Factsheet
IMF-FSB Early Warning Exercise
October 4, 2009
One of the lessons of the current crisis is the need for better analysis of the underlying risks to the global economy, including plausible worst case scenarios. In April 2009, officials called on the IMF to improve its analysis of the linkages between the financial sector and the real economy, as well as cross-border spillovers and sources of systemic risk. They also mandated the IMF and the Financial Stability Board (FSB) to collaborate in conducting Early Warning Exercises (EWE). The Exercise is designed to strengthen assessments of systemic, low probability-high impact risks to the global outlook, identify possible mitigating actions, and provide policymakers with policy options. It seeks to integrate macro-economic and prudential perspectives on systemic risks, drawing on a range of quantitative tools and widespread consultations.
Assessing systemic tail risks
The Exercise aims to assess the risks of unlikely, but plausible downside scenarios that would result in policy recommendations different from those generated by the baseline scenario presented in the World Economic Outlook (WEO) and Global Financial Stability Report (GFSR). Conceptually, the Exercise is similar to a stress test around the WEO/GFSR baseline. The EWE does not attempt to predict crises; rather, it identifies existing vulnerable aspects of the financial system, the economy, and government interventions; it also looks for possible triggers that could precipitate a crisis; recommends risk-mitigating actions; and, if a crisis is considered to be imminent, suggests contingency plans that can be put in place quickly.
Integration with IMF surveillance
The Exercise is part of the IMF’s efforts to strengthen surveillance, especially the analysis of economic, financial and fiscal risks as well as cross-border spillovers. The Exercise is conducted on a semi-annual basis, in close coordination with the World Economic Outlook (WEO) and Global Financial Stability Report (GFSR), the IMF’s flagship publications on global surveillance. The IMF’s regular country, cross-country, and global surveillance activities are used to follow up on EWE findings and policy recommendations.
Collaborating with the FSB
To be effective, the Exercise needs to provide an integrated perspective on risks and vulnerabilities. The Fund and the FSB cooperate closely on the EWE, with the Fund taking a lead on economic and macro-financial concerns and the FSB on financial system regulatory and supervisory issues, in line with their respective specializations. The FSB represents experts and practitioners from financial supervisory agencies and central banks from member countries, thus providing an important complement to the multilateral research and analysis at the IMF.
Analytical underpinnings
The Exercise draws on a broad range of analytical work as well as market information and expert opinions. These include a large empirical toolkit, market and country-specific insights gained through the IMF’s regular surveillance and crisis work, as well as consultations with market participants, academics, and country authorities.
Communicating the findings
Following discussions at the IMF Executive Board and the FSB Plenary, the EWE’s findings are presented to senior officials during the Spring and Annual Meetings. The findings contribute to the discussion of tail risks in Fund surveillance more generally.
Also see "Anticipating the Next Crisis," Finance and Development, September 2009, available at www.imf.org.