Asia's voice in post-crisis reforms
Call for Coordinated Approach to Global Financial Reforms
By Kenneth Kang
IMF Asia and Pacific Department
May 19, 2010
- Asia's participation needed in reform debate
- Coordinated approach needed on financial safety nets
- IMF steps up engagement with Asia
International cooperation to reform the global financial order is needed to ensure future, stable growth, says a top IMF official, who also highlighted the role of Asia in shaping the debate.
At a seminar organized by the Fund in the Japanese capital, Tokyo, the First Deputy Managing Director of the IMF, John Lipsky, said that the ultimate aim of reform was to build a financial system that was stronger, more resilient, and better able to promote growth and prosperity for all.
“Effective cooperation will not always require full uniformity, but broad agreement on principles, which the IMF can help galvanize … In the absence of such a dialogue, unilateral actions could be undermined by regulatory arbitrage and would do little to safeguard the stability of the global system as a whole,” he said.
Opportunity for Asia to inform the debate
The seminar recognized that Asia has a vital role to play in helping to shape post-crisis financial reforms. Lipsky noted the resilience of the region’s banking system during the current crisis was likely to impact that debate but he cautioned against complacency, especially in light of the likely strengthening of capital flows in coming years.
Lipsky also pointed to the region’s growing role in institutions like the IMF, saying it provided Asia with a platform to help deliver the reforms needed to sustain future growth.
“Just as Asia is leading the world recovery, its voice in these debates will be vital. Perhaps more than at any time in modern history, the region as a whole has the ability to influence global policymaking. Moreover, it is in its own interest to do so,” he said.
“As it powers the global economy in coming decades, the region will need a resilient financial system that can support growth through sound intermediation, efficient capital allocation, and facilitating innovation,” he added.
Managing unintended consequences
In a later address to the seminar, Arthur Yuen, the Deputy Chief Executive of the Hong Kong Monetary Authority acknowledged the need for global financial regulatory reforms, but warned against some potential unintended consequences for the region.
His words were also echoed by Japan’s Vice Minister for Finance, Rintaro Tamaki, who agreed Asian policymakers needed to be vigilant about the effects of changes in the global financial landscape.
In general, banking systems in Asia have remained resilient throughout the crisis. As a result, there is debate among some policymakers within Asia about the wisdom of adopting changes designed to address problems originating from outside the region.
Yuen voiced concern that more stringent regulatory requirements, and a desire to reduce the possibility of financial contagion, could lead to a reduction of the exposure of Asian banking systems to the rest of the world.
“This could dampen cross-border banking flows and the implications have to be carefully assessed,” he suggested.
Responding to Asian concerns
Lipsky acknowledged that “moving too quickly on reforms could stifle still-fragile economic recoveries or that a rigid approach would unfairly burden banks with less risky business models.” He said these concerns were being heard by officials, who were looking to phase in reforms based on individual country circumstances.
“The relevant officials are cognizant that new regulations and charges should be incentive compatible and better differentiated, including by linking financial taxes and capital buffers to the riskiness of bank balance sheets. Such refinements demonstrate the benefits that come from all countries carefully considering and contributing to the discourse on reform,” he said.
At the same time, Lipsky emphasized that improved regulations would need to be complemented by a strong supervisory regime, including building up risk assessment capabilities and incorporating a macroprudential approach.
A stronger global financial safety net
As well as highlighting the need for global financial reforms, the recent crisis has revealed the necessity of improved financial safety nets. Lipsky suggested the Fund could play a critical role as part of a “multilayered global financial safety net” together with other financing vehicles such as central bank swap lines and regional financing arrangements.
“Central banks have a natural advantage in alleviating short-term liquidity pressures … Meanwhile, by pooling risks, regional financing arrangements help address idiosyncratic shocks that hit an individual economy,” he said. Lipsky suggested that given its global reach, large resources, and ability to catalyze private lending, the IMF could, for its part, provide countercyclical lending and a further layer of insurance.
“At the same time, putting in place a comprehensive global financial safety net would free up the region’s vast savings to be invested and reallocated within Asia from mature economies to less developed ones with rapid growth opportunities,” he added.
IMF steps up engagement with Asia
IMF staff have participated in the ASEAN +3 process with the Association of Southeast Asian Nations (ASEAN) for the last four years, and Tamaki welcomed the Fund’s contribution to the surveillance process.
“Their objective views of the regional outlook, as well as presentation of global risks, have enriched the discussion at a global level,” he said.
Tamaki also saw scope for the IMF to contribute further to crisis prevention and resolution in the region, including through the soon-to-be-established ASEAN +3 Macroeconomic Research Office (AMRO) in Singapore—East Asia's first ever economic and financial surveillance office, which will run the $120 billion multilateral currency swap scheme known as the Chiang Mai Initiative.
Tamaki said AMRO would “contribute to the early detection of risks, implementation of remedial actions, and effective decision making” of the Chiang Mai Initiative.
In his address Lipsky also raised the possibility of collaborating with regional reserve pools including the Chiang Mai Initiative. “We certainly do not see such funds as ‘competitors’. Indeed, they can be a positive and stabilizing force in international financing,” he suggested.
The IMF and Asia
Lipsky said that for the Fund to play an effective role in Asia, it had to have the confidence and trust of its member countries. He suggested one way to do this was for the Fund to collaborate with regional groupings such as ASEAN.
Another critical priority was to address concerns about the IMF’s governance. He said the IMF had already taken a number of important steps, including the quota reforms agreed in 2008 that would give under-represented countries in Asia nearly 3 additional percentage points in quota share, raising the region’s overall IMF quota to about 19 percent.
“Looking ahead, Asia is expected to gain even more under the agreement reached at the Pittsburgh G-20 Summit last September to shift at least a further 5 percentage points of quota from over-represented to under-represented countries by early 2011,” Lipsky said.