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On-chain crypto-assets transaction volumes have grown rapidly, particularly during the COVID-19 pandemic. Crypto-assets activity appears to be a global phenomenon, although it still remains modest relative to gross domestic product for most countries. Panel regressions across more than 130 countries show that the variation in countries’ monthly crypto volumes is mostly driven by globally relevant factors such as real U.S. longer-term inflation expectations, U.S. real Treasury yields, and gold and crypto-asset prices, rather than recent country-level macroeconomic developments. Cross-sectional regressions offer tentative evidence that crypto activity is higher in countries with higher information and communications technology adoption and higher reliance on remittances. Taken together, the findings shed new light on the drivers behind crypto activity and offer support to the notions that crypto-assets are perceived as a risk asset, a potential macro hedge, and a potential tool to support cross-border transactions. However, the results come with caveats: a significant portion of the sample period includes extraordinarily loose global financial conditions; the crypto volume data have a short history, rely on important limiting assumptions, and do not represent all crypto activity; and crypto-assets represent a fast-evolving, increasingly diverse asset class and industry.

Global and domestic factors shape a country’s Fiscal and Monetary Policy Space (FMPS). In response to the COVID-19 crisis, many countries adopted unconventional measures to expand policy space, including monetary policies that helped to widen fiscal policy space and vice versa. This has been driven by the uniquely severe nature of the crisis, where unprecedented expansionary fiscal and monetary policies, especially in advanced economies, were deployed concurrently to shore up liquidity and provide economic stimulus. The policy response in advanced economies was a key enabler for subsequent Emerging Market and Developing Economy (EMDE) policies. Low-interest rates supported by expansive monetary policy reduce the cost of government borrowing and thus enlarge fiscal policy space (FPS). Asset purchase programs also contributed to a tightening of the monetary-fiscal link, as these purchases increased the demand for, and reduced the cost of, longer-dated government debt. Fiscal policy can also increase the efficacy of monetary policy, while also aiding monetary policy space (MPS). This is achieved by providing a backstop, which ultimately helps preserve the central bank’s credibility and independence. However, this tightened nexus may put fiscal and monetary policy on a collision course in a reflation scenario, triggering financial market volatility. The objective of this paper is to highlight for policy makers and development practitioners how differences in FMPS across countries impacted the COVID-19 crisis response, as well as the important enabling role that the financial sector played. Toward this objective, a simple conceptual framework is developed for the analysis of the determinants and interactions between FMPS and the financial sector. This framework is then used to develop heatmaps for the assessment of FMPS.

Reverse stress tests can be a useful tool to evaluate bank resilience to a credit shock, especially in environments where financial data are limited or opaque. This paper develops a simple and transparent country-level banking sector resilience indicator that focuses on tail risks, the Consolidated Distance to Breakpoint. Based on individual bank reverse stress test results, this novel metric quantifies the increase in nonperforming loans needed to deplete capital buffers for a subset of the most fragile banks that collectively represent at least 20 percent of total banking system assets, a level commonly associated with a systemic banking crisis. The paper calculates the Consolidated Distance to Breakpoint using public data for more than 1,500 banks in 59 emerging market and developing economies during the COVID-19 pandemic. The paper explores the value added of this metric in relation to widely used country-level macro-financial and soundness indicators. The results show that the association of the Consolidated Distance to Breakpoint with these macro-financial and financial soundness indicators is limited. This suggests that this new indicator encapsulates complementary information, possibly because aggregate measures may obscure challenges in individual banks. As such, the Consolidated Distance to Breakpoint metric could serve as a useful input to establish a basic understanding of a banking sector’s resilience.

This paper introduces a new global database and a policy classification framework that records the financial sector policy response to the COVID-19 pandemic across 154 jurisdictions. It documents that authorities around the world have taken a diverse array of measures to mitigate financial distress in markets and for borrowers, and to support the provision of critical financial services to the real economy. Measures that focus on the banking sector constitute the majority of policies taken and aim to take advantage of the flexibility embedded in the international standards. However, emerging markets and developing economies tend to rely more on prudential measures that go beyond this embedded flexibility compared with advanced economies, which may reduce bank balance sheet transparency and increase risks. Using Cox proportional hazards and Poisson regressions, the paper takes initial steps to analyze the determinants of policy makers’ responsiveness and activity in emerging markets and developing economies, respectively. The results indicate that policy makers have typically been significantly more responsive and have taken more policy measures in emerging markets and developing economies that are richer and more populous. Countries with higher private debt levels tend to respond earlier with banking sector and liquidity and funding measures. The spread of COVID-19, macro-financial fundamentals, and fiscal and containment policies appear to play a limited role. In a substantially smaller sample, the paper explores the role of banking characteristics and finds that emerging markets and developing economies with higher private credit levels and that have adopted Basel III features have taken fewer policy measures. Future work is necessary for better understanding the country determinants of the policy response as well as the effectiveness and potential unintended consequences of the measures.

This paper analyzes the main trends and patterns of nominal lending interest rates and lending-deposit interest rate spreads in emerging markets and developing economies. Using data from 140 emerging markets and developing economies, analysis shows that nominal lending rates and spreads declined between 2003 and 2017, with regional heterogeneity. In addition, it finds that less economically and financially developed countries tend to exhibit higher lending rates and spreads. These higher rates tend to be driven by higher spreads, not deposit interest rates. Also, illustrative regressions suggest that relevant correlates of nominal lending rates include inflation, public debt, and policy interest rate (macro-fiscal conditions); overhead costs, nonperforming loans, and non-interest income (banking characteristics); and credit bureau coverage and time to resolve insolvency (business environment). Finally, illustrative decompositions of the level and 10-year change between 2007 and 2017 of nominal lending rates find relative differences across regions. On the decline of nominal interest rates in that decade, rising public debt and nonperforming loans have pushed rates up, which was counterbalanced by a reduction in inflation, the policy interest rate, and overhead costs and a better business environment. Since the global financial crisis, a common global factor has increased in importance and has contributed to the downward trend in nominal lending rates.

Cross-border banking in emerging markets and developing economies has expanded across most World Bank regions and has become large relative to some home and host economies. This paper analyzes recent trends of bank activities of financial groups headquartered in 46 emerging markets and developing economies, as well as the ownership structure of 51 prominent financial groups from emerging markets and developing economies. The data suggest that cross-border groups in most regions have grown in size, geographical reach, range of activities, and group complexity. The increasing relevance and complexity of cross-border banking pose challenges for policy makers in home and host jurisdictions as well as for the groups themselves to maximize the benefits of international financial integration while mitigating the risks. This balance calls for stronger consolidated supervision, more regional coordination and harmonization, and better group-wide corporate governance and controls. However, key challenges include institutional capacity constraints and political factors.

This paper conducts a simple stress test to gauge the ability of listed nonfinancial corporates to withstand shocks to earnings and receivables. It targets two basic accounting ratios that capture a firm’s ability to cover its short-term liabilities and interest expenses. The sample consists of almost 17,000 firms in 73 countries and represents US$22.1 trillion in total assets and US$6.05 trillion in total debt. The findings show that, prior to the pandemic, almost 60 percent of the debt was associated with firms that already exhibited vulnerabilities according to at least one ratio. A 30-percent shock to earnings and receivables raises this to 88 percent, of which 29 percentage points is vulnerable in terms of both indicators, a 230-percent increase compared with before to the pandemic. Firms in East Asia and Pacific, the Middle East and North Africa, and South Asia appear to be the most exposed. Some countries with vulnerable corporate sectors also display weaknesses in insolvency frameworks, which may impede restructurings and write-downs and contribute to a surge in socially inefficient liquidations of cash-strapped but otherwise viable firms.

This paper examines the macro-financial implications of the COVID-19 pandemic. The pandemic represents a massive macro-economic demand and supply shock with significant adverse ramifications for global economic growth, employment, and poverty and demands an unprecedented response by national policy makers and international organizations. Prior to the outbreak of the pandemic, many economies already displayed increased macro-financial vulnerabilities in the form of high levels of debt of households, businesses, and the public sector, secular stagnation of economic growth, and an extended period of quantitative easing and low interest rates. The economic impact of the pandemic in the form of a global recession due to social distancing measures, losses of revenue and income for households, businesses, and the public sector, increased public spending to manage the health impacts, contain the pandemic, and protect vulnerable businesses, households, state-owned enterprises, and public entities adds significantly to pre-existing macro-financial vulnerabilities. Managing these vulnerabilities will be critical for a resilient recovery from the COVIC-19 pandemic, requiring a range of short- and medium term macro-financial policy measures.

This paper examines the interaction between macro-financial and climate-related risks. It brings together different strands of the literature on climate-related risks and how these relate to macro-financial management and risks. Physical impacts of climate change as well as the transition toward a resilient low-carbon economy pose significant challenges for macro-financial management, as they can damage the balance sheets of governments, households, firms, and financial institutions due to the adverse and possibly abrupt impacts on investment and economic growth, fiscal revenue and expenditure, debt sustainability, and the valuation of financial assets. In turn, macro-financial risks translate into weakened resilience to physical climate risks and constrained capacity for climate adaptation and mitigation efforts. The paper finds that many countries face the "double jeopardy" of simultaneous elevated climate-related and macro-financial risks. Reducing macro-financial risks in countries under double jeopardy is an important component of international efforts to tackle climate change to complement and support country-specific efforts.

This paper explores the sovereign-bank nexus in emerging markets and developing economies: the interconnectedness between the health of the sovereign and the banking system. Data from 140 emerging markets and developing economies suggest that this nexus is rising. First, banks have increased their exposure to their sovereigns in the past decade. Second, government debt has grown, and fiscal positions have deteriorated, raising the specter of sovereign stress. Third, banking system assets and bank credit to the private sector have steadily increased, which may restrict the sovereign's capacity to contain a banking crisis. Fourth, empirical evidence from 36 emerging markets and developing economies documents the existence of the nexus and suggests that it has increased recently. However, deeper country analysis is required for a better understanding of the sovereign-bank nexus, given country idiosyncrasies, including the structure of sovereign debt and the composition of the investor base, and data lags and opacities. To minimize the adverse effects of the sovereign-bank nexus, efforts should be focused on maintaining fiscal and bank buffers, strengthening surveillance and supervision of the banking system, improving transparency and data quality of bank-sovereign linkages, better addressing the regulatory treatment of the sovereign exposures and government support of the banking sector, and carefully evaluating the policy trade-offs in the sovereign-bank nexus.

In 2009, the G20 embarked on an ambitious financial regulatory reform agenda to address the fault lines that caused the global financial crisis. Although the global benefits are expected to outweigh the overall costs, these reforms could produce cross-border adverse spillover effects to individual emerging markets and developing economies that are not required to implement the reforms themselves, but are affected by their implementation elsewhere. To improve the evidence base on such potential adverse impacts, the World Bank has undertaken qualitative surveys of senior officials at regulatory agencies, local banks, and global banks that are active in seven emerging markets and developing economies. While important caveats prevent the formulation of definitive conclusions, the survey finds that banks and regulators routinely have different perspectives on the impacts. Most banks claim adverse effects on financial products, services, and markets; regulators broadly expect the effects to be positive over the longer term, but some recognize they may be negative during the transition phase. Regulators tend to agree that the (potential for) spillover impacts demand stronger home-host coordination, impose a higher supervisory burden, and require a stronger role for the international community to monitor and evaluate the impacts. The findings also emphasize the need for regulatory consistency within and between jurisdictions to ensure a level playing field. Taken together, more work remains to better understand the nature of these spillover effects, how they shape the provision of commercial financing to meet developmental objectives, and what action can be taken to mitigate any adverse impacts.