October 26, 2008
For those of you with the time to browse through 246 pages (gasp!), this heavy report from the IMF offers a tremendous overview of global financial markets up to the beginning of October 2008. It provides an amazing overview of global indicators, and puts the current crisis in full perspective.
My largest takeaway from having read the first chapter (70 pages), is that we are probably close to a bottom in economic terms. The research dissects data in a variety of ways, and offers a number of excellent charts many of which I am posting here as a resource for others in the blogosphere.
Another takeaway is that I have changed my opinion from earlier posts that suspending fair value, (also known as mark-to-market accounting) would be a good idea. Chapter three researches FV methods over business cycles, and makes a compelling argument for why suspending them would not be worthwhile. However there is an acknowledgment that some tweaks would be worthwhile.
An excerpt from the conclusion on FV accounting methods is below:
The chapter finds that, despite concerns about volatility and measurement difficulties, FVA is the appropriate direction forward and can provide a measure that best reflects a financial institution’s current financial condition, though various enhancements are needed to allow FVA to reinforce good risk management techniques and improved prudential norms. Nevertheless, the application of FVA makes more transparent the effects of economic volatility on balance sheets that, under certain risk management frameworks, could exacerbate cyclical movements in asset and liability values. Exaggerated profits in good times create the wrong incentives. Conversely, more uncertainty surrounding valuation in downturns may translate into overly tight credit conditions, and negatively affect growth at a time when credit expansion is most needed. This is not to say that alternative accounting frameworks such as historical cost accounting avoid such fluctuations, but rather that FVA recognizes them as they develop. Regardless, accounting frameworks are not meant to address the market-wide or systemic outcomes of their application, as they are applied only to individual institutions. Nevertheless, much of the controversy surrounding FV stems more from the risk management and investment decision rules using FV outcomes, rather than the framework itself. The interaction of FV estimates with other decision rules should be delinked from specific covenants such as sales triggers, margin calls or additional collateral requirements during downturns, or compensation tied to short-term profits during upturns.
You can download the full report from the IMF by clicking on the cover image below:
IMF Global Financial Stability Report October 2008: Financial Stress and Deleveraging - Macrofinancial Implications and Policy
The charts below have been gratuitously clipped from the report. I hope that these charts may be helpful to further the dialogue.
IMF Box 1.4 Mortgage Securitizations |
IMF Box 1.4 U.S. Fixed-Income Market |
IMF Box 1.5 Large Hedge Fund Failures |
IMF Box 1.5 Leverage and Cash Balances of Global Hedge Funds |
IMF Box 1.5 Typical “Haircut” or Initial Margin |
IMF Table 1.1. Estimates of Financial Sector Potential Writedowns |
IMF Table 1.2. Estimates of Potential Losses on Loans |
IMF Table 1.9. Comparison of Financial Sector Loss Estimates, October 2008 |
IMF Figure 1.1. Global Financial Stability Map |
IMF Figure 1.2. Heat Map- Developments in Systemic Asset Classes |
IMF Figure 1.3. Systemic Bank Default Risk |
IMF Figure 1.4. Asset Price Volatility and Funding and Market Liquidity |
IMF Figure 1.6. U.S. Loan Charge-Off Rates |
IMF Figure 1.7. U.S. Households’ Balance Sheets- Net Worth |
IMF Figure 1.8. U.S. Mortgage Delinquencies by Vintage Year |
IMF Figure 1.9. Prices of U.S. Mortgage-Related Securities |
IMF Figure 1.13. Comparison of Financial Crises |
IMF Figure 1.14. Financial Sector Losses |
IMF Figure 1.15. Ratio of Household Debt to Gross Disposable Income |
IMF Figure 1.23. European Banks’ Cross-Border Liabilities, end-2007 |
IMF Figure 1.26. Private Sector Credit Growth |
IMF Figure 1.28. Market Capitalization and Equity Book Values of Select Financial Institutions |
IMF Figure 1.29. Probability of Default Based on Equity Option Prices |
IMF Figure 1.31. Total Assets on Federal Reserve’s Balance Sheet |
IMF Figure 1.32. Potential U.S. Commitments and Mortgage Markets |
IMF Figure 1.33. Sovereign Credit Default Swap Spreads |
IMF Figure 1.34. Net Foreign Equity Investment in Emerging Economies |
IMF Figure 1.35. Emerging Market External and U.S. High-Grade Corporate Spreads |
IMF Figure 1.37. Credit Default Swap Spreads on Selected Emerging Market Banks, Jan. 2007— Early Oct. 2008 |
IMF Figure 1.38. Real Policy Rates- Latest Levels and Changes from end-2006 |
IMF Figure 1.41. Global Financial Stability Map- Monetary and Financial Conditions |
IMF Figure 1.42. Global Financial Stability Map- Risk Appetite |
IMF Figure 1.47. Commodity Futures Prices and Financial Positions |
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