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CONTENTS
Preface Chapter I. Overview Assessment of Global Financial Stability Risks in the Period Ahead Policy Measures to Mitigate Risks Risk Transfer to the Household Sector Financing Prospects and Risks Facing Emerging Market Countries Chapter II. Global Financial Market Developments Market Developments Developments and Risks in Mature Financial Markets Developments and Vulnerabilities in Emerging Markets Emerging Market Financing Banking Sector Developments in Emerging Markets Structural Issues in Mature Markets References Chapter III. Household Balance Sheets Household Balance Sheets Household Investment and Risk Management Behavior Need to Communicate, Educate, and Facilitate Advice Concluding Observations References Chapter IV. Corporate Finance in Emerging Markets Recent Trends in Corporate Finance Structural Determinants and Obstacles Vulnerabilities Associated with the Level and Composition of Corporate Finance Policy Issues Appendix References
vii 1 1 1 3 4 6 8 8 9 22 27 31 36 60 62 65 74 82 87 89 92 93 99 116 124 128 129
Glossary
134
Annex: Summing Up by the Acting Chair
140
Statistical Appendix
145
Boxes 2.1 Gauging Global Liquidity Conditions 2.2 Pension Fund Update
13 38
iii
CONTENTS
2.3 2.4 2.5 2.6 2.7 3.1 4.1 4.2
Insurance Industry Update Credit Derivatives Market Came of Age in 2004 Collective Action Clauses Issuing Global Bonds in Local Currencies: Toward the Absolution of Original Sin? Distance-to-Default Measure of Bank Soundness Longevity Bonds Finance and Economic Growth: A Brief Review of the Evidence New Firm-Level Evidence on Hedging Activities in the Nonfinancial Sector in Latin America
40 42 43
122
Emerging Market Financing Emerging Market Countries: Selected Bank Financial Soundness Indicators Recent Inflows, Performance, and Leverage of Hedge Funds Household Balance Sheet Volatility Measures Mortgage Markets in Selected Industrialized Countries: General Characteristics Structural Determinants of Corporate Leverage, 1993–2003 Cost of Equity Capital Estimates by Country Bankruptcy Costs and Legal Rights, 2004 Investor Protection by Country Use of IFRS for Domestically Listed Firms, by 2005 Countries with a Code of Good Corporate Governance Estimates of Average Firm-Level Private Benefits of Control Across Countries Corporate Debt Structures Nonfinancial Private Sector Firms: Sample Size for 2002
30 35 51 67 75 103 105 106 108 109 110 114 118 129
44 46 80 101
Tables 2.1 2.2 2.3 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Figures 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 2.15 2.16 2.17 2.18
iv
Global Real Interest Rates and Excess Liquidity Policy Rates U.S. Tightening Cycles: Movement in 10-Year Treasury Yields Real Yields on Inflation-Indexed Bonds U.S. Economic Growth and Treasury Yields Foreign Ownership of U.S. Securities High-Grade Corporate Bond Spreads High-Yield Corporate Bond Spreads Speculative Grade Corporate Default Rates Credit Derivatives Market Price-Earnings Ratios U.S. Equity and Benchmark Government Yields German Equity and Benchmark Government Yields Implied Volatilities Equity Volatility Equity Volatility and Corporate Spreads Implied Versus Actual Volatility United States: External Balance
10 10 11 11 12 12 16 16 17 17 18 19 19 20 20 21 21 22
CONTENTS
2.19 2.20 2.21 2.22 2.23 2.24 2.25 2.26 2.27 2.28 2.29 2.30 2.31 2.32 2.33 2.34 2.35 2.36 2.37 2.38 2.39 2.40 2.41 2.42 2.43 2.44 2.45 2.46 2.47 2.48 2.49 2.50 2.51 2.52 3.1 3.2 3.3 3.4 3.5 3.6 4.1 4.2
Emerging Asia Reserve Accumulation Asia (Excluding Japan) Currency Index Chinese Yuan 12-Month Forward Rates United States: 10-Year Rate Spread and Current Account Balance Currency Volatilities EMBIG Sovereign Spr