## 1.      Mandate

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---

### Mandate: two senses and current mismatch
- "Mandate" encompasses at least two ideas: expectations regarding the role of an institution, and the formal legal framework (purposes and powers) anchored in the Articles of Agreement.
- Greater clarity and consonance between expectations and legal framework increase institutional effectiveness.
- The Fund’s mandate to promote economic stability and collaboration lacks clarity and consonance, reflecting:
  - Articles that speak to issues of a bygone era (e.g., trade and payments restrictions).
  - Powers that do not reference today’s most compelling issues (e.g., systemic risk in a globalized financial sector).

### Why a review is needed
- Outdatedness alone is not sufficient grounds for mandate reform.
- Central lessons from the crisis:
  - Surveillance for crisis prevention needs to be much more rigorous, with greater coverage of financial sector and regulatory issues, and better appreciation of systemic risks and spillovers.
  - Lending for crisis response must be of speed, coverage and size far beyond previous assumptions; otherwise regional or country entities will fill that role.
- A clearer and stronger mandate can establish processes that impel the Fund and its members to better confront and respond to instability.
- An updated mandate can carry forward the Fund’s pro-active role in stabilizing the global economy since early 2008, including new Fund products and analyses.

### Approach to the Articles of Agreement
- The Fund’s mandate originates in its Articles, an international treaty balancing differing member views on goals, powers, and obligations.
- Options:
  - Amending the Articles is possible but difficult.
  - The Articles are sufficiently flexible to accommodate major reforms; several Article powers remain underexploited.
  - What is needed is a shared understanding set out in a vision statement endorsed by the membership, and Board decisions to give those force.

### Role of the Fund: three post-crisis priorities
- Crisis prevention:
  - Shift Fund oversight from bilateral surveillance (sum of parts) to multilateral surveillance (system as a whole).
  - Develop new modalities and outputs to tackle systemic implications and interactions of country policies.
  - Improve cooperation, data provision and peer review.
  - Expand coverage of financial sector policies to be ahead of the curve in crises.
- Crisis response:
  - Address risk of sudden runs on liquidity across advanced, emerging, and developing economies.
  - Offer more flexible insurance facilities building on recent reforms.
  - Expand lending capacity to be more effective in systemic crises.
- Stability of reserves:
  - Crisis highlighted tension between high demand for reserves by emerging markets and dependence on a few suppliers of reserve assets.
  - Strengthening prevention and response should reduce perceived need for reserve accumulation.
  - The Fund may have a role in promoting systemically preferable approaches, including the use of a global reserve asset.

### Surveillance — gaps and challenges
- Surveillance nominally covers bilateral (country policies) and multilateral (system-wide) surveillance (WEO, GFSR, EWE), but in practice:
  - Majority of Fund surveillance output is bilateral, focused on macroeconomic and exchange rate policies for domestic and balance of payments stability.
  - Significant gap exists between bilateral and multilateral surveillance:
    - Bilateral: detailed dialogue with policymakers but rarely addresses systemic effects of country policies.
    - Multilateral: addresses systemic outcomes but lacks detailed dialogue with all relevant policymakers.
  - The G-20 Mutual Assessment Process reflects demand for addressing systemic effects; the Fund must build on such initiatives.

### The mandate for systemic surveillance (Article IV, Section 3 (a))
- Article IV, Section 3 (a) requires the Fund to "oversee the international monetary system in order to ensure its effective operation."
- Challenges:
  - Expectations perspective: provision sounds sweeping—broad mandate to deliver stability.
  - Legal perspective: responsibility narrowly cast over the international monetary system (official arrangements relating to balance of payments—exchange rates, reserves, regulation of current payments and capital flows), distinct from the international financial system.
  - Practical perspective: the Fund has not spelled out what systemic oversight entails—process, substance, and data—resulting in multilateral surveillance that is mostly analytical with little formal debate of specific policy responses to systemic risks and spillovers.

### A multilateral surveillance decision (Board decision option)
- A Board decision could clarify that the financial sector is an integral part of the Fund’s systemic oversight mandate.
- Such a decision would:
  - Set out expectations of the Fund, including regarding the financial sector.
  - Define expectations of members for data provision and dialogue.
  - Specify new procedures for engaging members, singly or jointly, and possibly relevant nonmembers (e.g., the European Central Bank).
  - Aim to build analysis and discussion of systemic effects of country policies and developments.

### Why bilateral surveillance alone is insufficient
- Legal tensions:
  - Bilateral surveillance addresses whether a member’s domestic and external policies promote balance of payments stability—there must be a balance of payments channel for the policy to be addressed.
  - Members’ Article obligations regarding domestic policies are limited to adoption of policies that promote domestic stability, making bilateral surveillance a poor vehicle for global effects of country policies.
  - Financial sector shocks can transmit without balance of payments effects and without adverse implications for domestic stability.
  - Domestic policies with no negative domestic stability or balance of payments effects are best addressed in a multilateral procedure.
- Organizational challenges:
  - Bilateral surveillance is area-department centered; country teams are not fundamentally geared to assessing systemic effects and risks.
  - Delivering fully multilateral analysis that joins WEO/GFSR scope with bilateral detail poses substantial logistical challenges.

### A multilateral procedure — key features
- Would enable the Fund to address broader and systemic effects of country-level policies in a way different from WEO, GFSR, EWE or Article IV reports.
- Features:
  - Analysis based on dialogue with country authorities, accessing richer data and inputs.
  - Occupies space between aggregative WEO/GFSR and country-level detail of bilateral surveillance.
  - Unlike confidential EWE, a detailed report would be presented for discussion by the entire membership.
  - Could cover global imbalances or effects of a single economy’s policies on the rest of the world.
  - Reports on systemic effects could be taken up by the Board alongside Article IV; modalities can remain open.
  - Process could be discussed at the IMFC to raise profile and traction.

### Financial system oversight: role and limits
- Debate on whether an overarching agency should coordinate international financial oversight.
- The Fund:
  - Cannot realistically cover all financial sector issues nor should it become a global regulator.
  - Must cover all that bears on macroeconomic and financial system stability.
- One option:
  - Fund leads in identifying and prioritizing macro-systemic risks through macroeconomic, early warning, and macro-financial analyses.
  - Requires substantial collaboration with expert bodies such as the FSB and BIS.
  - Fund could play, at the global level, the role envisaged for country and regional systemic risk boards in assessing and responding to systemic risks, working with national authorities, FSB and BIS.
  - FSB and BIS remain better placed to lead on specialized micro-prudential and regulatory oversight.

### Financial data: challenges and options
- Crises prompt major data initiatives; this crisis highlighted opacity in shadow banking and derivatives markets.
- Progress: G-20 data gaps initiative underway; Fund cooperating closely with FSB.
- Remaining challenges:
  - Fund has limited and episodic access to supervisory data; members may decline to provide systemically relevant information citing confidentiality.
  - Fund has no authority to require confidential data on entities such as large complex financial institutions (LCFIs) due to Article VIII, Section 5.
  - Understanding linkages among LCFIs and changing exposures is crucial to global stability oversight.
- Possible alternatives:
  - Voluntary agreements with national and regional regulators/systemic risk boards, and with FSB and BIS, with suitable repackaging of data.
  - Consideration of a "Financial Data Dissemination Standard" for countries with systemically important financial sectors.

### Bilateral surveillance: evolution and possible strengthening
- Bilateral surveillance remains foundational.
- A new multilateral procedure for systemic effects of large countries would augment surveillance of large countries.
- Continue shifting bilateral surveillance to emphasize:
  - Cross-country comparison.
  - More analysis of regional spillovers.
- Possible innovations:
  - Permit thematic Article IVs: staff undertake joint discussions with several members facing common issues; Board concludes all Article IVs based on a single report and meeting (use judiciously).
  - Elevate expectations regarding financial sector policies (e.g., make FSAPs mandatory for countries with regionally or systemically important financial sectors).
  - Improve effectiveness with rules on timeliness of consultations.

### Capital flows
- Surveillance should cover capital flows and related policies more effectively.
- Amending the Articles to grant the Fund authority to approve capital controls would be difficult and divisive.
- Alternative Board clarifications:
  - Capital flows are integral to the surveillance remit.
  - Fund may advise members on related policies.
  - Fund could provide guidance on:
    - (a) conditions before a member liberalizes its capital account; and
    - (b) when controls on inflows or outflows may be appropriate for balance of payments or macroeconomic pressures.
  - Fund could foster collaboration among members on design and implementation of capital controls to avoid negative spillovers.
  - Fund could promote collection of more detailed cross-border capital account data.

### Lending — issues and options
- The Fund was not the first responder for major emerging market countries in this crisis; the US Federal Reserve, with swap lines, was.
- Reforms undertaken: new instruments and increased lending capacity.
- The Flexible Credit Line (FCL):
  - Demonstrated that the Articles’ requirement to attach conditionality to Fund resources can be achieved ex-ante through robust qualification criteria rather than traditional performance criteria and reviews.
  - Has been used sparingly; competition from central bank swap lines and member reservations limit uptake.
- Options to alleviate stigma and increase attractiveness of credit lines:
  - Increase flexibility regarding access and duration for FCLs.
  - Streamline ex-post conditionality in HAPAs for countries near FCL qualifiers.
  - Reduce uncertainty surrounding qualifiers by using transparent Maastricht-like criteria or Article IV assessments.
  - Broaden qualification possibilities with graduated hard caps on access or varying charges based on the strength of policies and fundamentals (charges differentiated on this basis would entail amending the Articles).
- Trade-offs:
  - Broadening qualification may expand coverage but undermine safeguards and reduce appeal to “platinum” countries.
  - Too rigid Maastricht-like qualification criteria may excessively restrict the Fund’s flexibility.

### Regional reserve pools, multi-country credit lines, lender of last resort, guarantees
- Regional reserve pools:
  - Growing prominence (e.g., Chiang Mai Initiative) reflects dissatisfaction with governance and conditions of multilateral pools.
  - Collaboration options: technical support, pre-qualification, monitoring, or backstopping regional pools with Fund resources.
- Multi-country credit lines:
  - In an intense systemic crisis, Fund could offer rapid responses across a broad spectrum of emerging markets, but challenges include stigma and coordination.
  - Proposed modality: unilateral offer of a short-term credit line to a group of members who satisfy qualification criteria; members accept and pay a commitment fee.
  - More radical option: amend the Articles to allow the Fund, in the systemic interest, to issue SDRs on a temporary basis to specific members in a flexible manner.
- Lender of last resort (collateral-based lending):
  - Concept: swap liquidity against eligible collateral, including temporarily illiquid assets.
  - Benefits: may reduce stigma while safeguarding Fund resources.
  - Obstacles: collateral is not a substitute for conditionality under current Articles; collateral-based lending may undermine the Fund’s catalytic role.
- Guarantees:
  - Fund could consider guaranteeing new debt issuances of governments or government-sponsored vehicles when markets are strained.
  - Amending the Articles would be needed to use the Fund’s general resources for guarantees; alternatively, Trust Fund or Special Disbursement Account resources may be preferable.

### Role in Low Income Countries (LICs)
- LIC lending framework revamped recently; scope exists to expand engagement:
  - Expand role as provider of insurance against global volatility and other shocks, including effects of climate change.
  - More flexible access under existing instruments.
  - Facilitation of commodity price hedging.
  - New insurance tools without ex-post conditionality.
  - Expanded technical support and exploration of ways to boost financial resources for countries facing fragilities and security issues.

### Implications for the size of the Fund
- Under the current mandate and lending facilities, a scenario broadly centered on a doubling of quotas would ensure that quota resources are adequate in most circumstances, taking the total size of usable Fund resources, including via the NAB, to almost US$1 trillion.
- If more expansive instruments are adopted, the Fund’s lending capacity would need to be larger.

### Reserves — issues and policy options
- Reserve accumulation expected to resume as the crisis fades.
- Three underlying problems with reserve accumulation:
  - Concerns about availability of international liquidity in times of crisis.
  - No automatic adjustment of current account imbalances.
  - Concentration of reserves in US dollars reflects absence of close substitutes.
- Article VIII, Section 7 calls on members to collaborate on reserve policies and on "making the special drawing right the principal reserve asset in the international monetary system."
- Reducing precautionary demand:
  - Fund offers more reliable and less politically onerous lending facilities as alternative to self insurance.
  - Stronger multilateral surveillance and possible regulation of capital flows could reduce volatility.
  - Limits: convenience and flexibility of reserves are hard to match.
- Reducing currency intervention in surplus countries:
  - Consider voluntary and gradual move to floating exchange rates by the next set of large advancing economies.
- Preserving the global store of value and multi-polar reserve system:
  - Options: several suppliers of reserve assets (euro, yen, renminbi) or globally-issued reserves.
  - Fund could give effect to Article VIII, Section 7 by collaborating with members to facilitate transition.
- SDRs:
  - Articles require Fund and members to work toward making the SDR the principal reserve asset.
  - Hurdles: tight conditions on issuance (i.e., according to quota, with 85 percent majority of Governors) and absence of deep and liquid markets in SDRs.
- A global currency:
  - More far-reaching approach would introduce a new global reserve currency issued by an institution with an impeccable balance sheet and governance; operational and political challenges are huge.
- Managing risks:
  - Consider mechanisms to mitigate interim risks to the principal reserve asset, including a global substitution account similar to that envisaged in the 1970s.

### Conclusions — priorities and recommendations
- Opportunity:
  - Fund can build on its crisis role to address shortcomings in mandate for crisis prevention and response, including macro-prudential risk assessments, platforms for collective action, and effective crisis insurance.
  - An updated mandate should not distract from core work or become an excuse for mission creep.
  - A renewed mandate can provide legal foundation and public expectation to adapt processes (e.g., new multilateral surveillance products).
- Multilateral perspective:
  - Need for better balance in Fund surveillance and lending between country versus systemic risks.
  - Importance of collective action and engagement with systemically relevant players beyond central banks and finance ministries, including large complex financial institutions, regional institutions (e.g., European Commission, European Central Bank), and regional reserve pools.
  - Scope for increased collaboration with multilateral development banks, including co-financing.
- Priorities (selected):
  - Surveillance:
    - Board decision on multilateral surveillance.
    - Sharper requirements on surveillance of the financial sector and capital flows.
    - Stronger peer review process.
  - Lending:
    - Build on recent reforms, offering more flexible insurance facilities.
    - Develop instruments to handle systemic crises (e.g., multi-country credit lines).
  - Institutional change:
    - Amendment of the Articles is largely not necessary; Board decisions and other measures can deliver many desired outcomes.

*Source: _012210a*

### 1.      Mandate. The term encompasses at least two ideas. One has to do with expectations

### 1.      Mandate

### Mandate: two senses and current mismatch
- The term "mandate" encompasses at least two ideas: expectations regarding the role of an institution, and the formal legal framework (purposes and powers) anchored in the Articles of Agreement.
- Greater clarity and consonance between expectations and legal framework increase institutional effectiveness.
- The Fund’s mandate to promote economic stability and collaboration lacks clarity and consonance, reflecting:
  - Articles that speak to issues of a bygone era (e.g., trade and payments restrictions).
  - Powers that do not reference today’s most compelling issues (e.g., systemic risk in a globalized financial sector).

### Why a review is needed
- Outdatedness alone is not sufficient grounds for mandate reform.
- Central lessons from the crisis:
  - Surveillance for crisis prevention needs to be much more rigorous, with greater coverage of financial sector and regulatory issues, and better appreciation of systemic risks and spillovers.
  - Lending for crisis response must be of speed, coverage and size far beyond previous assumptions; otherwise regional or country entities will fill that role.
- A clearer and stronger mandate can establish processes that impel the Fund and its members to better confront and respond to instability.
- An updated mandate can carry forward the Fund’s pro-active role in stabilizing the global economy since early 2008, including new Fund products and analyses.

### Approach to the Articles of Agreement
- The Fund’s mandate originates in its Articles, an international treaty balancing differing member views on goals, powers, and obligations.
- Options:
  - Amending the Articles is possible but difficult.
  - The Articles are sufficiently flexible to accommodate major reforms; several Article powers remain underexploited.
  - What is needed is a shared understanding set out in a vision statement endorsed by the membership, and Board decisions to give those force.

### Role of the Fund: three post-crisis priorities
- Crisis prevention:
  - Shift Fund oversight from bilateral surveillance (sum of parts) to multilateral surveillance (system as a whole).
  - Develop new modalities and outputs to tackle systemic implications and interactions of country policies.
  - Improve cooperation, data provision and peer review.
  - Expand coverage of financial sector policies to be ahead of the curve in crises.
- Crisis response:
  - Address risk of sudden runs on liquidity across advanced, emerging, and developing economies.
  - Offer more flexible insurance facilities building on recent reforms.
  - Expand lending capacity to be more effective in systemic crises.
- Stability of reserves:
  - Crisis highlighted tension between high demand for reserves by emerging markets and dependence on a few suppliers of reserve assets.
  - Strengthening prevention and response should reduce perceived need for reserve accumulation.
  - The Fund may have a role in promoting systemically preferable approaches, including the use of a global reserve asset.

### Plan of the paper
- Sets out main issues regarding the Fund’s mandate; a companion paper elaborates legal background.
- Section II: multilateral and bilateral surveillance, including financial sector and capital flows coverage.
- Section III: Fund’s lending role.
- Later sections: role of the Fund in the reserve asset supply-demand tension; Section V: concluding thoughts.

### II. SURVEILLANCE — Gaps and challenges
- Surveillance in principle covers bilateral (country policies) and multilateral (system-wide) surveillance (WEO, GFSR, EWE).
- In practice:
  - Majority of Fund surveillance output is bilateral, focused on macroeconomic and exchange rate policies for domestic and balance of payments stability.
  - There is a significant gap between bilateral and multilateral surveillance:
    - Bilateral: detailed dialogue with policymakers but rarely addresses systemic effects of country policies.
    - Multilateral: addresses systemic outcomes but lacks detailed dialogue with all relevant policymakers.
  - The 2006 multilateral consultation on global imbalances had only mixed results.
  - The G-20 Mutual Assessment Process, with data provision and policy dialogue mechanisms, reflects demand for addressing systemic effects; the Fund must build on such initiatives.

### The mandate for systemic surveillance (Article IV, Section 3 (a))
- Article IV, Section 3 (a) requires the Fund to "oversee the international monetary system in order to ensure its effective operation."
- Challenges:
  - Expectations perspective: provision sounds sweeping—broad mandate to deliver stability.
  - Legal perspective: no substantive obligations of members identified; responsibility narrowly cast over the international monetary system (official arrangements relating to balance of payments—exchange rates, reserves, regulation of current payments and capital flows), distinct from the international financial system.
  - Practical perspective: the Fund has not spelled out what systemic oversight entails—process, substance, and data—for itself or members, resulting in multilateral surveillance that is mostly analytical with little formal debate of specific policy responses to systemic risks and spillovers.

### A multilateral surveillance decision
- An alternative to amending the Articles is a Board decision clarifying that the financial sector is an integral (even if derived) part of the Fund’s systemic oversight mandate.
- Such a decision would:
  - Set out expectations of the Fund, including regarding the financial sector.
  - Define expectations of members for data provision and dialogue.
  - Specify new procedures for engaging members, singly or jointly, and possibly relevant nonmembers (e.g., the European Central Bank).
  - Aim to build analysis and discussion of systemic effects of country policies and developments, whether from one country or interactions among several.

### Why bilateral surveillance alone is insufficient
- Legal tensions:
  - Bilateral surveillance focuses on whether a member’s domestic and external policies promote balance of payments stability—there must be a balance of payments channel for the policy to be addressed.
  - Members’ Article obligations regarding domestic policies are limited to adoption of policies that promote domestic stability, making bilateral surveillance a poor vehicle for global effects of country policies.
  - Financial sector shocks can transmit without balance of payments effects and without adverse implications for domestic stability (example: US banks delevering abroad affecting Western/Eastern Europe); monetary shocks can transmit to foreign bond rates without currency effects.
  - Domestic policies with no negative domestic stability or balance of payments effects are best addressed in a multilateral procedure.
- Organizational challenges:
  - Bilateral surveillance is area-department centered; country teams are not fundamentally geared to assessing systemic effects and risks.
  - Delivering fully multilateral analysis that joins WEO/GFSR scope with bilateral detail poses substantial logistical challenges.

### A multilateral procedure
- Would enable the Fund to address broader and systemic effects of country-level policies (e.g., effect of US interest rates on Asian asset prices) in a way different from WEO, GFSR, EWE or Article IV reports.
- Key features:
  - Analysis would be based on dialogue with country authorities, accessing richer data and inputs.
  - Occupies space between aggregative WEO/GFSR and country-level detail of bilateral surveillance.
  - Unlike confidential EWE, a detailed report would be presented for discussion by the entire membership.
  - Could cover global imbalances or effects of a single economy’s monetary, fiscal, financial sector or exchange rate policies on the rest of the world.
  - Reports on systemic effects could be taken up by the Board alongside Article IV; modalities can remain open at this stage.
  - Profile and traction might be raised by discussing the process also at the IMFC.

### Financial system oversight: role and limits
- Debate exists on whether an overarching agency should coordinate international financial oversight.
- Should the Fund be that overarching entity?
  - The Fund cannot realistically cover all financial sector issues nor should it become a global regulator.
  - It must cover all that bears on macroeconomic and financial system stability.
- One option:
  - Fund leads in identifying and prioritizing macro-systemic risks through macroeconomic, early warning, and macro-financial analyses.
  - Requires substantial collaboration with expert bodies such as the FSB and BIS (existing EWE collaboration).
  - The Fund could play, at the global level, the role envisaged for country and regional systemic risk boards in assessing and responding to systemic risks, working with national authorities, FSB and BIS.
  - FSB and BIS are better placed to lead on specialized micro-prudential and regulatory oversight.

### Financial data: challenges and options
- Crises prompt major data initiatives (e.g., national accounts after Great Depression; SDDS after Asian Crisis).
- This crisis highlighted opacity in shadow banking and derivatives markets.
- Progress:
  - G-20 data gaps initiative underway; Fund cooperating closely with FSB.
- Remaining challenges:
  - Fund has limited and episodic access to supervisory data (e.g., FSAPs); members may decline to provide systemically relevant information citing confidentiality.
  - Fund has no authority to require confidential data on entities such as large complex financial institutions (LCFIs) due to Article VIII, Section 5 (members are under no obligation to furnish information exposing individual corporations).
  - Understanding linkages among LCFIs and changing exposures is crucial to global stability oversight.
- Possible alternatives (given unlikelihood of Article amendment):
  - Voluntary agreements with national and regional regulators/systemic risk boards, and with FSB and BIS, with suitable repackaging of data.
  - Consideration of a "Financial Data Dissemination Standard" for countries with systemically important financial sectors.

### Bilateral surveillance: evolution and possible strengthening
- Bilateral surveillance remains foundational, valued for international perspective on domestic policies.
- A new multilateral procedure for systemic effects of large countries would augment surveillance of large countries.
- Continue shifting bilateral surveillance to emphasize:
  - Cross-country comparison (valuable as more countries can analyze policies).
  - More analysis of regional spillovers.
- Possible innovations:
  - Permit thematic Article IVs: staff undertake joint discussions with several members facing common issues; Board concludes all Article IVs based on a single report and meeting (use judiciously).
  - Elevate expectations regarding financial sector policies (e.g., make FSAPs mandatory for countries with regionally or systemically important financial sectors).
  - Improve effectiveness with rules on timeliness of consultations.

### Capital flows
- Given global capital market integration and the Fund’s role when sudden stops/reversals threaten the international monetary system, surveillance should cover capital flows and related policies more effectively.
- Amending the Articles to grant the Fund authority to approve capital controls would be difficult and divisive.
- Alternative Board clarifications:
  - Capital flows are integral to the surveillance remit.
  - Fund may advise members on related policies.
  - Fund could provide guidance on:
    - (a) conditions before a member liberalizes its capital account; and
    - (b) when controls on inflows or outflows may be appropriate for balance of payments or macroeconomic pressures.
  - Fund could foster collaboration among members on design and implementation of capital controls to avoid negative spillovers and account for broader goals.
  - Fund could promote collection of more detailed cross-border capital account data for better-informed surveillance.

### III. LENDING — Issues noted
- The Fund was not the first responder for major emerging market countries in this crisis; the US Federal Reserve, with swap lines, was.
- This and the unprecedented shock led to major reforms of Fund lending instruments and increased lending capacity.
- The Flexible Credit Line (FCL) demonstrated that the Articles’ requirement to attach conditionality to Fund resources can be achieved ex-ante through robust qualification criteria rather than traditional performance criteria and reviews.
- Despite flexibility allowed by the Articles and concepts like balance of payments need, the Fund can do more to provide requisite insurance and address stigma associated with Fund lending (notably in Asia).
- Options (in ascending ambition) build on recent initiatives.

*Source: _012210a - 1.      Mandate. The term encompasses at least two ideas. One has to do with expectations*

### 16.      Credit lines. The FCL has been instrumental in tackling the current crisis by casting a

### 16. Credit lines. The FCL has been instrumental in tackling the current crisis by casting a safety net over key emerging market countries that otherwise would have delayed approaching the Fund on account of the associated stigma.

### Credit lines, FCL, and HAPAs
- The FCL has been used sparingly, in part because of competition from central bank swap lines and because members continue to have reservations about it.
- Similar considerations apply to High Access Precautionary Arrangements (HAPAs).
- Options to alleviate stigma and increase attractiveness:
  - Increase flexibility with regard to access and duration for FCLs.
  - Streamline ex-post conditionality in HAPAs for countries near FCL qualifiers.
  - Reduce uncertainty surrounding qualifiers by using transparent Maastricht-like criteria or Article IV assessments.
  - Broaden qualification possibilities with graduated hard caps on access or varying charges based on the strength of policies and fundamentals (charges differentiated on this basis would entail amending the Articles).
- Trade-offs:
  - Broadening qualification may expand coverage but undermine safeguards and reduce appeal of the FCL to “platinum” countries with strong fundamentals and policy frameworks.
  - Too rigid Maastricht-like qualification criteria may excessively restrict the Fund’s flexibility.

### Regional reserve pools
- Regional arrangements (exemplified by the Chiang Mai Initiative) have grown in prominence, partly reflecting dissatisfaction with governance arrangements and conditions attached to multilateral pools such as the Fund.
- Regional pools symbolize regional solidarity and integration.
- Collaboration options between the Fund and regional pools:
  - Low-level Fund engagement: technical support to assess financing needs, pre-qualify members, and monitor policies.
  - Backstopping regional pools: making Fund resources available to the pool’s constituent members.

### Multi-country credit lines
- In a repeat of an intense systemic crisis like October 2008, the Fund could possibly put in place rapid responses across a broad spectrum of emerging markets, but challenges are significant.
- Key challenges include stigma, obtaining major players’ agreement, and difficulty justifying common access without signaling unintended differences.
- Proposed modality:
  - The Fund could unilaterally offer, on grounds of systemic stability, a short-term credit line to a group of members who satisfy qualification criteria; members would accept the offer and pay a commitment fee.
  - The mere existence of a firm—and credibly large—offer by the Fund to a critical set of members could quell an emerging crisis.
- More radical option:
  - Amend the Articles to allow the Fund, in the systemic interest, to issue SDRs on a temporary basis to specific members in a flexible manner, not uniformly based on quota and long-term global need.

### Lender of last resort (collateral-based lending)
- Distinction: the Fund already acts as a “lender of last resort” to countries with impaired or no market access; here the term is intended to convey lending similar to central banks—a swap of liquidity against eligible collateral, with recourse to the solvent borrower’s assets.
- Potential collateral:
  - Beyond liquid foreign assets or domestic government bonds; could include temporarily illiquid foreign assets or domestic private assets.
- Benefits:
  - Switching from conditionality to collateral-based lending may reduce stigma while safeguarding Fund resources.
- Obstacles:
  - Collateral is not a substitute for conditionality under current Articles: some form of pre-qualification or ex-post conditionality would still be required.
  - Collateral-based lending may undermine the Fund’s catalytic role because other creditors rely on the Fund’s assessment and conditionality when deciding to disburse.

### Guarantees
- The Fund could consider guaranteeing new debt issuances of governments or government-sponsored vehicles (for bank recapitalization, purchase of troubled assets) when financial markets are strained.
- Leverage and resource considerations:
  - If backing for guarantees is less than the value of the guarantees, this leverages official resources.
  - Amending the Articles would be needed to use the Fund’s general resources for guarantees; alternatively, deploying Trust Fund or Special Disbursement Account resources may be preferable to back up guarantees.

### Role in Low Income Countries (LICs)
- The overall lending framework for LICs—conditionality, instruments, and financing—was revamped last year, but scope exists to build on the Fund’s engagement.
- Possible expansions:
  - Expand role as provider of insurance against global volatility and other shocks, including effects of climate change.
  - More flexible access under existing instruments.
  - Facilitation of commodity price hedging.
  - New insurance tools without ex-post conditionality.
  - Expanded hands-on technical support and exploration of ways to boost financial resources for countries facing fragilities and security issues.

### Implications for the size of the Fund
- The envisaged role of Fund lending in maintaining international stability is key to the overall size and structure of Fund resources (quotas versus borrowed resources).
- Under the current mandate and lending facilities, a scenario broadly centered on a doubling of quotas would ensure that quota resources are adequate in most circumstances, taking the total size of usable Fund resources, including via the NAB, to almost US$1 trillion.
- If more expansive instruments discussed above need to be used, the Fund’s lending capacity would need to be larger.

### IV. Reserves

### Issues
- The build-up of international reserves as a buffer against shocks is widely expected to resume as the crisis fades and to some extent already has.
- Three underlying problems with reserve accumulation:
  - Concerns about availability of international liquidity in times of crisis, prompting precautionary reserve buildup, especially when heavy capital inflows threaten emerging markets.
  - No automatic adjustment of current account imbalances; neither surplus countries nor reserve-issuing deficit countries face automatic pressure to adjust.
  - Concentration of reserves in US dollars reflects absence of close substitutes as a global store of value and anchor for asset and price stability.
- Article VIII, Section 7 (rarely discussed) calls on members to collaborate on reserve policies with the objective of “better international surveillance of international liquidity and making the special drawing right the principal reserve asset in the international monetary system.” Consideration may need to be given to reviving this provision as a basis for action, particularly given the large size of official reserves relative to private flows and potential market impact from sudden portfolio reallocation.

### Reducing precautionary demand
- Most promising avenue: Fund offers more reliable and less politically onerous lending facilities as an alternative to self insurance.
- Stronger multilateral surveillance and possible regulation of capital flows could reduce the volatility that reserves aim to insure against.
- Limits:
  - Precautionary motives are only part of reserve accumulation.
  - Convenience and flexibility of reserves are hard to match; better surveillance and regulation will not eradicate volatility.

### Reducing currency intervention in surplus countries
- Consideration of a broader political agreement on limiting currency intervention to promote systemic stability.
- Could involve a voluntary and gradual move to floating exchange rates by the next set of large advancing economies, similar to the adoption of floating by major economies in the 1970s.

### Preserving the global store of value and multi-polar reserve system
- Problem: using a national currency as the main global reserve asset transmits instability in its value to the entire system.
- Amelioration options:
  - Presence of several suppliers of reserve assets (euro has emerged as an alternative to the dollar; yen and renminbi might in future).
  - Globally-issued reserves.
- Given network externalities, neither solution is likely to emerge spontaneously soon.
- Fund could give effect to Article VIII, Section 7 by collaborating with members to facilitate transition to a more stable system.
- A truly multi-polar reserve system depends on size and health of underlying financial markets and official preferences of reserve issuers and managers; the Fund could encourage a less skewed distribution while being mindful that co-equal reserve currencies could induce volatile exchange rates absent close collaboration.

### Special Drawing Rights (SDRs)
- Articles require the Fund and members to work toward making the SDR the principal reserve asset—a provision dormant for decades.
- Hurdles to a greater role for the SDR:
  - Tight conditions in the Articles on issuance of SDRs (i.e., according to quota, with 85 percent majority of Governors).
  - Absence of deep and liquid markets in SDRs, tradable only within the official sector.
- Revisiting these limitations and active collaboration would be required to establish the SDR as a principal reserve asset.

### A global currency
- SDR is a right to access freely usable currencies in case of balance of payments difficulties; its stability rests on component currencies.
- More far-reaching approach: introduce a new global reserve currency (similar to Keynes’ bancor), issued by an institution with an impeccable balance sheet and governance to function as a prudent and independent world central bank.
- Such a currency would remove vulnerabilities associated with reserve accumulation in national currencies and address lack of automatic adjustment, but operational and political challenges would be huge—an idea for the long term.

### Managing risks
- Regardless of whether the system endures, diversifies, or moves to a globally-issued reserve currency, interim risks to the principal reserve asset remain.
- Consider mechanisms to mitigate such risks, including setting up a global substitution account similar to that envisaged in the 1970s, perhaps in conjunction with reducing foreign currency intervention by surplus countries.

### V. Conclusions

### An opportunity
- The Fund has the chance to build on its positive role in the crisis, addressing shortcomings in its mandate for crisis prevention and response and helping membership confront issues such as macro-prudential risk assessments, platforms for collective action, and effective crisis insurance.
- An updated mandate is not a silver bullet and will not guarantee prediction of the next crisis; it should not distract from core work or become an excuse for mission creep.
- A renewed mandate can provide legal foundation and public expectation to adapt processes (e.g., new multilateral surveillance products) that impel the institution to take up difficult issues and respond more effectively.

### Multilateral perspective
- The crisis highlights multiple connotations of “multilateral”:
  - Fallacy of composition: collective destruction of global wealth can be disproportionate to one country’s exuberance.
  - Need for better balance in Fund surveillance and lending between country versus systemic risks.
  - Importance of collective action and global coordination.
  - Engagement should extend to systemically relevant players beyond central banks and finance ministries, including large complex financial institutions, regional institutions (e.g., European Commission, European Central Bank), and regional reserve pools; the Fund’s mandate to engage with these entities directly might be reconsidered.
  - Scope for increased collaboration with multilateral development banks, including co-financing.

### Priorities
- Over-arching theme: strengthen the Fund’s role as a guardian of systemic stability rather than solely country-level stability.
- Surveillance recommendations:
  - Board decision on multilateral surveillance.
  - Sharper requirements on surveillance of the financial sector and capital flows.
  - Stronger peer review process to deliver compliance with obligations.
- Lending recommendations:
  - Build on recent reforms, offering more flexible insurance facilities.
  - Develop instruments to handle systemic crises (e.g., multi-country credit lines).
- Institutional change:
  - Amendment of the Articles is largely not necessary; Board decisions and other measures can deliver many desired outcomes.

*Source: Chapter/section content from the provided IMF PDF content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2010/_012210a.pdf_