GLOBAL FINANCIAL STABILITY REPORT
International Monetary Fund
he central banks o the largest advancedeconomies have taken unprecedentedmeasures to combat the deepest andmost prolonged period o recession andnancial instability since the 1930s.
Tese measuresinclude an extended period o very low interest ratesas well as so-called unconventional policies—provid-ing long-term liquidity to banks to support the ow o credit, lowering long-term rates through bondpurchases, and stabilizing specic markets such asmortgage lending.
Central banks have also issued“orward guidance,” in which they announce anintention to maintain an accommodative stance oran extended period. We will reer to the combina-tion o exceptionally low policy interest rates andunconventional policy measures as “MP-plus” toindicate that these policies go beyond conventionalmonetary policy in terms o tools and objectives.Te objectives o MP-plus are to benet not only the macroeconomy but also nancial stability. By providing liquidity to banks and buying specicassets, MP-plus directly mitigates short-term insta-bility in nancial markets and vulnerabilities in thedomestic banking sector. In addition, MP-plus alsoindirectly limits stress in the nancial sector to theextent that it succeeds in preventing a sharper eco-nomic downturn. By encouraging economic activity through its easing o credit conditions, MP-plus canhelp strengthen private and public balance sheets andthus make a more durable contribution to nancialstability. Such benets may result, or instance, i rms take advantage o lower longer-term rates by extending the maturity prole o their debt.However, MP-plus may have undesirable sideeects, including some that may put nancial stabil-ity at risk. Ample bank liquidity may raise credit risk at banks by compromising underwriting and loan
Note: Tis chapter was written by S. Erik Oppers (teamleader), Ken Chikada, Frederic Lambert, ommaso Mancini-Grioli, Kenichi Ueda, and Nico Valckx. Research support wasprovided by Oksana Khadarina.
Examples o the unconventional policies are quantitativeeasing by the Federal Reserve, the Funding or Lending Schemeby the Bank o England, and the announcement o the OutrightMonetary ransactions o the European Central Bank. Te Bank o Japan implemented a program o quantitative easing in theearly 2000s and—along with other unconventional policy mea-sures—again in the atermath o the global nancial crisis.
quality standards, and it may encourage a delay innecessary balance sheet repair and bank restructur-ing. Likewise, low interest rates encourage othernancial institutions, including pension unds, insur-ance companies, and money market mutual unds,to increase risk by “searching or yield.” A search oryield can help push the market value o some assetsbeyond their undamental value (“bubbles”) or drivean excessive increase in balance sheet leverage. Insome cases, risks may stem not rom the unconven-tional policies themselves but rom the difculties inexiting rom them. Where central banks intervenedin markets to mitigate instability, their presencemay aect market unctioning or mask continuing vulnerabilities, complicating exit and raising thepotential or policy missteps.Tis chapter aims to bring empirical evidence tobear on some o the nancial stability eects o MP-plus. It denes and quanties the MP-plus policies o our major central banks—the Federal Reserve, theEuropean Central Bank (ECB), the Bank o Japan(BOJ), and the Bank o England (BOE)—and thenidenties possible risks to domestic nancial stability and to the nancial health o banks. Banks are theocal point o the chapter because they are naturally leveraged and, as a whole, they are the most systemi-cally important nancial institutions in the advancedeconomies that are actively using MP-plus policies.Te potential eects on pension unds and insurancecompanies and evidence o emergent bubbles arecovered in Chapter 1. Te risk that central bank mea-sures will have macroeconomic and nancial stability eects abroad is an important topic that deservescareul analysis; to keep the scope o this chaptermanageable, it is not covered here, but it is examinedin Chapter 1 and in an IMF paper on unconventionalmonetary policy (IMF, orthcoming).
In the areas it examines, the chapter nds ew immediate nancial stability concerns associated withMP-plus. So ar, it appears to have increased some mea-sures o bank soundness; and in markets where centralbanks have become major players, their interventioneither has not appreciably aected market liquidity or ithas corrected market dysunction. However, the longer
Also see previous IMF publications or the eect on pensionsand insurance (or example, Chapter 2 o the September 2011GFSR) and spillovers (Chapter 4 o the April 2010 GFSR).