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IMFSurvey Magazine: Policy

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Closer View of Financial Links Can Help Avert Crises

IMF’s financial surveillance agenda includes deepening analysis of links between financial, real sectors (photo: Chris Hondros/Newscom)

FINANCIAL SURVEILLANCE

Closer View of Financial Links Can Help Avert Crises

IMF Survey online

April 19, 2012

  • Immediate priority is to restore stability, limit euro area spillovers
  • Medium-term goals include more systemic view of global surveillance
  • IMF is also supporting efforts to close data gaps laid bare by global crisis

The IMF is revamping its financial monitoring role to keep pace with changes in the international financial landscape since the onset of the global financial crisis.

The institution is drawing up a strategic plan for its financial sector monitoring—or financial surveillance—focusing on the links and transmission channels between systemic financial institutions, markets, and national economies.

The IMF has completed a stocktaking exercise and work agenda on financial surveillance as a first step to developing a fully fledged strategy, which will follow a period of consultation with other global stakeholders.

As the global financial crisis has underscored, understanding the links and transmission channels between systemic financial institutions, markets, and the macroeconomy, as well as cross-border linkages between national financial systems, is essential in helping countries avoid the worst outcomes.

For this reason, in recent years, the IMF has placed a high priority on financial sector work and macrofinancial linkages. The IMF’s 2011 review of the effectiveness of its economic analysis and policy advice called for further steps in this direction—in particular, to better integrate financial sector work into the IMF’s regular macroeconomic surveillance.

One of these steps was a strategic plan for financial surveillance. This is particularly timely given the profound changes in the international financial landscape and policy agenda since the crisis, and notably the emergence of important new global actors, such as the Group of 20 leading advanced and emerging market economies, and the Financial Stability Board.

First step toward a strategy

The work agenda takes stock of the extensive body of work that the IMF has already done, and defines both immediate and more medium-term priorities for future work.

The immediate priority is to address the continuing effects of the global financial crisis, restore stability in advanced economies, and limit spillovers from the euro area. At the same time the IMF is continuing to engage with all member countries and regions facing policy challenges, including in emerging market and low-income countries.

Medium-term priorities are geared to adopting a more systemic perspective to global surveillance and a more integrated approach to macrofinancial policies. This includes strengthening analysis of financial interconnections across economies, deepening analysis of the links between the financial and real sectors, monitoring vulnerabilities in bank and nonbank institutions, and policies aimed at financial sector development. Jointly with other stakeholders, the IMF is also supporting efforts to close the data gaps laid bare by the crisis and is improving its monitoring of the macroeconomic risks that could arise from global systemically important institutions and markets.

The next step is to develop a strategic plan that will provide greater detail of where the IMF’s priorities in this area are, especially in light of the growing role of the Financial Stability Board, current resource constraints, and the importance of the IMF focusing on areas of its core competency.