2012.04.18 - IMF_April_2012_text
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2012.04.18 - IMF_April_2012_text

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risky assets, an
active and sizable market, and low market correla-
tion, among others.7 Importantly, different investors
place a different emphasis on each of these criteria.
For example, investors with long-term liabilities—
such as pension funds and insurance companies—
place limited emphasis on market liquidity and thus
consider less liquid, longer maturity assets as safe.
If their potential payoffs are linked to inflation and
no inflation indexed securities are available, pension
funds emphasize the real capital preservation aspect
of safe assets. Global reserve managers consider all
of these aspects, in view of the high share of credit
instruments denominated in foreign currencies
and their need to maintain ready liquidity. Finally,
demand for some noncredit instruments, such as
gold, is largely driven by perceptions of its store of
value, with less regard to its market risk.

Changes in Safe Asset Perceptions

The global financial crisis was preceded by consid-
erable overrating, and hence mispricing, of safety. In
retrospect, high credit ratings were applied too often,
both for private and sovereign issuers, and they did
not sufficiently differentiate across assets with differ-
ent underlying qualities.

6See also Gaillard (2011).
7For a more detailed discussion of the safety criteria for assets

underlying liquidity risk management, see BCBS (2010a), pp.
5–6.

0

1

2

3

4

5

6

7

8

Mar-
07

Sep-
07

Mar-
08

Mar-
09

Sep-
08

Sep-
09

Mar-
10

Sep-
10

Mar-
11

Sep-
11

United States Canada Japan

United Kingdom Germany

France Spain Italy

Portugal Greece

Netherlands Austria Belgium

Source: Bloomberg L.P.
Note: Yields greater than 8 percent are deliberately excluded to clarify developments in

the low-yield range.

Figure 3.1. Ten-Year Government Bond Yields in Selected 
Advanced Economies
(In percent)

C H A P T E R 3 S A f e A S S e tS: f i n A n c i A l S yS t e m co r n e r S to n e?

 International Monetary Fund | April 2012 5

Ta
bl

e 3
.1

. H
ist

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ica

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ve

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w
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&P

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05

20
10

20
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20
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(E

nd
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Ja
nu

ar
y)

Au
st

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19

75
NR

AA
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+

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19
88

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NR

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AA

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da
19

49
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AA

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AA

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AA

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nm

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k

19
81

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+

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nl

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19
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NR
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Gr
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19

88
NR

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NR

NR
BB

B-
BB

B-
A-

A
BB

+
CC

CC

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19
89

NR
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NR

A
A

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B-
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Ire
la

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19

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NR
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ly

19
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pa

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19

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 N

R1
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19
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th

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la

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19
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No
rw

ay
19

58
 N

R1
AA

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A
AA

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AA

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AA

A
AA

A

Po
rtu

ga
l

19
88

NR
NR

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NR

A
AA

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AA
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A-
BB

B-
BB

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ai

n
19

88
NR

NR
NR

NR
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AA
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+
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ed

en
19

77
NR

NR
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+
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+
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A
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itz

er
la

nd
19

88
NR

NR
NR

NR
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A
AA

A
AA

A
AA

A
AA

A
AA

A
AA

A

Tu
rk

ey
19

92
NR

NR
NR

NR
NR

B+
B+

BB
-

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BB

BB

Un
ite

d
Ki

ng
do

m
19

78
NR

NR
AA

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AA

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Un
ite

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tm

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So
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 (2

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.

G LO B A L F I N A N C I A L S TA B I L I T Y R E P O RT

6 International Monetary Fund | April 2012

 • AAA-rated securitizations were found to embed
much higher default risks than warranted by their
high ratings. For example, as of August 2009,
63 percent of AAA-rated straight private-label
residential mortgage-backed securities issued from
2005 to 2007 had been downgraded, and
52 percent were downgraded to BB or lower.8

 • Five-year probabilities of default associated with
AAA-rated sovereign debt were about 0.1 percent in
2007, suggesting virtually no credit risk, but markets’
implied default rates had risen to more than 1 percent
by 2011 (Table 3.2). The large difference between the
implied default probabilities within each rating bucket
across the two periods suggests that the default prob-
abilities do not increase consistently with the decline
in ratings, reaffirming ratings should not be relied
upon as the sole quantitative measure of safety.9

8See IMF (2009a) for a detailed discussion of securitization and
credit ratings flaws.

9The implied volatility of default falls from 6.050 to 4.240
between the BBB and BB rating groups and rises again for the B
groupings, showing the large volatility across ratings.

 • Haircuts on the highest rated securitized instru-
ments in the U.S. private bilateral repo market
increased sharply from near-zero precrisis levels to
more than 30 percent for certain instruments (see
Gorton, 2009).

 • In the euro area, the years following the creation
of the monetary union were characterized by
almost perfect convergence of government bond
yields. As evidenced by greater risk differentiation
since 2010, this development was arguably not
justified on the basis of fiscal fundamentals of dif-
ferent euro area member states.
Empirical analyses confirm the mispricing of

risk prior to the crisis. Returns show a high degree
of homogeneity across assets of different quality
within each asset class (Figure 3.2). Asset classes were
grouped closely into asset pools with limited dif-
ferentiation in terms of safety. These pools included:
(1) U.S. debt (sovereign, agency, and corporate);
(2) Japanese debt (sovereign and corporate); (3)
European debt (sovereign and corporate), including
EU covered bonds and highly collateralized bonds
issued by German banks (Pfandbriefe); (4) emerg-
ing market sovereign debt; and (5) a more dispersed
set including equity market indices, commodities,
and currencies. The very tight clustering of euro
area sovereign debt shown in Figure 3.2 confirms
that, indeed, prior to the crisis, there was little
price differentiation across assets of varied quality.10
Moreover, sovereign debt instruments of advanced
economies were found to have highly homogeneous
exposures to aggregate risk factors.11 This suggests
that market prices did not embed information suffi-
cient to differentiate the underlying risks of coun-
tries with weaker fundamentals.12

After the crisis, the differentiation in the
perceived safety of various asset classes increased

10See Annex 3.1 for details.
11These factors include (1) the excess return on the global

market portfolio as a measure of perceived market risk of an asset
or a portfolio, (2) the VIX as a measure of market uncertainty,
(3) the term spread as a measure of rollover or reinvestment risk,
(4) a measure of market