Strengthening Surveillance—Lessons from the Financial Crisis
March 31, 2014
Following the 2011 Triennial Surveillance Review, the IMF has undertaken major initiatives to strengthen surveillance to respond to a more globalized and interconnected world. These initiatives include revamping the legal framework for surveillance, deepening analysis of risks and financial systems, stepping up assessments of members’ external positions, and responding more promptly to concerns of the membership. This factsheet outlines recent actions in these areas.
The global crisis underlined the need for more analysis of linkages among economies, which the IMF now provides through a number of channels:
- Pilot "spillover" reports prepared in 2011, 2012, and 2013 assessed the impact of economic policies in the world’s five largest economies—China, the euro area, Japan, United Kingdom, and the United States—on partner economies. The 2013 report examined potential spillovers arising from the euro area crisis, U.S. fiscal and monetary policy, structural and fiscal reforms in Japan, and a possible slowdown in China.
- Cluster reports are regularly prepared on common issues facing member countries (e.g., capital flows, macroprudential policies, and unconventional monetary policies). Individual country monitoring, as well as multilateral surveillance reports such as the IMF’s World Economic Outlook (WEO), Global Financial Stability Report (GFSR) and various Regional Economic Outlook, have also deepened their analysis of interconnections and spillovers.
- The IMF also draws on its analysis of cross-border risks and spillovers in international fora such as the Group of Twenty (G-20) industrialized and emerging market economies and Financial Stability Board to promote policies that support sustainable global growth and financial stability.
In July 2012, the IMF adopted an Integrated Surveillance Decision (ISD) that provides the basis for more effective surveillance in a highly integrated world economy. The ISD allows for more systematic coverage of spillovers from members’ economic and financial policies in Article IV consultations and better integrates surveillance at the bilateral and multilateral levels. The new Decision helps the IMF to engage members at an earlier stage in the buildup of risks and vulnerabilities, and encourages them to be mindful of the impact of their policies on global stability.
The IMF is sharpening risk assessments so that potential problems can be spotted and appropriate policy responses developed more effectively. One innovation has been the incorporation of risk assessment matrices in many Article IV reports.
- Similarly, the IMF conducts a semiannual Early Warning Exercise (EWE) to identify and assess low probability, but possibly high impact risks to the global economy. It also conducts Vulnerabilities Exercises (VEs) to assess vulnerabilities and emerging risks in individual Advanced, Emerging Market, and Low-Income Countries.
- Article IV discussions with authorities are focusing more on risk assessments, drawing on the results of the EWE and VEs, the WEO, and the GFSR.
Given the potential for financial sector developments to rapidly ignite and propagate crises, effective financial sector surveillance is critical. The IMF now gives more emphasis to financial sector issues in its multilateral and country surveillance, as outlined in its Financial Surveillance Strategy.
- The IMF is enhancing its financial sector expertise: It has assigned financial sector experts to most systemically important and vulnerable economies, and intensified internal training and developed analytical tools.
- Another major continuing initiative is the Financial Sector Assessment Program. Under this program, comprehensive financial stability assessments are conducted every five years for economies with systemically important financial sectors. The findings are followed up in discussions with policy makers in the context of Article IV consultations.
- The IMF is a member of the Financial Stability Board, which enhances collaboration on macro-financial and supervisory issues.
Assessing external stability and external imbalances remains a core component of the IMF’s mandate. External imbalances can have a significant impact on the operation of the global economy.
- In July 2013, the IMF published the second Pilot External Sector Report covering the world’s largest economies. The Report contains a multilaterally consistent assessment of members’ external balances, currencies, and policies. The analysis broadens external sector surveillance by more systematically assessing, in addition to exchange rates, current accounts, balance sheet positions, reserves adequacy, capital flows, and capital flow measures.
- In addition, in 2012 the IMF introduced a new pilot External Balance Assessment, which builds on and improves previous methods (the IMF's Consultative Group on Exchange Rates).
For its advice to have the most impact, the IMF seeks to provide strong economic analysis, candid and evenhanded advice that is tailored to country circumstances, and clear messages.
- The IMF’s major findings and policy messages are published twice a year in the Managing Director’s Global Policy Agenda. This report highlights the top-line messages from the IMF’s multilateral surveillance products (e.g., the WEO, GFSR, Fiscal Monitor, Pilot ESR and Spillover Reports) and sets the agenda for the IMF’s key priorities.
- Other initiatives that are expected to improve surveillance are coverage of relevant social issues (such as unemployment and inequality), including a recent comprehensive report on jobs and growth; early consultations with country authorities on relevant policy questions prior to Article IV consultations; and systematic follow-up on past advice.