiveness of the Policy Response 30
F. Costs of Official Support, Potential Spillovers, and Policy Risks 44
Annex 1.1. Global Financial Stability Map: Construction and Methodology 52
Annex 1.2. Predicting Private “Other Investment” Flows and Credit Growth in
Emerging Markets 57
Annex 1.3. Spillovers Between Foreign Banks and Emerging Market Sovereigns 60
Annex 1.4. Debt Restructuring in Systemic Crises 64
Annex 1.5. Methodology for Estimating Potential Writedowns 67
References 71
Chapter 2. Assessing the Systemic Implications of Financial Linkages 73
Summary 73
Four Methods of Assessing Systemic Linkages 75
How Regulators Assess Systemic Linkages 98
Policy Reflections 104
Annex 2.1. Default Intensity Model Estimation 108
References 108
Chapter 3. Detecting Systemic Risk 111
Summary 111
What Constitutes “Systemic” Risk? 113
“Fundamental” Characteristics of Intervened and Nonintervened Financial Institutions 114
Market Perceptions of Risk of Financial Institutions 118
Identifying Systemic Risks Through Regime Shifts 133
Role of Global Market Conditions During Episodes of Stress 135
Policy Implications 141
Conclusions 143
Annex 3.1. Financial Soundness Indicators 145
Annex 3.2. Groups of Selected Financial Institutions 146
Annex 3.3. List of Intervened Financial Institutions 146
References 147
Glossary 150
Annex: Summing Up by the Acting Chair 156
Statistical Appendix 159
Boxes
1.1 Near-Term Financial Stability Challenges and Policy Priorities 3
1.2 Cross-Border Exposures and Financial Interlinkages within Europe 14
1.3 Effects of the Global Financial Crisis on Trade Finance: The Case of Sub-Saharan Africa 18
1.4 Enhanced IMF Lending Capabilities and Implications for Emerging Markets 23
1.5 Modeling Corporate Bond Spreads: A Capital Flows Framework 32
1.6 Recent Unconventional Measures of Selected Major Central Banks 45
1.7 Forecasts for Charge-Offs on U.S. Bank Loans 68
2.1 Network Simulations of Credit and Liquidity Shocks 80
2.2 Quantile Analysis 87
2.3 Default Intensity Model Specification 96
2.4 Basics of Over-the-Counter Counterparty Credit Risk Mitigation 102
2.5 A Central Counterparty as a Mitigant to Counterparty Risk in the Credit Default Swap
Markets 106
3.1 Modeling Risk-Adjusted Balance Sheets: The Contingent Claims Approach 120
3.2 Option-iPoD Measures of Risk Across Financial Institutions 125
3.3 Higher Moments and Multivariate Dependence of Implied Volatilities from Equity
Options as Measures of Systemic Risk 130
3.4 The Consistent Information Multivariate Density Optimizing Approach 134
3.5 Spillovers to Emerging Markets: A Multivariate GARCH Analysis 139
3.6 The Transformation of Bank Risk into Sovereign Risk—The Tale of Credit Default Swaps 144
Tables
1.1 Macro and Financial Indicators in Selected Emerging Market Countries 13
1.2 Potential Writedowns and Capital Needs for Emerging Market Banks by Region 20
1.3 Estimates of Financial Sector Potential Writedowns (2007–10) by Geographic Origin of
Assets as of April 2009 35
1.4 Bank Equity Requirement Analysis 36
1.5 Policy Measures and Effectiveness 40
1.6 Tentative Easing in Credit Conditions 41
1.7 Bank Wholesale Financing and Public Funding Support 44
1.8 Public Debt and Stabilization Costs 48
1.9 Mature Market Sovereign Credit Default Swap Spreads and Debt Outstanding 49
1.10 Announced Sovereign Guaranteed Bank Debt 49

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