Global Financial Surveillance and the Quest
for Financial Stability:
Back to Basics?
Christopher Towe
Deputy Director
Monetary and Capital Markets
Department
Disclaimer: The views expressed in this presentation are those of
the author and should not be attributed to the IMF or its Board.
Outline


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Will try to complement other
speaker and panelists' remarks
Will focus principally on how
multilateral agencies—especially
the IMF—are responding to the
crisis
And will try to flag some issues that
we—the international community—
still need to work hard on
2
What are we doing?
 The IMF, in particular, is going “back to
basics” including by:
 redesigning our core mandate for
multilateral and bilateral surveillance
 Redesigning our instruments for providing
emergency liquidity
3
In our surveillance…
 Going “back to basics” means “ruthless
truth telling”
 The crisis drove home:
 Warnings were unclear
 Policy messages not prioritized
 Misunderstanding of transmission channels
 Policy impact was limited
4
So how are we responding?
 Policy messages are becoming more forthright
 And coordination between agencies being enhanced
 Takes advantage of gains from trade (IMF, FSB, BIS)
 Tools are being strengthened
 IMF/FSB Early Warning Exercise
 IMF/WB Financial Sector Assessment Program becoming
more risk and analytically focused
 Surveillance of systemically important institutions (not just
countries)
 Methodologies for both identifying systemically important
institutions
 Designing and promoting prudential norms to internalize
externalities
5
Our lending facilities are also going
“back to basics”…
 IMF lending facilities have been significantly
expanded
 Trying to keep pace with global capital markets
 Re-establishes IMF mandate as international
lender of last resort
 Adapted our conditionality framework
 New Flexible Credit Line relies on “ex ante”
conditionality and helps reduces moral hazard
 Other facilities have also been streamlined
 “Structural” performance criteria have been eliminated
6
What will be the challenges?
1.
2.
3.
4.
5.
6.
Candor v. effectiveness
Maintaining interest in tail events
Blurred accountability
Cross-border cooperation
Information gaps
Deciding on the acceptable level of
systemic risk
7
What will be the challenges?
1. Trade-off between public candor and
effectiveness
 Long worried that outspokenness
undermines authorities’ willingness to
engage and seek advice
 But this concern is (more often than not)
is outweighed by:


The greater impact that candid and public
messages can bring
And the critical need to demonstrate that the
Fund and others are impartial
8
What will be the challenges?
2. Maintaining policymakers' interest in low
probability tail events
By definition, these events are unlikely to
materialize
Undermines the credibility of the risk manager
Requires that stridency is consistent with
likelihood/potential severity of impact of risk
But, just as in a bank, the culture of
policymaking has to value risk management
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True both nationally and internationally
9
What will be the challenges?
3. The danger of blurred accountability
The IMF’s original mandate was as the preeminent global systemic risk regulator
But the number of actors has grown
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Large number of actors risks:
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E.g., BIS, FSB, OECD, standard-setters, G7, G20, etc.
Lack of clarity about institutional responsibility
Conflicting messages
Loss of attention by policy makers
Steps taken to clarify IMF/FSB roles recently
and close cooperation will be vital
10
What will be the challenges?
4. Encouraging/enforcing cross-border cooperation
 Lehman Brothers/Icelandic banks illustrates the need
 Absent action on this front, risk of retreat to financial autarky
and barriers to international transactions and markets
 Goals should include:
 Internationally harmonized bank resolution and bankruptcy
regimes
 Clarity with regard to burden sharing (deposit insurance and
beyond)
 Supervisory cooperation that extends beyond MOUs (and even
colleges)
 But at the global level, progress is likely to be slow
 Focus instead on ensuring consistent standards
 E.g., FSB principles for cross border crisis management
 And (perhaps) supporting coalitions of the willing
 I.e., encouraging regional approaches to cooperation
11
What will be the key challenges?
5. Filling information gaps
 Crisis illustrated massive gaps at the national and
multi-national levels
 On- and off-balance sheet exposures of banks
 Level of risk associated with CDOs and CDS
 Connectivity
 Given magnitude of cross-border flows and
spillover risks…
 Agencies such as BIS and IMF need to take a
leadership role in requiring internationally
consistent data
 E.g., strengthen BIS international bank flow data and IMF
“Financial Sector Indicators”
 But will require major effort and cooperation of
national authorities
12
What will be the challenges?
6. Deciding on the acceptable level of systemic
risk
 Too much stability is boring!
 Regulation is costs and could weigh excessively on
innovation and investment
 So decisions on higher capital, liquidity, etc.
charges need to be well calibrated
 And…
 Better to build formula based norms that are countercyclical, in order to keep average cost low
 But
 Do not rely too much on “rules”
 Regulators must be held accountable for exercising
“discretion” to tighten when vulnerabilities appear
 E.g., Pillar II
13
THE FINANCIAL SECTOR
ASSESSMENT PROGRAM
Christopher Towe
Deputy Director, Monetary and Capital
Markets Department
Global Financial Surveillance and the Quest
for Financial Stability:
Back to Basics?
Christopher Towe
Deputy Director, Monetary and Capital
Markets Department
Disclaimer: The views expressed in this presentation are those of
the author and should not be attributed to the IMF or its Board.