Bank customers in Copenhagen: The IMF is encouraging strong financial sector coordination across the Nordic region (photo: Francis Dean/Corbis)
NORDIC REGIONAL REPORT
This new approach—which analyzes clusters of economies that have strong interlinkages or common concerns—complements the institution’s current approach to surveillance, which up until now has consisted of bilateral surveillance (the on-the-ground appraisal of individual member countries) and multilateral surveillance (the high-altitude oversight of the world economy). The pilot project attempts to fill a gap between these two types of monitoring.
Called “cluster consultations,” the analyses look at logical groupings of economies and consider the policies of these countries in an integrated way. The reports aim to highlight shared concerns and policy lessons to policymakers and, where relevant, how shocks propagate and how countries can potentially benefit from policy coordination. In this way, the reports help inform what is needed at the national level.
In the following interview, Helge Berger and Thomas Dorsey of the IMF’s European Department discuss the Nordic Regional Report, the first cluster report to be issued as part of the pilot project. Topics for future reports are still under consideration.
IMF Survey: What do cluster reports contribute to IMF surveillance?
Berger: The quest for bringing together bilateral and multilateral surveillance is an old one, and the IMF has been experimenting with different formats.
The spillover reports produced since 2011 are a good example of international surveillance, looking at how policies in the United States, euro area, China, Japan, and the United Kingdom affect each other and the wider global economy.
But our member countries still felt that there was a gap—that there should be some approach to cover the “sweet spot” between high-altitude perspective of the spillover reports and our country assessments, known as the Article IV consultation. So we have begun looking at “clusters” of countries, where common issues and experiences are brought together to illuminate the IMF’s annual assessments of individual countries. In the Nordic Regional Report—which looks at Denmark, Finland, Norway, and Sweden—we focus in particular on the region’s banking sector and the interdependencies and policy issues that come with it.
IMF Survey: Why did you choose to focus on these four countries?
Dorsey: The Nordics are fairly similar in structure, they trade a lot, regionally and globally, and share a tradition of policymaking sometimes called the “Nordic model.” All this lends itself well to this new type of regional reporting. In addition, an urgent theme affects all of the continental Nordics: a group of particularly large and highly concentrated banks operates across the region. This study helped us develop a much better understanding of the shared policy issues and common challenges that come from these financial and other links, which ultimately led to a better understanding of how actions within any one country affect the others.
IMF Survey: What were your main findings?
Berger: We found that the region has benefited greatly from trade and financial openness. While this openness probably increased the impact of the global financial crisis, the region’s strong institutions and solid fundamentals allowed it to bounce back fairly quickly. However, challenges remain.
As Tom indicated, the Nordic 4 share certain risks. There is the banking system that operates across the region. At the same time, households are heavily indebted and property prices high. While there are differences between countries—and the report makes this clear—the combination of these factors can bring problems and contagion. This means that countries themselves need to stay sharp on their policies and that, collectively, they have to stay vigilant and carry out policies that will safeguard macroeconomic stability across the region.
Dorsey: The banking sector is indeed unusually large in these countries, particularly in Sweden and Denmark. Its size, depending on how you measure it, averages a little more than 300 percent of GDP in these countries. So if the sector does run into problems, countries could face costs that are potentially much larger as a share of GDP than they’ve seen previously. The sector is also highly concentrated, with six institutions accounting for some 85 percent of the region’s banking system assets.
IMF Survey: What sort of risk does a large banking sector pose?
Berger: Again, the real risk comes from a combination of factors. If you have households that are highly indebted, house prices that are elevated (and in some cases still rising), and you add to this banks that are large, integrated, and concentrated, you have the potential for something to happen on a systemic basis. If there is, say, a housing price collapse in Norway, a Norwegian housing problem could quickly become a Swedish banking problem.
IMF Survey: What policies would help reduce these risks?
Dorsey: We would like to see strong national policies that take into account these shared risks. A policy that addresses the financial stability issues in Sweden will benefit not only Sweden, but the region overall. We are calling for policymakers in all these countries to complete their macroprudential toolkits—that is, implement policies to make the “systemically important” banks more resilient to shocks.
We're also advocating more intensive exchanges of information for coordinating banking supervisory practices and for dealing with these large regional banks. One of the elements has to be ensuring a level playing field across the region. For example, all of the banks that operate in Norway, regardless of their country of origin, should work under uniform conditions.
IMF Survey: Can the Nordic 4 learn from other regions?
Berger: The need for coordination in the region mirrors that of other regions, such as the euro area. Our work on this report gave us a sense for how difficult it is—even in a region famed for a common socio-economic model and collaborative approach—to reach agreement on common policies. That said, the Fund’s role is to highlight what needs to be done and the fine tradition of Nordic collaboration and pragmatic problem solving sets a strong example for others.
At the same time, it is worthwhile mentioning that progress on the European level, for example on coordinating bank resolution regimes, should help the Nordics organize their approach to the regional banking system. Other initiatives, such as the Banking Union, might have similar benefits and may actually present an opportunity for the Nordic countries to make further headway in this area.
IMF Survey: Did this cluster report expose anything that the individual country assessments did not reveal?
Berger: Typically, when we conduct a consultation with a particular country, we tend to treat factors outside the country as a given. But with this regional report tool, we can actually speak meaningfully about what, say, Norway can do to support banking stability in the region—and conversely, what the region can do collectively to support banking stability in Norway. And that's true for Sweden, Denmark, and Finland, as well. I think cluster reports are a major step forward in opening up the horizon for our policy advice beyond the individual country.
What we learn from bilateral surveillance helps identify common policy issues and build a regional picture, which in turn helps inform what is needed at the national level. In this sense, the Article IV and multilateral cluster reports reinforce each other. As we said earlier, the right combination of the two could be considered the “sweet spot” of IMF surveillance.
IMF Survey: What’s the next step in the pilot project?
Dorsey: The IMF is currently receiving feedback from member countries on the value of this type of surveillance. Based on the feedback we receive, we will decide whether or not to make it a permanent part of the IMF’s work. If cluster consultations become part of our permanent toolkit, we will establish a framework for conducting them based on our experience in the pilot.
