The document discusses recent developments in global financial markets. It finds that while supportive monetary and fiscal policies are strengthening recovery prospects, growing vulnerabilities could impact growth. Accommodative policies have led to rising asset prices, debt, and leverage, increasing financial stability risks. Vulnerabilities in corporate debt markets and real estate sectors exposed to weak firms pose challenges. Rising emerging market debt also increases refinancing risks. The growth of alternative finance like crypto assets raises concerns of market corrections that could have broader implications.

1. GLOBAL FINANCIAL MARKETS
Supportive market conditions, yet growing
vulnerabilities could impact recovery
Committee on Financial Markets, April 2021
OECD Directorate for Financial and Enterprise Affairs

2. Committee on Financial Markets
• The Committee on Financial Markets’ overarching objective is to promote efficient,
open, stable and sound financial systems, based on high levels of transparency,
confidence, and integrity, so as to contribute to sustainable and inclusive growth.
• The Committee’s core method to support this objective is through in-depth and
proactive surveillance of financial developments and analysis of their impact on
economic growth and stability.
• This presentation reflects the Committee’s current surveillance of global financial
markets and risk transmission mechanisms related to the economic and financial
consequences of Covid-19.
2

3. 3
Overview
Financial market developments amid
COVID-19 vaccines roll-out and
accommodative policies
Assessment of market dynamics and risk
implications
The rising importance of alternative finance
markets and risk implications
1
2
3

4. 1. KEY RECENT FINANCIAL MARKET
DEVELOPMENTS
4

5. Unprecedented monetary and fiscal stimulus strengthens recovery
prospects while increasing inflation expectations from very low levels
5
• Additional fiscal support in some countries has boosted expectations of a global recovery and lifted
inflation expectations, benefiting valuations in riskier asset classes, yet contributing to vulnerabilities
and growing risks, which raises resilience concerns.
Note: This figure shows total balance sheet of major central banks expressed as a share of GDP.
Source: Refinitiv, OECD calculations.
Accommodative monetary policy of major central
banks in 2020
Modest rise in inflation expectations despite
unprecedented stimulus
Note: This figure shows 5-year US breakeven inflation rate along with 5-year
inflation linked swap rates for the Euro Area and the United Kingdom.
Source: Refinitiv, OECD calculations.
0
0.5
1
1.5
2
2.5
3
3.5
4
0.5
1
1.5
2
2.5
3
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21
%
%
United States Euro Area United Kingdom (RHS)
0
20
40
60
80
100
120
140
Bank of Japan European Central Bank Federal Reserve Bank of England
% of GDP
December 2019 April 2021

6. Expectations of improving growth and rising inflation contribute to
rising long-term sovereign yields in major advanced markets
6
• Increase in 10-year sovereign bond yields to
pre-pandemic levels, following strong fiscal
support and accelerated vaccine deployment.
• Negative inflation-linked sovereign bond yields
are fueling investors’ hunt for yield that
encourage exposures to lower-rated sovereigns
or firms, equity and alternative assets.
Source: Refinitiv.
Source: Refinitiv.
Flattening nominal sovereign bond yields at pre-
pandemic levels in major markets
Real yields remain negative while increasing
slightly from historical lows
-1
-0.5
0
0.5
1
1.5
2
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21
%
United States Euro Area United Kingdom Japan
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21
%
United States
Euro Area
ICE BofA World Inflation-Linked Sovereign Bond Index

7. The recent rise in prices of oil and industrial metals amid signs of
economic recovery is contributing to headline inflation
7
• Rebound in oil prices to pre-pandemic levels
reflects a boost in demand from improved
industrial activity in the US and China, as well
as OPEC+ supply cuts.
• The surge in oil prices has restored investors’
optimism and assisted low-rated US shale
issuers in increasing their leverage in 2021.
• Rise in commodity prices lifted by temporary
supply disruptions, recovery in demand from
China and depreciation of the US dollar.
• Outlook heavily dependent on progress in
containing the COVID-19 pandemic, policy
support measures in advanced economies and
production decisions in major commodity
producers.
Note: Commodity total return indices are derived from S&P GSCI global indices.
Source: Refinitiv, OECD calculations.
Source: Refinitiv, OECD calculations.
Crude oil prices recovered in record time Global recovery and supply shortfalls boosted
metal and agricultural prices
0
10
20
30
40
50
60
70
80
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21
US Dollar per
barrel
Crude oil brent WTI crude oil
70
90
110
130
150
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21
Price index
(100=Jan-2020)
Industrial metals Agriculture

8. Accommodative policies and improving earnings outlooks
contribute to elevated equity market valuations
• Elevated equity valuations raise concerns as to
the sustainability of the market rebound, which
will depend on the evolution of the pandemic,
the speed of vaccine deployment globally and
the continuation of policy support.
8
• Improving economic prospects following
additional US fiscal stimulus have boosted
earnings expectations for cyclical-type stocks.
• Uncertainty on long-term prospects due to
post-pandemic structural changes.
Elevated price-to-earnings ratios in both
advanced and emerging markets
Renewed growth in cyclical stocks
Note: Price-to-earnings ratios are derived from Refinitiv equity benchmarks for advanced
versus emerging markets.
Source: Refinitiv, OECD calculations.
Note: : Percent change in 12-month forward earnings per share are derived from Refinitiv
global sectoral equity benchmarks, calculated from November 6th, 2020 to April 15th, 2021.
Source: Refinitiv, OECD calculations.
0
10
20
30
40
50
60
70
%
9
12
15
18
21
24
27
30
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21
Ratio
Advanced markets Emerging markets
Average P/E ratio 1995-2020: advanced markets Average P/E ratio 1995-2020: emerging markets

9. Accommodative credit market conditions for lower-rated issuers
and CMBS markets supported by improved economic prospects
9
• Improved economic prospects have supported
credit market conditions in affected CMBS
markets that remain vulnerable to corporate
rating downgrades and defaults.
Source: Refinitiv, OECD calculations.
Note: Option-adjusted spreads are derived from ICE BofAML bond indices.
Source: Refinitiv, OECD calculations.
Decline in speculative-grade corporate bond
spreads
Improvements in US MBS credit market
conditions supported a recovery in ETF
performance
• CCC spread stands below pre-pandemic levels
driven by investors’ hunt for yield while BB
spreads remain wider reflecting concerns over
possible rating downgrades and the inability of
certain institutional investors to hold non-IG
grade debt.
0
200
400
600
800
1000
1200
1400
1600
1800
2000
100
400
700
1000
1300
Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21
Basis points
Basis points
US BB US B
Euro High-Yield EMEs corporate High-Yield
US CCC (RHS)
0
500
1000
1500
2000
2500
3000
30
40
50
60
70
80
90
100
110
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21
Basis points
Price index (100=Jan-2020)
Vanguard real estate ETF iShares mortgage real estate ETF
US MBS Agency spread (RHS) US non-agency CMBS spread (RHS)

10. Rising bank equity valuations boosted by additional US fiscal
stimulus combined with rising global investment banking fees
10
• Substantial improvements in US bank equity
valuations compared to other regions, driven
by additional fiscal stimulus that is expected to
improve economic conditions.
• Record high levels of equity and debt issuance
in 2020 has boosted the rise in global
investment banking fees.
Source: Refinitiv Deals Intelligence database, OECD calculations.
Note: Price-to-book value ratios are calculated using Refinitiv bank equity regional benchmarks.
Source: Refinitiv, OECD calculations.
Sharp rise in US banks’ price-to-book value
ratio compared to other major banking systems
A substantial increase of 18% in global
investment banking fees in 2020
0
20
40
60
80
100
120
140
USD, bn
0.4
0.6
0.8
1
1.2
1.4
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21
Ratio
United States Europe Asia Pacific China

11. 2. ASSESSMENT OF MARKET
DYNAMICS AND RISK IMPLICATIONS
11

12. Surge in global debt and leverage raises debt sustainability
concerns
12
• Support measures in response to the pandemic
is coupled with a sharp decline in government
and corporate revenues, which has driven non-
financial sector debt to over 280% of GDP in
2020, with major implications for debt
sustainability.
• Despite slower growth of household debt, a
potentially slower recovery combined with
corrections in housing prices could complicate
debt servicing and trigger additional debt
delinquencies or defaults.
Note: These charts show total credit by economic sectors excluding the financial sector using a sample of 43 advanced and emerging market economies.
Data are expressed as a share of GDP. 2020 data are as of end of third quarter.
Source: BIS credit to the non-financial sector database, IMF World Economic Outlook database, OECD calculations.
Increase in global debt stock to new highs in 2020
0
20
40
60
80
100
120
140
2006 2008 2010 2012 2014 2016 2018 2020*
% of GDP
Advanced economies
0
20
40
60
80
100
120
140
2006 2008 2010 2012 2014 2016 2018 2020*
% of GDP
Emerging market economies
Households Non-financial corporations Government sector

13. Given increases in government debt, estimated funding needs
raises concerns for debt sustainability and refinancing risk
13
• Borrowing costs on new issuance have
substantially decreased which has made the
use of expansionary fiscal policies less costly
and more attractive in the fight against the
COVID-19 pandemic.
• Shortened maturities combined with continued
large new borrowing needs contribute to
higher rollover ratios and refinancing risks.
Source: OECD Sovereign Borrowing Outlook 2021,in chapter 1 and up-coming
chapter 3.
Redemptions of central government
marketable debt in OECD versus emerging
economies
Increase in the share of low-yield fixed-rate
bonds in total issuance
0
10
20
30
40
50
60
70
80
90
100
2019 2020
%
Negative % 0 to <1% 1 to <2% 2%+
Source: OECD Sovereign Borrowing Outlook 2021,in chapter 1 and up-coming
chapter 3.
0
5
10
15
20
25
30
35
40
45
50
OECD Emerging economies
% of total debt
stock
2021 2022 2023

14. Rising corporate debt vulnerabilities could undermine financial
resilience and economic recovery
14
• A slow recovery or an early withdrawal of
supportive government measures could trigger
additional debt delinquencies or defaults, with
adverse pressures on a range of intermediaries.
• Sustained reliance on supportive government
measures coupled with very low interest rates
could encourage additional debt accumulation
by the most indebted corporates.
Note: Data shown in this figure are as of December, 25th 2020.
Source: S&P Global Ratings.
Increasing share of “at risk” and “distressed”
firms in total listed corporates
Elevated effective and potential corporate
bond rating downgrades
Note: “At risk” and “distressed” firms correspond to all firms with an interest
coverage ratio between two and one and less than one respectively for three
consecutive years.
Source: Refinitiv, OECD calculations.
0
2
4
6
8
10
12
14
16
18
2004 2006 2008 2010 2012 2014 2016 2018 2020
% of firms with
ICR<2
Advanced Emerging

15. Vulnerable real estate segments exposed to the corporate sector
and negative implications for CMBS markets
15
• Outlook for procyclical commercial real estate
sector tied to economic recovery and structural
changes (i.e. remote working, e-commerce)
that may result in a permanent decline in
demand for space with potentially severe
impacts on property values.
• CMBS markets prone to potential spillovers
and rating downgrades with negative
implications for a wide range of intermediaries
exposed to these markets.
Source: Trepp.
Source: Refinitiv, SIFMA, AFME, OECD calculations.
Sharp decline in CMBS issuance in 2020
Elevated delinquency rates in affected sectors
while declining from peaks reached in 2020
-20
-15
-10
-5
0
5
10
15
20
25
30
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21
%
%
Industrial Multifamily Office
Lodging (RHS) Retail (RHS)
0
20
40
60
80
100
120
2008 2010 2012 2014 2016 2018 2020
USD, bn
US Non-agency
0
2
4
6
8
10
12
14
2010 2012 2014 2016 2018 2020
USD, bn
Europe (incl.the UK)

16. While market conditions have improved prospects in many banking
systems, rising NPLs could reduce banks’ capacity to intermediate
16
• Potential rise in bank non-performing,
particularly in countries where banks entered
the pandemic with weaker asset quality, with
negative implications for banks’ resilience
and capacities to intermediate credit.
• High non-performing loan ratios combined
with continued compression of net interest
margins may increase banks' challenges in
generating returns above the cost of equity.
Note: This figure shows average non-performing loan ratios across banks within a given
region. The sample includes 798 commercial banks.
Source: Refinitiv, OECD calculations.
Increase in non-performing loans in 2020,
by region
Deterioration in bank performance metrics
(excluding US banks)
0
1
2
3
4
5
6
7
8
Asia Pacific North America Europe Emerging market
economies
%
With monetary and fiscal support Without monetary and fiscal support
Historical maximum NPL ratio 2019
6
8
10
12
14
16
18
2004 2006 2008 2010 2012 2014 2016 2018 2020
% ROE COE
Note: ROE and COE stand for return on equity and cost of equity respectively, and
are calculated using Refinitiv global bank equity benchmark that excludes US banks.
Source: Refinitiv, OECD calculations.

17. Increasing debt and deficits make EMEs more vulnerable to sharp
changes in risk appetite and global portfolio flows
• Decline in portfolio flows to EMEs due to rising
US yields, yet heterogeneity across countries
related to pre-crisis macroeconomic
vulnerabilities and the severity of the
pandemic and associated health measures.
17
• A reversal of capital flows, higher currency
volatility and downward pressure on
sovereign credit ratings, which in turn
combined with high debt and deficits, may
amplify refinancing risk.
Source: Refinitiv, OECD calculations.
Source: The Institute of International Finance (Capital flows to Emerging Markets
report, April 2021).
Declining capital flows to emerging markets Increase in 10-year nominal sovereign bond
yields in 2021
-11
-6
-1
4
9
14
19
5
6
7
8
9
10
11
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21
%
%
Russia Brazil India
South Africa Mexico Turkey (RHS)

18. 3. THE RISING IMPORTANCE OF
ALTERNATIVE FINANCE MARKETS
AND RISK IMPLICATIONS
18

19. Elevated crypto-asset market valuations raises concerns of market
corrections and spillovers
19
• The surge in the total value of crypto-assets
locked in decentralised finance is boosting
investors’ demand and thus contributes to lift
prices of crypto-assets.
Note: Total value locked in DeFi is calculated by taking these balances and multiplying
them by their price in USD.
Source: Defipulse.com, as of 14 April 2021.
Note: Other cryptocurrencies include 3984 available in the coinmarketcap database.
Source: Coinmarketcap, OECD calculations.
Increase in crypto-assets market capitalisation
since late 2020
Surge in total value of crypto-assets locked in
decentralised finance since 2020
• The rapid rise in crypto-asset prices that have
proved to be volatile in the past, is raising
concerns of a market correction and spillovers.
0
10
20
30
40
50
60
Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21
USD, bn
0
500
1000
1500
2000
Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Dec-18 Apr-19 Aug-19 Dec-19 Apr-20 Aug-20 Dec-20 Apr-21
USD, bn
Bitcoin Ethereum Other cryptocurrencies

20. Signs of strong risk appetite and downside risks in private equity
and SPAC markets
• Private equity groups benefit from low
borrowing costs to fund acquisitions or
dividends through their already highly
leveraged portfolio companies.
• Rising deal levels and leverage raise concerns
for leveraged loans and CLO markets.
20
• Sharply growing activity in SPACs raises
concerns about investor protection, lack of
transparency around incentives, and the
frenzied valuations attributed to young
companies.
Note: This figure shows private equity buyout and venture capital deals value in the United
States and Europe.
Source: Refinitiv Deals Intelligence database, OECD calculations.
Note: SPAC issuance data in 2021 are as of end-April 2021.
Source: SPAC data, OECD calculations.
Private equity markets have been resilient
following the COVID-19 crisis
Unprecedented surge in SPAC issuance in
2020-2021
0
100
200
300
400
500
600
700
800
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
USD, bn
0
5
10
15
20
25
30
0
20
40
60
80
100
2016 2017 2018 2019 2020 2021*
% of global IPO
proceeds
USD, bn
SPAC gross proceeds Share of SPAC gross proceeds in global IPOs

21. Exuberant market conditions also contributes to growth of
sustainable finance markets
21
• Greater demand for environmentally
sustainable investments has led to a
substantial increase in global green bond
issuance.
• ESG investment has grown in the past decade,
supported by commitments to climate
objectives, and US stimulus could further boost
climate-resilient investment.
• Lack of consistency of sustainability-labelled
products’ undermine market integrity.
Source: Source: GSIA, Bloomberg Intelligence.
Note: This figure shows total global green issuance including bonds and loans.
Source: Bloomberg Finance L.P., Deutsche Bank Research.
Increase in ESG global assets under
management
The rising importance of green debt markets
0
50
100
150
200
250
300
350
400
450
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
USD, bn
0
5
10
15
20
25
30
35
40
2014 2016 2018 2020
USD, tn

22. Accommodative market conditions supported by unprecedented
policy support, yet challenges remain for financial resilience
22
• The gradual deployment of COVID-19 vaccines and additional fiscal
support in some countries have lifted inflation expectations,
contributing to a rise in long-term sovereign bond yields.
• Risky asset classes exhibit heightened valuations; while credit risk
premia remain compressed despite credit quality deterioration of fallen
angels.
• Governments should allow for more pre-insolvency flexibility and
provide incentives for private sector equity financing and co-
participation in public support schemes using debt-equity swaps.
• NPL resolution schemes would help strengthen bank resilience, credit
intermediation capacities and economic recovery.
• EMEs higher deficits and debt make them more vulnerable to sharp
changes in risk appetite and global portfolio flows.
Crisis response
lifted growth
and inflation
expectations
Elevated risky
asset valuations
EME risks are
rising
Deteriorating
bank asset
quality
Solvency
concerns for
corporates

23. .
Supporting financial markets during the pandemic
Financial markets policy guidance on the OECD COVID-19 Hub:
 Financial markets – financial fragilities and policy recommendations to address financing
needs
 Public debt management – increased borrowing needs and market volatility
 Financial consumer protection – easing the burden on households
 Supporting financial resilience of citizens – financial awareness and literacy
Link to Recent OECD publications:
 OECD Economic Outlook, Interim Report March 2021
 Sovereign Borrowing Outlook 2021
 The COVID-19 crisis and banking system resilience
 Decentralised Finance (‘DeFi’) - forthcoming
 Financial Markets and Climate Transition - forthcoming
 COVID-19 Government Financing Support Programmes for Businesses

24. FOR MORE INFORMATION VISIT
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