Ben Cohen: “What we are trying to do is bring the strengths of these two organizations together in identifying risks and vulnerabilities.” (IMF photo)
Statistics Conference
After a conference organized by the IMF and the FSB in early July on the financial crisis and information gaps, IMF Survey online spoke with Ben Cohen of the FSB about his organization’s new role and how both institutions are working together to identify risks and vulnerabilities.
IMF Survey online: The FSB replaced the Financial Stability Forum (FSF) this past April. What were the shortcomings of the Financial Stability Forum? And what will be new FSB be doing differently?
Cohen: The FSF was set up in 1999 in the aftermath of the Asian, Russian, and Brazilian crises. There was a realization that there needed to be more dialogue and more joint action among treasuries, central banks, and regulators from the major economies. It functioned pretty well through the years and it looked at a number of different issues.
After this current crisis broke, the FSF did a lot of work on developing recommendations and responses to strengthen the financial system and draw lessons from the crisis. It also came up with ways to strengthen different aspects of financial regulation and other financial policies.
Over the past year, however, there was a realization that for the FSF to be effective, it would need a larger membership and a stronger mandate. So, in April the FSF was expanded to include the remaining members of the Group of Twenty. That brought in the large emerging economies. The name of the FSF was also changed to the Financial Stability Board to move the grouping from being a consultative body to more of a coordinating body.
IMF Survey online: The global financial crisis has uncovered major information gaps. From the user’s perspective, which are the most pressing data gaps arising from the crisis?
Cohen: We had a very productive conference because it brought together the people who are analyzing financial stability and financial stability risks at various central banks, treasuries, and other agencies around the world with the people who are in charge of developing statistics and coordinating the international production of statistics. So, I think both sides found it very useful.
The main data gaps that users pointed to were in the so-called shadow banking system. We know a lot about banks and about other regulated institutions, but we don’t know enough about special investment vehicles, conduits, securitization markets and instruments, and about all of the financial intermediation that happens outside the traditional banking system. There was agreement that there has to be more coordination in terms of definitions and concepts that are used in different countries to make the data comparable across countries. This is something that the IMF and other statistical agencies have worked on for a number of years, but the emphasis has been mostly on macroeconomic data. It’s now clear that the emphasis also has to be placed on financial market data and housing markets.
Finally, there was a realization that broad aggregate numbers like aggregate leverage or credit growth could be useful, but that it’s more helpful to have what we call granular data—data on individual institutions, sectors, and on the ranges of these different ratios across sectors. These are the types of information that are helpful when people try to analyze the risks that are in the system.
IMF Survey online: But international agencies like the IMF and the FSB have no enforcement powers over private entities and new financial instruments such as derivatives and hedge funds. How effective can you really be?
Cohen: A key aspect of the FSB is that it brings together the right people around the table. So, even though the FSB itself does not have any enforcement powers, its members do. When its members commit to taking some kind of action in a coordinated way, they can go back to their home countries and actually do what they have committed to do.
The FSB is most effective when there is consensus as to what needs to be done. When there are issues where there are differences of opinion in the international community, the FSB provides a forum for discussing those differences and resolving them. But once there is consensus as to what needs to be done, the FSB can be very effective because it allows the members to know what each one is doing and to take actions with an understanding of what else is going on in the system.
IMF Survey online: Are the IMF and the FSB planning to conduct an early warning exercise? In your view, can early warning systems prevent crises such as the current one?
Cohen: The way we look at it is that the dry-run early warning exercise took place this past April at the IMFC [International Monetary and Financial Committee, which sets the IMF’s political direction and overall policy priorities] meetings, where the Chairman of the FSB and the Managing Director and Deputy Managing Director of the IMF presented their views as to what are the key risks facing the financial system. So, I think that we are past the dry-run phase, but it’s still a work in progress.
What we’re trying to do is bring the strengths of these two organizations together in identifying risks and vulnerabilities, and also identify policies that are needed to address them. The IMF obviously has a very strong analytical function and is able to look very closely at issues and bring a lot of tools and data to bear. The FSB brings to the table the fact that its members are analyzing these questions in their economies and areas of interest and it can pool the analysis being done across all of these different member institutions and come up with a sense of what are the key issues and risks that these national and international authorities are dealing with.
But those involved in the process are realistic as to what such an exercise can accomplish. Obviously, we can’t predict a crisis. A crisis by definition is what happens when the unpredictable happens. But what an exercise like this can do is raise warnings as to areas where problems might emerge—either in the near future or in the medium term—and point authorities in the right direction in terms of actions to address these potential problems.
Shocks can happen anywhere at any time and nobody is really sure where they’re going to come from, but the key is to build resilience into the system and to make sure that the key institutions and markets that help the financial system operate are able to function even in the face of shocks. Those are the issues that we are hoping to cover in the early warning exercise.
This interview is an edited version of the audio file. As such, it does not constitute a transcript of the podcast interview. For exact quotes, please listen to the audio file.
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