## EXECUTIVE SUMMARY (_072511) ## Source details **Canonical URL:** [EXECUTIVE SUMMARY (_072511)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2011/_072511.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2011/_072511.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2011/_072511.pdf.json) --- ### Introduction and purpose - Provide an independent view of how the Fund is discharging its multilateral surveillance responsibilities, including contribution to global financial stability and crisis prevention, in coordination with other international groupings/institutions such as the FSB and BIS. - Context: As we emerge from the Global Financial Crisis (GFC), the Fund has regained much of its credibility and relevance but must build on strengths to become a Global Financial Stability Advisor. - Structure: Sections A–F cover introduction; case for the role; evaluation methodology and sources; assessment of successes, opportunities and limiting factors; recommendations on how to get there; and conclusions. ### The case for a Global Financial Stability Advisor - Rationale: - Multiple actors (World Bank, BIS, FSB, BCBS, IAIS, OECD, regional development banks, national/regional systemic risk bodies) contribute to stability but pursue narrower mandates and may leave gaps where risks “fall between the cracks.” - The Fund is presented as the only organization with potential to carry out the overarching role because it has a “truly multilateral and universal perspective” that encompasses countries at different stages of development and cuts across borders, markets and sectors. - Historical context: - Post-1990s regional crises led to creation of the FSF and initiatives such as the Financial Stability Assessment Program (1999) and the Fund’s Global Financial Stability Report (started in 2002). - Complacency during long periods of relative stability reduced effectiveness of surveillance. - Specific pre-GFC gap: - Failure to “connect-the-dots” (e.g., link unsustainable global imbalances to buildup of financial and housing market imbalances and to ultra-low interest rate induced risk-taking). - Proposed overarching role: - Monitor all risks with cross-border implications. - Work with other actors to ensure attention to risks that could contribute to a financial crisis. - Fill gaps in the global-macro-financial space by fully integrating bilateral and multilateral surveillance activities. ### Current strengths and weaknesses — key findings - Strengths: - The Fund is already playing many aspects of the overarching role and has high-quality surveillance work with improving depth and breadth. - Increasingly effective in encouraging country actions on cross-border problems. - Able to work cooperatively with international, regional and national financial stability actors, providing analytical support and advising on gaps. - Making efforts to look at systemic risks holistically and sharpening toolkit to spot tail risks. - Weaknesses / limiting factors (as listed in source): 1. Multilateral surveillance products, while widely read, are too voluminous and do not always reach key decision makers directly. 2. Much surveillance work is carried out in subject-area silos, impeding ability to connect-the-dots. 3. Institutional impediments (e.g., being too close to the official view, consensus-seeking culture) hinder identification and discussion of emerging risks outside the mainstream. 4. Fund as a whole is not close enough to markets and tends to be behind the curve on market developments. 5. Culture and traditions favor a conceptual macroeconomic framework, which may impede spotting risks in the financial sector and identifying tail risks. 6. Analytical work requires careful peer review and publication, making it difficult to monitor fast-moving financial sector events and to develop contingency plans for tail risks. 7. Institutional impediments weaken the Fund’s ability to be a candid truth-teller. ### Assessment of traction and reach - Key metrics and findings: - EXR media data: in the April 2011 Spring Meetings, IMF’s flagship products generated 75,598 mentions over a more than six-day period. - IEO readership evidence: "less than 25% of ministers and governors and their deputies actually read the WEO and GFSR"; from a survey of G7 countries, none of the G7 countries' policymakers read the WEO and only one country reported that senior policymakers read the GFSR. - Decision-makers tend to consume summaries: senior readers use overviews prepared by staff, press coverage, press releases, and speeches; shorter products (G20 notes, EWE outputs) reach audiences more directly. - Communication implications: - Long flagship publications are dense and oriented to mid-level technical staff rather than top decision-makers. - Messages are sometimes filtered by media and intermediaries, raising control and traction issues. ### Examples and illustrative findings - Tail risk and EWE observations: - EWE aims to detect vulnerabilities and warn about tail risks but has focused on risks that have already materialised; design may overweight empirical analysis over market intelligence and expert judgment. - Financial sector facts quoted: - GFSR April 2011 Box 1.4: stylized stress tests suggest that a 300 basis point increase in funding costs would increase the average share of uncovered debt to 18 percent. - GFSR April 2011 Box 1.5: major banks in China and Brazil expanded their balance sheets by more than 100 percent during the 2007–10 period. - WEO April 2011: “Brazil, Colombia, India, Indonesia, and Turkey have experienced a noticeable pickup in real credit growth, generally close to or well into a 10 to 20 percent range (more in the case of Turkey). Over the past five years, credit almost doubled in real per capita terms in these economies.” ### Institutional and mandate constraints - FSAP history and mandate issues: - FSAP developed as a voluntary pilot and treated as technical assistance; Board did not support making FSAP mandatory until 2010. - FSAP was made mandatory in 2010 for members with financial sectors designated by the Fund to be systemically important; such members were given five years after such designations for FSAPs to be carried out. (Decision No. 14736-(10/92), adopted on September 21, 2010.) - Because FSAPs were voluntary, financial sector surveillance did not become a fully integrated formal surveillance mandate, contributing to continued siloed culture. - Legal constraints: - Article VIII, Section 5 precludes the Fund from requiring members to report certain information useful for effective surveillance, including information relating to financial groups; confidentiality protections for supervisory information are limited under current Articles. ### Conclusion of Executive Summary - The Fund is already contributing substantially to global financial stability and has unique comparative advantages to act as a Global Financial Stability Advisor. - Important weaknesses and institutional impediments remain and will limit effectiveness unless addressed. - Transforming the Fund will take time and will face resistance, but the Fund should act decisively to perform its role as guardian of global economic and financial stability. *Source: EXECUTIVE SUMMARY* --- ### Concept and operational agenda for a Global Financial Stability Advisor - Concept: - An overarching agency to bring together international, regional and national bodies charged with financial oversight to address issues that "fall between the cracks". - Roles envisaged: "independent, unbiased umpire; objective commentator; trusted, confidential advisor and ruthless truth-teller on key issues and policies that have a bearing on global financial and economic stability." - Operational tasks and analytical agenda: - Analyse macro-financial linkages, cross-border spillovers, systemic risk sources, aggregated exposures and interlinkages among major global institutions, crisis triggers and adverse scenarios (examples: default in periphery European economies; hard landing in China). - Act as "objective commentator" on regulatory reforms and propose mitigating actions. ### Case for the IMF as Advisor - Comparative strengths: - Deep macroeconomic and financial sector expertise. - "Truly multilateral and universal perspective" encompassing countries at different development stages. - Research leadership in macro-financial risks, "wealth of PhDs and multilateral perspective" and growing macro-finance expertise. - Influence via lending capacity and ability to "name and shame", though publication of member-specific documents requires consent. ### Scope and limits - The Fund should not become a global regulator nor cover all financial sector issues. - Focus on monitoring and filling gaps where work bears on macroeconomic and financial system stability. --- ### Key recommendations — five broad areas for action ### (1) Strengthen the Fund’s Analytics and Flexibility - Need for nimbleness, "out of the box" thinking, and breakdown of silos. - Three new initiatives proposed: - a. Pre-cogs team - Purpose: uncover tail risks; market-based intelligence gathering complementing EWE; spot emerging threats; assess need for further work; bring issues to senior management. - Design features: - Staff on short-term (say one to two years) rotational assignments from various departments. - Ideally separate from any single department. - Members with recent financial sector/private sector experience. - Focus on market intelligence and attend weekly surveillance meetings. - Fast-track review and reporting to senior management; empowered to raise premature or controversial issues. - b. Ad-hoc, issue-specific temporary working groups - Triggered by Pre-Cogs; interdepartmental; timeliness prioritized; financed from existing resources. - Sponsored by department designated by senior management but not institutionalized under one department. - Initial dissemination via private channels; consider publication when appropriate; research quality and tentative nature to be clearly disclosed. - c. Global Policy Note (GPN) - An authoritative, short, readable, frequent summary for top public and private decision-makers distilling surveillance work and emerging threats; fast-track review akin to Pre-Cogs. - Align incentives and HR policies to reward candour, cross-disciplinary work and timely warning. ### (2) Strengthen Traction and Impact - Ensure IMF messages reach decision-makers by tailoring products to target audiences. - Build trust and rapport with key decision makers (MD, First Deputy MD, Financial and Economic Counsellors to play leading outreach roles). - Deliver messages with sufficient clarity and candour; use face-to-face meetings and private channels where appropriate. ### (3) Work more effectively with the FSB - Support FSB initiatives without seeking credit; recognize distinctive mandates. - Where appropriate, comment independently on the effectiveness of FSB initiatives despite IMF membership in the FSB. - Be prepared to offer independent views within FSB fora and publicly; study longer-term impacts of FSB initiatives and suggest mid-course adjustments. ### (4) Adopt a threefold strategy on data - (a) Play an active role in the G20 Data Gaps Initiative, including plan to develop a data template for Global SIFI’s; involve non-G20 countries appropriately. - (b) Continue to leverage existing published and proprietary data and perform more interconnectedness analysis. - (c) Press for more extensive public disclosure by European and other non-North American financial groups. - Over time this strategy should enhance the Fund’s credibility and expertise in monitoring Global SIFIs. ### (5) Strengthen the legal foundation - Options: - Amend the Articles of Agreement and/or adopt a Multilateral Surveillance Decision clarifying responsibility, role and scope of multilateral surveillance of the financial sector. - Consider modifying Article VIII, Section 5 to permit requiring certain information and permitting the Fund to protect confidential supervisory information. - For timely and independent non-mainstream work, consider a fast-tracked review process separate from the Board. - Review the role of the Board in supporting the revised mandate and the Fund’s role as Global Financial Stability Advisor. --- ### Implementation emphasis — cultural, organisational and operational change ### Cultural and institutional change required - Break down subject-area silos and change norms favoring consensus and closeness to official views. - Enhance market engagement and shorten analytical-to-publication timeframes to detect fast-moving risks. - Align incentives to reward candour, contrarian views, cross-disciplinary collaboration and timely warnings. ### Operational priorities - Establish the Pre-cogs team (short-term rotational staff; market intelligence focus). - Convene temporary working groups to investigate flagged issues and prepare scenarios/contingency plans. - Publish the Global Policy Note (GPN) as succinct, targeted, frequent summary for decision makers. - Engage actively in G20 Data Gaps Initiative and press for broader public disclosure by Global SIFIs. - Pursue legal clarifications/amendments to strengthen mandate, data access and confidentiality protections. ### Organisational cautions and resource approach - Continue integrative initiatives (cross-referencing, Financial Surveillance Group, weekly interdepartmental meetings). - Major reorganisations carry risk of unintended consequences; approach with caution. - Implement recommendations within current resource envelope by reprioritising departmental activities and resources. --- ### Communication, candour, even-handedness and contingency planning ### Communication and audience targeting - Review target audiences for flagship products; shorter, targeted products (G20 notes, EWE, GPN) reach senior decision-makers more directly. - Improve outreach to governors, central bank governors, CEOs of global SIFIs, and regional financial stability boards; combine institutional and informal outreach. ### Candour and work-in-progress communication - Adopt a clear protocol to publish research on tail risks without implying senior management consensus; consider Board-approved policy for clearly-labelled public statements on emerging threats and work-in-progress. - Use private channels for highly preliminary or potentially destabilising concerns. - Encourage staff to hold contrarian opinions and publish clearly-labelled research even if it does not support official positions. ### Conflict between lending and surveillance; contingency planning - Recognise conflict: when providing financial support, the Fund cannot comment publicly on likelihood of program failure without risking self-fulfilling outcomes. - Recommendation: institute a formal internal policy for financing operations to: - Internally assess and document risks and consequences of failure. - Assess systemic impact on other economies and possible mitigating actions. - Communicate privately on needed mitigating actions; consider public communication carefully. - Develop contingency plans including alternative strategies and “stop-loss rules” to guide decisions if initial strategies fail (lesson drawn from Argentine crisis and IEO 2004). ### Even-handedness perceptions - Perceptions persist that the Fund may favor systemically important countries and be less candid on certain advanced/economically powerful members. - Improvement in even-handedness noted but further steps (including broader governance changes) may be needed to bolster perceived fairness and trust. --- ### Data, Global SIFIs and legal constraints ### Data gaps and international initiatives - G20 Data Gaps Initiative grouped gaps into: - (1) monitoring risks in the financial sector; - (2) international network connections; - (3) sectoral and other financial and economic datasets; and - (4) communications of official statistics. - Interagency Group on Economics and Financial Statistics (IAG) chaired by the IMF includes BIS, ECB, Eurostat, OECD, UN and WB. ### Monitoring international connectedness and Global SIFIs - Need for an aggregated system-wide picture of interlinkages among major global institutions; no reliable mechanism currently exists to aggregate consolidated supervisory exposures. - Supervisory colleges improve group supervision but do not provide a mechanism to inform supervisors of other financial groups about potentially threatening intergroup exposures. - External experts largely opposed to assigning oversight of Global SIFIs to the Fund on grounds that the Fund is not a supervisor, lacks legal framework to require institution-specific reporting, and cannot guarantee confidentiality of supervisory information. ### Short-term strategy for the Fund’s data role (paragraph 70) - (1) Play an active role in the G20 Data Gaps Initiative, including developing a data template for Global SIFI’s; involve non-G20 countries at appropriate time. - (2) Continue to work with existing published and proprietary data and perform more interconnectedness analysis. - (3) Press for more extensive public disclosure by European and other non-North American financial groups. - Expected outcomes over time: - Enhanced Fund credibility and expertise in monitoring Global SIFIs. - Improved rapport between senior management and CEOs of global SIFIs; reduced resistance to data sharing as stakeholders see value in a “global risk map.” ### Legal foundation and Articles considerations (paragraph 71) - Options: - Amend Articles of Agreement and/or adopt a Multilateral Surveillance Decision clarifying the Fund’s role to “promote global economic and financial stability.” - Clarify that financial sector supervision and regulation fall within scope of multilateral surveillance, including items covered in FSAPs and ROSCs. - Consider amending Article VIII, Section 5 to permit requiring certain member reporting related to financial groups and permit protecting confidential supervisory information. - Incorporate a fast-tracked, separate review process for timely independent non-mainstream work. - Review the Board’s role in supporting the revised mandate. ### Strategic conclusion and call to action (paragraph 72) - The Fund should institutionalize the overarching role of Global Financial Stability Advisor, work cooperatively with other actors, fill gaps that no other group can effectively address, and link macroeconomic and financial expertise to understand contagion channels. - Given practical constraints on immediate mandate change, the Fund should "seize the day" and redouble efforts to explore emerging risks and encourage preventative action without waiting for legal amendments. --- *Source: IMF internal report chapter — evaluation of IMF role as Global Financial Stability Advisor and multilateral surveillance (excerpts).* ### EXECUTIVE SUMMARY ...................................................................................................... ### EXECUTIVE SUMMARY ### Introduction - Purpose: provide an independent view of how the Fund is discharging its multilateral surveillance responsibilities, including contribution to global financial stability and crisis prevention, in coordination with other international groupings/institutions such as the FSB and BIS. - Context: As we emerge from the Global Financial Crisis (GFC), the Fund has regained much of its credibility and relevance but must build on strengths to become a Global Financial Stability Advisor. - Structure of report: Sections A–F cover introduction; case for the role; evaluation methodology and sources; assessment of successes, opportunities and limiting factors; recommendations on how to get there; and conclusions. ### The case for a Global Financial Stability Advisor - Rationale: - Many actors (World Bank, BIS, FSB, BCBS, IAIS, OECD, regional development banks, national/regional systemic risk bodies) contribute to stability but pursue narrower mandates and may leave gaps where risks “fall between the cracks.” - The Fund is argued to be the only organization with the potential to carry out the overarching role because it has a truly multilateral and universal perspective that encompasses countries at different stages of development and cuts across borders, markets and sectors. - Historical context: - Post-1990s regional crises led to creation of the FSF and initiatives such as the Financial Stability Assessment Program (1999) and the Fund’s Global Financial Stability Report (started in 2002). - Complacency during long periods of relative stability reduced effectiveness of surveillance. - Specific gaps before the GFC: - Failure to “connect-the-dots” (e.g., link unsustainable global imbalances to buildup of financial and housing market imbalances and to ultra-low interest rate induced risk-taking). - Proposed overarching role for the IMF: - Monitor all risks and potentially problematic developments with cross-border implications. - Work with other actors to ensure sufficient attention is paid to risks that could contribute to a financial crisis. - Fill gaps in the global-macro-financial space by fully integrating bilateral and multilateral surveillance activities. ### Current strengths and weaknesses (key findings) - Strengths: - The Fund is already playing many aspects of the overarching role and has high-quality surveillance work with improving depth and breadth. - Increasingly effective in encouraging country actions on cross-border problems. - Able to work cooperatively with international, regional and national financial stability actors, providing analytical support and advising on gaps. - Making efforts to look at systemic risks holistically and sharpening toolkit to spot tail risks. - Weaknesses / limiting factors (listed in source as important weaknesses): 1. Multilateral surveillance products, while widely read, are too voluminous and do not always reach key decision makers directly. 2. Much surveillance work is carried out in subject-area silos, impeding ability to connect-the-dots. 3. Institutional impediments (e.g., being too close to the official view, consensus-seeking culture) hinder identification and discussion of emerging risks outside the mainstream. 4. Fund as a whole is not close enough to markets and tends to be behind the curve on market developments. 5. Culture and traditions favor a conceptual macroeconomic framework, which may impede spotting risks in the financial sector and identifying tail risks. 6. Analytical work requires careful peer review and publication, making it difficult to monitor fast-moving financial sector events and to develop contingency plans for tail risks. 7. Institutional impediments weaken the Fund’s ability to be a candid truth-teller. ### Recommendations — five broad areas for action - (1) Strengthen the Fund’s Analytics and Flexibility - Need for nimbleness and capacity to think “out of the box,” break down silos and change work culture. - Propose three new initiatives: a. Set up a team (Pre-cogs) to uncover tail risks, complementing EWE work; geared toward market-based intelligence gathering rather than model-based research; spot emerging threats, assess need for further work, and bring issues to senior management. b. Study new and emerging risks through ad-hoc, issue-specific and temporary working groups after Pre-cogs identification. c. Create a new summary report for top public and private decision-makers called the Global Policy Note (GPN), issued timely and frequently as a distillation of surveillance work and emerging threats. - Align incentive structures within the Fund to support these initiatives; without structural, incentive and cultural change, limits will remain on preventing the next financial crisis. - (2) Strengthen Traction and Impact - Ensure IMF messages reach decision-makers by tailoring products to target audiences. - Build trust and rapport with key decision makers in the public sector and global financial institutions. - Ensure messages are delivered with sufficient clarity and candour. - (3) Work more effectively with the FSB - “Relax” in working with the FSB: support FSB initiatives without seeking credit while recognizing distinctive mandates. - Where appropriate, comment independently on the effectiveness of FSB initiatives despite IMF membership in the FSB. - (4) Adopt a threefold strategy to the resolution of data issues - (a) Play an active role in the G20 Data Gaps Initiative, including the plan to develop a data template for Global SIFI’s, while remaining mindful of involving non-G20 countries at the appropriate time. - (b) Continue to work with existing data from both published and proprietary sources and perform more analysis on interconnectedness. - (c) Add the Fund’s strong voice to calls for more extensive public disclosure by European and other non-North American financial groups. - Over time, this strategy should enhance the Fund’s credibility and expertise in monitoring Global SIFIs. - (5) Strengthen the legal foundation - Strengthen the Fund’s mandate to give explicit authority for an expanded overarching financial stability role via amending the Articles of Agreement and/or adopting a Multilateral Surveillance Decision clarifying responsibility, role and scope of multilateral surveillance of the financial sector. - When amending the Articles, consider modifying Article VIII, Section 5 (which precludes the Fund from requiring members to report certain information required for effective surveillance, such as information relating to financial groups) and permitting the Fund to protect confidential supervisory information. - To promote timely and independent non-mainstream work, consider a review process that is fast-tracked and separate from the Board. - Review the role of the Board in supporting the revised mandate and the Fund’s role as a Global Financial Stability Advisor. ### How to get there (implementation emphasis) - Cultural and institutional change required: - Break down subject-area silos and change norms that favor consensus and closeness to official views. - Enhance market engagement and shorten analytical-to-publication timeframes for fast-moving risks. - Align incentives to reward candour, cross-disciplinary work and timely warning. - Operational initiatives to prioritize: - Establish Pre-cogs team for market-based early-warning intelligence. - Convene temporary working groups to investigate flagged issues. - Publish the Global Policy Note (GPN) as a succinct, targeted, frequent summary for decision makers. - Engage actively in the G20 Data Gaps Initiative and press for broader public disclosure by Global SIFIs. - Pursue legal clarifications/amendments to strengthen mandate and data access/protection. ### Conclusion - The Fund is already contributing substantially to global financial stability and has unique comparative advantages to act as a Global Financial Stability Advisor. - Important weaknesses and institutional impediments remain and will limit effectiveness unless addressed. - Transforming the Fund will take time and will face resistance, but the Fund should act decisively to perform its role as guardian of global economic and financial stability. *Source: EXECUTIVE SUMMARY* ### 9. The GFC has shown that there are multiple gaps in our understanding of the world -- ### 9. The GFC has shown that there are multiple gaps in our understanding of the world -- ### Concept: Global Financial Stability Advisor - The GFC revealed regulatory and supervisory gaps, data gaps, and gaps in understanding inter-linkages that "call for an integrated view of the world and a global response". - Proposal: an overarching agency to bring together international, regional and national bodies charged with financial oversight — the Global Financial Stability Advisor. - Roles envisaged: "independent, unbiased umpire; objective commentator; trusted, confidential advisor and ruthless truth-teller on key issues and policies that have a bearing on global financial and economic stability." - Acknowledged tension between these roles and the Fund’s existing lending and surveillance roles; the report promises later discussion on managing these tensions. ### Operational tasks and analytical agenda - The Global Financial Stability Advisor would address issues that "fall between the cracks", including: - robust supervision and development of macroprudential tools (see Section D). - providing a platform for global policy discussion and fostering global policy coordination. - providing intellectual leadership to "connect-the-dots", with specific analytic activities such as: - analyse and research macro-financial linkages such as the impact of the level of interest rates on risk-taking behaviour, explore the channels of transmission from interest rate developments to risk-taking behavior, explore the impact of financial system risk-taking on the macro economy; - analyse cross-border spillovers; - identify sources of systemic risks and sources of increasing risk concentrations and trace through the effects of their realisation; - aggregate financial exposures and develop a system-wide picture of interlinkages among the major global institutions; - map out the interlinkages between major players in the financial system and the risk transmission channels; - identify cross-cutting themes that group countries according to financial exposures, systemic importance, risk profile; - identify crisis triggers and articulate adverse scenarios that may play out, such as a default in the periphery European economies or the risk of a hard landing in China; - play the role of an "objective commentator" on regulatory reforms, as a counterweight to the key countries which have the greatest influence and vested interests in shaping regulatory reforms; - propose solutions and mitigating actions to address threats to financial stability. ### Case for the IMF as the Advisor - Arguments why the Fund is "the only organization capable" of the overarching role: - deep macroeconomic and financial sector expertise to monitor global and cross-border developments and understand linkages across countries, economies and financial sectors; - a "truly multilateral and universal perspective" encompassing countries at different stages of development and cutting across borders, markets and sectors. - Post-crisis evolution: - "The Fund’s role began to shift after the crisis. From its macroeconomic role, the Fund has risen to become a leader in cutting-edge research on macro-financial risks." - One authority: the Fund should feel confident about its "unassailable position in the world", with its "wealth of PhDs and multilateral perspective" and a growing number of finance and macro-finance experts. - Influence and leverage: - The Fund has the "bully pulpit" and influence via lending capacity and ability to "name and shame" to encourage necessary actions by country authorities. - Caveat: publication of country specific documents requires member consent and the Fund cannot publish some confidential information without consent; nevertheless, it can and does use public information and the prospect of publication can give the Fund leverage with members. ### Scope and limits of the Fund's responsibilities - The Fund should not attempt to cover all financial sector issues nor become a global regulator. - It should monitor and when necessary fill gaps in the work of other financial stability actors and concentrate on issues that bear on macroeconomic and financial system stability, recognizing that the two are "intertwined". ### Assessment of current performance - The report's judgement: "the Fund is, in many ways, already playing the overarching role" needed to enhance multilateral surveillance and strengthen global financial stability. - Surveillance quality is high; depth and breadth are improving. - The Fund is increasingly effective in encouraging cross-border corrective actions. - The Fund cooperates with other actors (international, regional, national) and provides analytical support and advice where gaps are identified (example: paper on the need for robust supervision). - Remaining shortcomings: - Much work is still carried out in subject-area silos by departments devoted to one stability product. - Institutional impediments exist to identifying and discussing emerging risks outside mainstream consensus. - Multilateral surveillance work has not achieved sufficient traction with decision makers (see Box 1; paragraphs 44-45 referenced for further discussion). ### Boxed stakeholder perspectives (selected quotes) - "The IMF’s mission should be to link the macro-economic and the macro-prudential – to show how things fit together." - "The Fund needs to look for interlinkages. Now, responses tend to be differentiated by the separate disciplines." - "Where the Fund adds unique value to financial stability is its expertise in macroeconomic policy and its ability to understand the role of global imbalances as drivers of financial instability." - "The Fund’s comparative advantage is its integrated view of the world." - "The Fund is in the best position to advise when to trigger the counter-cyclical buffer." - "There is a need to get people in different disciplines to share expertise. Staff need to work more closely together and to develop a common view." ### Evaluation methodology and sources - Objective: independent assessment of Fund surveillance on global financial stability issues and whether it provided sufficient thought leadership since the GFC in offering "timely, candid and effective analysis and advice." - Scope and period: examined multilateral surveillance activities since 2008 and considered existing activities, trends and future plans. - Information sources: - interviews with IMF staff; - interviews with authorities and experts (effort to emphasize senior public sector decision-makers with capacity to act; sought balanced representation from advanced and emerging countries across regions); - review of key IMF multilateral surveillance and related products (including GFSR, WEO, Fiscal Monitor, G20 discussions, thematic reports, Early Warning Exercise, spillover analyses, past IEO reports and vulnerability assessments, Article IV Consultation Reports and FSSA Reports). - review of other reports: OECD, BIS, FSB, credit rating agencies’ reports and Financial Stability Reports of central banks. - Limitations: IMF placed important limitations on scope, precluding review of matters directly related to ongoing financial operations and reporting certain internal deliberations; the evaluation was not permitted to comment directly on specific questions related to Fund surveillance in certain European countries receiving financial assistance. - Interview questions posed to authorities included: - Is the Fund well-placed to be the Global Financial Stability Advisor? - What impediments prevent it from fulfilling its role? - Suggestions for getting there? - How has the Fund’s analysis and advice improved during and after the GFC? - Has IMF’s advice on the financial sector been timely, candid and effective? - Do flagship products give sufficient attention to macro-financial linkages, spillovers and contagion risks? - Are warnings issued in a specific and actionable manner? - How can it best coordinate and work with other international groupings such as the FSB, G20? ### The surveillance process (generic elements) - Identification: broad horizon scan to identify potentially high impact issues. - Assessment: prioritise low probability but potentially high impact issues for further analysis. - Analysis: study characteristics, transmission channels and impacts; may include scenarios and stress testing. - Classification: gauge potential probability and implications; determine mitigating actions. - Communication: communicate emerging threats at various stages through public and private channels; warnings should become more urgent as seriousness is confirmed. - Action: encourage action to mitigate probability and/or impacts via solutions, contingency plans, moral suasion, private and public pressure, and conditionalities in financing operations. ### Key successes, metrics and opportunities for improvement - Successes: - High technical quality, rigour and clear organization of surveillance products. - Products are generally well-structured, intelligently summarised, and use boxes, charts and headings to aid readability. - Surveillance products are widely read and attract significant media attention: - EXR media data: in the April 2011 Spring Meetings, IMF’s flagship products generated 75,598 mentions over a more than six-day period. - Historical comparison: in 2005 coverage of the WEO was about three times larger than coverage of the OECD Economic Outlook. - Communication initiatives (speeches, presentations, press conferences by Managing Director, First Deputy Managing Director, Economic Counsellor and Financial Counsellor) have been effective and well received. - Opportunities for improvement: - Reduce siloed work by fostering integrated cross-disciplinary analysis linking macroeconomic, fiscal and financial sector risks. - Overcome institutional impediments to identify and discuss emerging risks outside mainstream consensus. - Increase traction with decision makers (further discussion in paragraphs 44-45). *Source: IMF internal report chapter — evaluation of IMF role as Global Financial Stability Advisor and multilateral surveillance (excerpts).* ### 24. Some IMF Surveillance Products tend to reach decision-makers indirectly rather than ### 24. Some IMF Surveillance Products tend to reach decision-makers indirectly rather than directly ### Decision-makers’ exposure to flagship and shorter IMF products - Based on interviews with 19 senior public sector decision-makers, they are aware of the flagship products but do not have the time to read them systematically and thoroughly. - For longer publications (WEO and GFSR) senior decision-makers tend to read overviews and summaries prepared by their own staff, or newspaper articles, press releases and texts of speeches given by senior IMF officials. - For shorter products (G20 surveillance notes, Early Warning Exercise (EWE) outputs delivered at meetings) exposure tends to be direct. - The Fund is making efforts to deliver key messages directly (press conferences, press releases), but some messages are filtered by others (media, staff summaries), raising questions about whether the Fund controls delivery to those in a position to act. - Supporting evidence (IEO’s review of Multilateral Surveillance): "less than 25% of ministers and governors and their deputies actually read the WEO and GFSR"; from a survey of G7 countries, none of the G7 countries' policymakers read the WEO and only one country reported that senior policymakers read the GFSR. ### Findings from interview boxes on readership and messaging - Representative interview comments about reading IMF material: - "I don’t read a large amount of IMF material. It tends to be rather voluminous and dense. I don’t know where to start." - "I will read an IMF publication when someone refers it to me or when it is covered in the press." - "I don’t read the Fiscal Monitor or the GFSR. I may read summaries of the WEO to compare with our own analysis. Working level people will read these. I do read the G20 Surveillance notes because they are an easy read." - "I skim the GFSR and the WEO, looking at headings and boxes." - "Publications are oriented to mid-level technical people." - "I feel a tremendous sense of guilt in not reading the WEO and GFSR." ### Siloed structure of IMF surveillance products and implications - Each flagship product has a distinct departmental ownership and focus: - WEO: Research Department; concentrates on the real economy, baseline trends and other possible outcomes. - Fiscal Monitor: Fiscal Affairs Department; addresses important fiscal developments and trends. - GFSR: Monetary and Capital Markets Department; analyses risks and vulnerabilities in the global financial system. - EWE and Spillover Reports: joint interdepartmental teams; EWE focuses on tail risks and is presented to private audiences; Spillover Reports address macroeconomic and financial risks in systemically important countries. - Silo effects: - Functional specialisation produces deep subject matter expertise and departmental pride, but ownership of products tends to lie with one department. - Cross-fertilisation exists (inputs from country desks, functional departments) but departmental "ownership" can undermine interdepartmental cooperation. - Different staff backgrounds (financial expertise vs macroeconomic expertise) and model incompatibilities can exacerbate silos. - Interviewed authorities’ perceptions of internal IMF dynamics: - "There is too much internal competition within the IMF." - "It is hard to solve turf issues within the Fund." - "Internal politics are an impediment for the Fund." - "The Fund does not have an effective set of products as it stands now." ### Limits of sectoral focus for understanding transmission of risks - Crises cross the financial-real economy boundary (example: GFC—global imbalances → liquidity → excessive household borrowing and financial sector leverage → crisis erupted in financial sector and impacted the real economy). - Current risks include high public-sector leverage replacing private-sector leverage, and links between fiscally constrained sovereigns and weak, undercapitalised banks. - The Fund is attempting to break down barriers (interdepartmental work, cross-referencing, new products like EWE and Spillover Reports, integrated messages at the top of the house e.g., G20 notes and MD speeches). - Nevertheless, much analytical capability continues in sectoral silos and "not enough is being done to understand and address cross-sectoral linkages and transmission channels." ### Early Warning Exercise (EWE) and exploring tail risks - Purpose of EWE: detect vulnerabilities and warn about tail risks; forward-looking, "flag-raising" exercise to connect risks and uncover potential spillovers and systemic impact. - Current status and focus: - EWE is in early days and has focused on risks from the GFC that have already materialised, which may give the impression of focusing on obvious tail risks. - The EWE design paper states it will place greater focus on tail risks and "new sources of systemic risks" when conditions have stabilised and will combine "rigorous empirical analysis with surveys of experts and market intelligence". - IEO view: - The Fund should both continue to monitor known tail risks and actively scan for emerging threats now, not only after stabilization. - Concern that Part II of the EWE design paper is heavily weighted toward empirical analysis and may underweight market intelligence and expert judgment. - Risk that an economist-driven process with macroeconomic conceptual frameworks may miss important market developments. - Macro-financial modelling is still in its infancy; current models will not always capture market developments and complexities. - The Fund needs to adapt to messiness, improvise, and look beyond comfort zones to play the role of Global Financial Stability Advisor well. - Interview comments on EWE and tail risks: - "The IMF is concentrating too narrowly on the Crisis. It needs to cast its net more broadly." - "The Fund should do more to test the robustness of the system." - "Very few issues are raised in the GFSR that are not familiar to senior people with responsibilities in financial stability." - "The EWE is a bit simplistic. Its focus on tail events is too narrow." - Counterpoint: "We are living in the tail. The biggest risks are known [and need to be addressed]. The time to be looking more broadly is when we are back in a ‘great moderation’." ### Institutional impediments and cultural constraints to identifying emerging risks - The Fund is not close enough to markets and tends to be behind the curve. - The Fund’s traditional careful research approach (study literature, develop frameworks, create and test models, peer review, publish) supports credibility but is ill-suited to rapid detection and discussion of emerging tail risks and fast-moving market events. - Risks of prematurely communicating unvetted concerns: - Public communication of under-researched concerns could later prove exaggerated, undermining the Fund’s reputation and possibly creating adverse market impacts. - Member-owned governance may pressure the Fund to be certain before challenging members’ views, reducing willingness to expose vulnerabilities publicly. - Additional constraints: - Tendency toward "group thinking" and self-censorship among staff. - Reluctance of members to accept advice inconsistent with their beliefs or priorities, reinforcing self-censorship. - Conclusion: without changes to structure and culture, limits will remain on the Fund’s ability to uncover risks and propose solutions preemptively. ### Candour in communication — progress and remaining gaps - Candour is a key criterion for effective multilateral surveillance—whether findings are delivered clearly and candidly to those who need to act. - Historical assessments found the Fund insufficiently frank, especially toward advanced economies. - Interviewees acknowledge the balance the Fund must strike between candour and avoiding actions that could undermine confidence, and that some issues require careful handling. - Most interviewees believe candour has improved but still falls short in public and private fora. - Interview remarks on candour: - "In delivering its messages, the Fund needs to balance between public disclosure and small group consultations." - "The EWE was pretty hard hitting." - "The Board receives a sanitised version of the EWE." - "The WEO is too timid on spillover effects." - "Staff need to be more adventurous and aggressive." - "If things are not said with clarity, they are not worth saying." - "The Fund moderates messages for political purposes." - "Candour is improving; The Fund is trying hard to be candid without bringing on that which (through candour) they are trying to prevent." - "The IMF is too close to the official view." ### Illustrative example — European stress tests and timing of candour - European stress tests (CEBS, July 2010) were widely perceived as reverse-engineered to produce a high pass rate and less stringent than US tests. - The Fund’s public comments at the time were relatively positive (July 2010 GFSR Update: supportive of publishing results and "a very important step"; Oct 2010 GFSR: results "helped to reassure markets"). - By April 2011 GFSR the Fund listed parameters for new stress tests, implicitly suggesting earlier tests were inadequate. - IEO implication: stronger, timely constructive criticism at the time of the tests might have enhanced the Fund’s reputation as an independent commentator without necessarily undermining confidence. ### Examples of frank messaging delivered publicly - The Fund delivered strong, pointed public messages on the need to restore fiscal balances to a more sustainable path in the United States and Japan. - Selected quotations from flagship reports: - Fiscal Monitor, April 2011: "The United States will be the only major advanced economy implementing procyclical fiscal policies this year, albeit in the face of a still-sizable output gap. Moreover, getting on track to achieve the Toronto Declaration commitment to halve the deficit by 2013 will require a significant adjustment next year." - GFSR April 2011: "....Meanwhile, public debt is also on a problematic trajectory in other parts of the world, notably in Japan and the United States." - WEO Update, Jan 2011: "The recently implemented stimulus measures in the United States and Japan make it more challenging to ensure medium-term fiscal sustainability. Therefore, it has become even more important to formulate more credible plans to bring debt down over the medium term." - WEO Update, Jan 2011: "For the United States, it is critical to immediately address the debt ceiling and launch a deficit reduction plan that includes entitlement reform and revenue-raising tax reform. Should the recovery threaten to turn out substantially weaker than currently projected, the pace of fiscal adjustment should be modified accordingly, within the envelope of a credible medium-term consolidation plan." - WEO Update, June 2011: "Fiscal challenges continue to pose various risks for the recovery. A first set of concerns revolves around fiscal imbalances in the euro area periphery. A second set involves the large near-term fiscal adjustment in the United Sates against a still-fragile recovery. A third set of concerns centers on medium-term fiscal sustainability in the United States and Japan. In the United States, these risks are rising because of the absence of credible consolidation and reform plans, while Japan’s plans must be made sufficiently ambitious and be implemented. In Japan, the fiscal response to the earthquake has raised challenges to attaining medium-term fiscal sustainability. Some credit rating agencies have already put U.S. and Japanese sovereign credit ratings on negative watch." *Source: _072511 - 24. Some IMF Surveillance Products tend to reach decision-makers indirectly rather than* ### 32. Another issue complicating the Fund’s ability to deliver clear and candid messages on ### _072511 - 32. Another issue complicating the Fund’s ability to deliver clear and candid messages on ### Conflict between lending and surveillance - When the Fund is providing financial support to a country, it cannot comment on the likelihood of success (or failure) of its own lending program or the broader stability implications if the program fails because such comments could become a self-fulfilling prophesy. - This conflict can prevent the Fund from developing contingency plans to address program failure and spillovers. - IEO (2004) questioned whether the Fund should have developed a contingency plan for Argentina; the IEO concluded: “there may well have been no feasible actions by the IMF that would have enabled the adoption of a meaningful Plan B. But this possibility is not an adequate justification for failing to think about, let alone design and actively promote, such a plan.” ### Lesson from the Argentine crisis (Box B) - Extract from the IEO report on Argentina: Lesson 6: - “Decisions to support a given policy framework necessarily involve a probabilistic judgment, but it is important to make this judgment as rigorously as possible, and to have a fallback strategy in place from the outset in case some critical assumptions do not materialize.” - “In the absence of a well thought-out alternative strategy, and with only an ill-defined exit strategy, it took the IMF a long time to change gears in the face of the demonstrated failure of the program to achieve its stated objectives. This led to repeated attempts to use the same strategy when it was evident that it had failed.” - Contingency planning should encompass alternative strategies and “stop-loss rules”—a set of criteria to determine if the initial strategy is working and to guide the decision on when a change in approach is needed. ### Recommendations on contingency planning and communication - The Fund should develop contingency plans to address the possibility of failure, including spillover effects on other economies. - The Fund should consider how to communicate the risks and consequences of failure and the need for preparation to those likely to be affected. - The Fund should consider the extent to which risks and consequences of failure could be discussed publicly, given that others will comment in media and other fora. - These questions will be addressed in the recommendations (See paragraph 64-66). ### Even-handedness and perceptions - The Fund is generally conscious of the need for clarity and candour but sometimes suppresses or dilutes important findings and recommendations to support or not undermine the authorities. - Perception of lack of even-handedness persists among membership, advanced and emerging: - Claims heard in interviews include that “the IMF favours systemically important countries and is too harsh on emerging countries,” and that the IMF is “blunt with developed countries and tiptoes around issues affecting powerful emerging countries.” - Reference made to the IMF as the “European Monetary Fund” with a tendency to take a softer stance on European issues. - Perception that greater even-handedness in Fund surveillance would likely increase acceptance of candid advice (See Box 7). ### What the IMF said about China and Brazil (Box C) - The Fund warns of signs of a credit boom, overheating pressures, shift towards wholesale funding in banks, and build-up of vulnerabilities in the corporate sector in China and Brazil but, with exceptions, “does not go far enough to ‘connect-the-dots’ and trace through the implications if a confluence of these risks factors were to materialise.” - Suggested stronger approaches: - Develop plausible tail scenarios. - Extend stress testing to consider impact on bank solvency, credit contraction and economic growth. - Selected factual findings quoted from flagship reports: - GFSR April 2011 Box 1.4: Stylized stress tests suggest that a 300 basis point increase in funding costs would increase the average share of uncovered debt to 18 percent. - GFSR April 2011 Box 1.5: Major banks in China and Brazil expanded their balance sheets by more than 100 percent during the 2007–10 period. - Regulatory capital ratios for the bigger banks in emerging markets were at relatively comfortable levels in the second quarter of 2010, though state-owned banks in some emerging markets might need to bolster their capital ratios. - WEO April 2011: “Brazil, Colombia, India, Indonesia, and Turkey have experienced a noticeable pickup in real credit growth, generally close to or well into a 10 to 20 percent range (more in the case of Turkey). Over the past five years, credit almost doubled in real per capita terms in these economies.” - REO (Asia and Pacific), Oct 2010: No immediate threat of a housing price bust in China given authorities’ actions, but “rapid property price growth in China is likely to continue” and financial imbalances take time to build. - WEO, Oct 2010: Chinese measures in spring 2010 included increases in transaction taxes and stricter controls on lending; the government will need to evaluate and fine-tune these measures over time. ### Views from interviews on even-handedness (Box 7) - Selected quotes: - “The IMF is blunt with developed countries but coded when it comes to emerging countries.” - “The Fund is overly responsive to EC objections.” - “The Fund will not address the issue of massive reserve accumulation and domestic rebalancing.” - “The WEO makes no reference to currency misalignments.” - “The U.S. QE II is damaging the global economy, contributing to massive liquidity going around the world (the Fund is not saying enough about this).” - “The Fund may not be as persistent and even-handed with systemically important countries (as with emerging economies). You cannot blame the staff for this. The Board has to take some responsibility.” - “Even-handedness is improving. The IMF realised it had to change after the Asian crisis.” - “Even with the right direction, we have yet to see a proper balance of voting rights between advanced and emerging economies.” ### IMF–FSB relationship: cooperation and tensions - The relationship between the Fund and the FSB is crucial for multilateral surveillance and financial stability. - Concerns among Fund staff: - The Fund’s stability work may have been subordinated to that of the FSB. - Fund membership on the FSB may have muzzled it and made it difficult to offer independent views on FSB initiatives. - The FSB may be duplicating Fund work, notably with the FSB’s peer review programme and vulnerability exercises. - External authorities generally view the relationship as working reasonably well and complementary: - The FSB’s role principally is to strengthen resilience of financial systems, not to carry out multilateral surveillance (a Fund competency). - The report’s view: - The relationship is working reasonably well with many areas of effective cooperation, including the joint IMF/FSB EWE. - Vulnerability exercises by others are not viewed as competitive; “the more eyes that are looking for vulnerabilities and emerging threats, the more likely we will be to predict and prepare for the next crisis.” - The Fund should act as the world’s Global Financial Stability Advisor in a complementary, backstopping role. - Areas needing improvement: - IMF should be willing to speak up on regulatory and supervisory issues within the FSB and publicly where appropriate. - Some Fund staff feel their comments on regulatory initiatives may be unwelcome in FSB discussions and that their ability to challenge FSB initiatives publicly has been compromised. - The Fund has already taken independent positions on some FSB initiatives and should continue to do so. - The new Basel III rules have a long glide path to full implementation and are “not beyond criticism.” - The Fund, with supervisory expertise particularly in MCM, must be prepared to offer independent views both within the FSB and in public communications. ### Views from interviews on IMF–FSB interaction (Box 8) - Selected quotes: - “The relationship and division of labour between the IMF and FSB is not clear.” - “There is a good balance between the FSB and the Fund.” - “Why not merge MCM and the secretariat of FSB?” - “The IMF needs to stick to its skill sets. It is not tuned in to markets. It is not a supervisor.” - “The Fund should not feel a need to get the credit or to compete (with other stability bodies).” - “The Fund should bring its special expertise to bear on stability issues: macro-economic policies, global imbalances and its work on FSAP’s and ROSCs.” ### Data, indicators and macro-prudential statistics - Progress made in strengthening macroeconomic statistics collection and dissemination using the System of National Accounts (SNA). - A similar organising framework for macro-prudential statistics is not yet in place, but the IMF and other international organisations are developing consensus on key concepts and indicators, including in relation to the SNA. - IMF work and initiatives: - Development of the Financial Soundness Indicator (FSI) and encouraging greater disclosure through the Co-ordinated Compilation Exercise (CCE). - GDDS and SDDS initiatives that improve disclosure. - Following a recent Board Decision, the SDDS will be enhanced to include seven FSIs to strengthen information about the financial sector and better detect system risks. - Consideration of creating an SDDS plus to address gaps identified during the GFC. - Data Quality Assessment Framework plays an important role in enhancing data quality and consistency across the membership. *Source: _072511 - 32. Another issue complicating the Fund’s ability to deliver clear and candid messages on (PDF chapter/section).* ### 40. As in other crises, the GFC has demonstrated once again that data gaps, while not the cause of ### _072511 - 40. As in other crises, the GFC has demonstrated once again that data gaps, while not the cause of ### Data gaps and international initiatives - The GFC highlighted that data gaps, while not the cause of the crisis, impede effective surveillance. - The G20 Data Gaps Initiative, in collaboration with IMF and FSB, identified data gaps grouped into four areas: - (1) monitoring risks in the financial sector; - (2) international network connections; - (3) sectoral and other financial and economic datasets; and - (4) communications of official statistics. - Plugging these data gaps requires multilateral cooperation; some steps build on existing initiatives while others require new initiatives and additional data collection, with potential confidentiality issues. - Other data initiatives include the Interagency Group on Economics and Financial Statistics (IAG), chaired by the IMF, comprising the BIS, ECB, Eurostat, OECD, UN and WB. (footnote 29) ### Monitoring international financial connectedness and Global SIFIs - The GFC demonstrated the importance of global SIFIs to financial stability and the contagion risk from complex interlinkages and exposures. - The Fund has produced papers on cross-cutting themes, interconnectedness, and large banking systems, with MCM, SPR, and other departments engaged; stress tests have been carried out and reported in past GFSRs and in the US FSAP for North American Financial Groups. - Limitations identified: - No reliable mechanism exists for aggregating consolidated supervisory exposures to develop a system-wide picture of interlinkages among major global institutions. - Supervisory colleges encouraged by the FSB and standard-setting bodies should improve group supervision, but they do not provide a mechanism to inform supervisors of other financial groups about potentially threatening intergroup exposures. - There is a clear need for an overview of intergroup exposures of all major financial groups; currently no mechanism exists to achieve such an overview. ### IMF role, legal constraints, and disclosure standards - The Fund believes it is well-placed to monitor activities and intergroup exposures of major global SIFIs, but external experts interviewed provided virtually no support for assigning such a role to the Fund. - Cited grounds for opposition include that the Fund: - is not a supervisor; - does not have the legal framework to require members to report certain information useful for surveillance (including information regarding financial groups); and - cannot guarantee confidentiality of supervisory information submitted for systemic monitoring. (Article VIII, Section 5 of the Fund’s Articles is referenced in the source. Footnote 30) - It was noted that the Fund’s ability to monitor systemic exposures would be enhanced if all institutions were required to follow disclosure standards similar to those in the U.S. and Canada, which require disclosure of extensive information regarding financial exposures of a publicly listed financial institution. - If European and Asian financial institutions met these standards, the IMF could enhance off-site monitoring of global SIFIs without requiring as much confidential supervisory information. - The report states it will address this issue further in Section E and refers to Box 9. ### Views from interviews (Box 9) - Acknowledges that someone should be looking at global banking risks, but does not support IMF involvement in the oversight of global SIFI’s. - The IMF should be pushing for standardised data (that would make it easier to understand the exposures of SIFI’s without access to supervisory information). - A lot of work is already underway to obtain data to make conjunctural assessments of SIFI’s. The IMF is very active in this work. - National authorities have concerns about giving the IMF access to confidential data on SIFI’s. - The scale of damage that can be done to financial systems by SIFI’s suggests the need for lots of eyes to look at these exposures. ### Impact and traction of Fund’s multilateral surveillance - The overall impact/traction of the Fund’s multilateral surveillance has improved considerably since the GFC but there is room for further improvement. - Four elements of impact and traction identified: - Whether the IMF’s messages reach decision-makers without being filtered. - Whether the messages are seen as authoritative and correct based on comprehensive analysis. - Whether messages are delivered with sufficient clarity and candour for decision makers to understand required actions and urgency. - Trust: whether the Fund’s messages are seen as correct and balanced with appropriate consideration given to the countries or groups invited to act. - Assessment summary (references to prior paragraphs preserved): - Key decision-makers are generally aware of the Fund’s key messages but do not always receive them directly (paragraph 25). - Fund’s existing work is believed to be of very high quality but does not go far enough to connect the dots between real economy and financial sector risks (paragraphs 22, 27–28). - Fund could do more to scan the horizon for future tail risks. - Despite improvements in candour, the Fund may still be reluctant to challenge official views on important risks and risk-mitigating measures (paragraph 29). - Progress has been made in the last decade, but the Fund is not always seen as fair and unbiased, which may undermine trust (paragraph 35). - Conclusion: impact and traction have improved and the trend is encouraging, but more is needed for multilateral surveillance to achieve desired impact (reference to Box 10). ### Views from interviews on traction (Box 10) - The IMF has a name and shame power. - The Fund has successfully exerted pressure on countries to repair their policies. - The EWE’s get across focused messages and generate good focused discussions. - If you are suggesting vulnerabilities, you have to suggest how each vulnerability relates to financial stability. You also have to clearly suggest what to do. It is easy to walk away after raising the issue. - The IMF has an impact. It can reinforce our priorities. - There is not enough focus in the Fund on solutions. - The Fund does a good job at G20 meetings, without dominating. - In a crunch, people want to know what the IMF thinks. ### Mandate, FSAPs, and institutional impediments - The Fund’s existing surveillance mandate does not give the Fund clear and sufficient legitimacy to carry out surveillance of the financial sector. - The Fund’s mandate for multilateral surveillance originates in Article IV, Section 3 (a), focusing on overseeing the international monetary system to ensure its effective operation; this mandate is narrowly cast over official arrangements relating to the balance of payments and is distinct from the international financial system. - Following regional crises in the 1990’s, the Fund and World Bank were encouraged by the FSF and the G20 to play a more active surveillance role using FSAPs and ROSCs. - The FSAP was developed as a voluntary pilot treated as technical assistance. In December 2000 the IMF Board concluded the FSAP provided a coherent framework, agreed FSSAs are the preferred tool for strengthening monitoring under bilateral surveillance, and encouraged further development of analytical techniques including macroprudential indicators, stress tests, and scenario analysis. - FSAPs remained preferred and not mandatory; the Board did not support making FSAP mandatory, and frequency was limited by resource constraints. - The FSAP was made mandatory in 2010 for members with financial sectors designated by the Fund to be systemically important; such members were given five years after such designations for FSAPs to be carried out. (Decision No. 14736-(10/92), adopted on September 21, 2010.) (footnote 36) - Because FSAPs were voluntary and treated as technical assistance, they did not become part of the Fund’s formal surveillance mandate; this contributed to a culture in which financial sector surveillance remained a second order activity despite increased activity since the GFC. - Gaps between bilateral and multilateral surveillance (e.g., follow-ups and coverage of systemic issues) need to be bridged for the Fund to play an overarching role as a Global Financial Stability Advisor. ### Recommended institutional reforms and initiatives (Section E) - The Fund should accept and institutionalize the overarching role of a Global Financial Stability Advisor, acknowledge institutional impediments, and take organization-wide steps to focus efforts on that role (paragraph 47). - Strengthen analytics and flexibility; break down silos and change work culture; align incentive structures with new initiatives (paragraph 48). Proposed new initiatives - Initiative 1: Establish a small Pre-Cogs team (paragraphs 49–50) - Role: complement EWE work by spotting emerging threats and risks, assessing need for further study, and bringing issues to senior management. - Characteristics: - Staff assigned short-term (say one to two years) from various Fund departments with interest in financial stability. - Ideally separate from any Fund department. - Members should have recent financial sector and preferably private sector experience. - Focus on market-based intelligence as well as model-based research; cultivate internal and external sources; attend weekly surveillance meetings; review market information; monitor other actors. - Fast-track review and reporting structure to ensure timely reporting to senior management and to avoid normal interdepartmental consensus-seeking delays. - Empowered to raise issues that may seem premature or controversial. - The Pre-cogs label references the film “The Minority Report” but the report clarifies it is not suggesting the Fund can predict crises; the term captures the role of being ahead of the curve. - Initiative 2: Ad-hoc, issue-specific and temporary working groups (paragraphs 50–51) - Triggered after Pre-Cogs identify risks needing further study. - Could use existing EWE/VE working groups or form new interdepartmental working groups for risks not susceptible to modeling. - Analysis may rely on back-of-the-envelope assessments, scenarios, and contingency plans; timeliness is key. - Working groups should be sponsored by a department designated by senior management but not institutionalized under any single department. - Strong guidance from senior management and involvement from heads of FAD, MCM, RES, and SPR to ensure good work is rewarded. - Communication: initial dissemination through the Fund’s private channels; consider publication once comfortable it would not undermine stability, even if studies are tentative; the nature and quality of research should be clearly disclosed. - Publication venue could be EWE or other Fund publications depending on content; topical studies may be referenced in the proposed GPN (paragraph 52). - Acknowledges the proposed arrangements will be “messy” but argues such “messiness” may be necessary for the IMF to break down interdepartmental barriers and integrate macroeconomic and financial risk assessment. *Source: IMF internal report excerpt (paragraphs 40–51 as provided).* ### 52. The third new initiative would be to create a new summary Global Policy Note. We propose ### The third new initiative would be to create a new summary Global Policy Note. We propose ### Proposal for a Global Policy Note (GPN) - Create a new publication, the Global Policy Note (GPN), issued on a timely and frequent basis and directed at top public and private sector decision makers. - The GPN is not intended to replace WEO, GFSR or the Fiscal Monitor, but to be an authoritative, short, readable and hard-hitting note that: - Pulls together surveillance work across the Fund, including “connecting the dots” work and work on emerging threats. - Distils what is most relevant to key decision-makers. - Is subject to a fast-track review process similar to the Pre-Cogs teams’ findings. ### Content sources and nature of messages - Some material for the GPN already exists in messages from the Managing Director, the First Deputy Managing Director, the Economic Counsellor and the Financial Counsellor delivered at G20 meetings and other fora, as well as in press conferences and media interviews. - These messages: - Reflect top management views on what is most relevant, timely and important for decision makers. - Are based on the full breadth of the Fund’s work, not simply summaries of flagship publications. - May reflect recent research or informed reactions to fast-moving events. ### Relationship to other surveillance products - The GPN should create interest in, not compete with, other Fund surveillance products. - It would draw from existing products, be cross-referenced to sources, and invite readers to consult underlying research. - Recommendation: carry out a review of the purpose and target audiences of each flagship product to ensure content is aligned to purpose and audience, while avoiding immediate major mergers or eliminations of flagship publications. ### Production, governance and team structure - Current practice: public communications of MD and other senior officials are developed by an ad hoc senior managers group including the head of EXR. - Proposed approach: - Create a small team of officers drawn from various Fund departments on short-term rotating assignments to foster teamwork and an integrated view. - The GPN team could report to the MD or the First Deputy MD, taking directions on key messages from senior management including the Financial and Economic Counsellors and the Head of EXR. - The team would work closely with the Pre-Cogs team. ### Organisational changes to support integrated multilateral surveillance - Deep-rooted departmental silos impede the Fund’s ability to “connect-the-dots” and “fill in the cracks” (see paragraphs 25 and 26). - Recommended cultural and HR changes: - Adopt HR policies to encourage more frequent interdepartmental transfers. - Adopt compensation policies that recognise good teamwork. - Encourage senior management commitment to reduce departmental insularity and promote cooperation. - Continue existing integrative initiatives such as cross-referencing publications, departmental involvement in reviewing surveillance publications, the Financial Surveillance Group, and weekly interdepartmental surveillance meetings. - Caution on major reorganisations: - A more fundamental organisational realignment to integrate financial stability risk views may have merit but is beyond the paper’s scope and should be approached with caution due to potential unintended consequences (paragraph 57). ### Resource implications and implementation - Implement recommendations within the current resource envelope. - Objective: shift effort away from traditional Fund activities toward integrated multilateral surveillance by reprioritising existing departmental activities and resources (paragraph 58). ### Strengthening impact and traction of multilateral surveillance (Section title: Strengthen Impact and Traction) - Key elements to strengthen impact: - Ensure IMF messages reach appropriate decision-makers (review target audiences). - Build trust and rapport with senior public- and private-sector decision makers (outreach). - Ensure messages are delivered with consistency, clarity and candour (dealing with candour). - Review of target audiences and products: - Case for rationalising surveillance products exists, but do not recommend immediate major changes to flagship products. - Risks of merging products include loss of capacity, internal conflict, and producing an unwieldy publication. - Over the medium term, other recommendations may set the stage for formal integration or consolidation. - Outreach recommendations: - Enhance outreach to senior decision-makers (governors of central banks, CEOs of global SIFIs). - MD, First Deputy Managing Director, Financial and Economic Counsellors should play central roles; face-to-face meetings preferred. - Extend outreach to regional groups and new financial stability boards in Europe, the U.S. and the U.K. to deepen understanding beyond the G20 and improve perceptions of fairness. - Outreach should combine institutional and informal personal-relationship elements. - Communicating tail risks and work-in-progress: - Adopt a clear protocol to publish research on tail risks without implying senior management consensus that risks are serious possibilities. - Consider a Board-approved policy allowing clearly-labelled public statements in multilateral surveillance products, including the GPN, about emerging threats and work-in-progress. - Use private channels for concerns judged too preliminary or potentially destabilising for public communication. - Failure to communicate speculative or in-progress risks publicly risks the Fund remaining behind the curve. - Trade-offs between public and private communication channels: - Sensitive issues may require private delivery of candid messages; public communication can provide leverage by incentivising authorities to act. - Excessive reluctance to use public channels may reduce leverage; lack of candour in private channels makes the Fund a “spectator.” - The tradeoffs become acute when the Fund participates in financing operations; recommend instituting a formal internal policy to assess and document risks and consequences of financing operation failure (paragraph 66). - Steps for financing operations: - Internally assess and document risks and consequences of failure. - Assess systemic impact of failure and consider mitigating actions for potentially affected countries. - Communicate privately regarding need for mitigating actions. - Consider whether and how concerns can be made public without undermining financing success. - Encourage staff to hold contrarian opinions and publish clearly-labelled research that may not support official positions; consider other media (e.g., IMF Direct blog) for contrarian views. - Perception of Fund fairness and candour: - Perception of fairness appears to be improving as memories of past crises fade. - No single measure will accelerate improvement except potentially rebalancing voting rights and ending automatic top-position dominance by Europe and the US (recommendations beyond this study). - Improvement in independence/candour and perceived fairness requires strong commitment from the Managing Director and senior management. ### Working with the FSB and data issues - Relationship with FSB: - The Fund’s relationship with the FSB is generally effective; the Fund adds significant value and the FSB does not, for the most part, undermine Fund work. - The Fund should support FSB efforts without seeking credit, recognising distinctive mandates. - The Fund should be prepared to comment independently on FSB initiatives and standard-setting both within FSB fora and publicly. - Value-add and research role: - The Fund is uniquely placed to provide systematic analysis of global regulatory efficiency and stability implications using its research expertise, cross-cutting spillover analysis, FSAP work and Article IV reviews. - The Fund could study longer-term impacts of FSB or FSB-inspired initiatives and suggest mid-course adjustments based on research. - Concerns exist within the Fund about aspects of Basel III; future stress scenarios and impact assessments at various implementation stages could test the validity of such concerns and act as a counterweight to efforts to dilute Basel III measures. *Source: IMF internal study (excerpts as provided).* ### 69. Play an active role in encouraging more data disclosure and surveillance of global SIFI’s. We ### _072511 - 69. Play an active role in encouraging more data disclosure and surveillance of global SIFI’s. We ### Data gaps, constraints, and the Fund’s role - The Fund has identified data gaps arising from the GFC, including those for global SIFI’s (see paragraphs 39 to 43 of Section D). - As long as the gaps remain unfilled, “there will remain an important hole in the dyke the authorities are trying to build against the threat of future crises.” - Hurdles to sharing global SIFI data include sensitivity and confidentiality issues and doubts about whether the Fund should be the repository/aggregator of this data. - The Fund has traditionally not been the organization that collects international banking statistics; that role has been the BIS, which “has the first mover advantage and track record in this area.” - These hurdles “will take time to address.” ### Short-term strategy to enhance the Fund’s data role (paragraph 70) - Recommended short-term approach with benefits that “will unfold over time”: - (1) Play an active role in the G20 Data Gaps Initiative, including in the plan to develop a data template for Global SIFI’s, while remaining mindful of the need to involve non-G20 countries at the appropriate time. - (2) Continue to work with existing data from both published and proprietary sources and do more analysis on interconnectedness. - (3) Add the Fund’s strong voice to calls for more extensive public disclosure by European and other non-North American financial groups. - Over time this strategy is expected to: - Enhance the credibility and expertise of the Fund in monitoring Global SIFIs. - Allow the Fund’s senior management to reach out to CEOs of global SIFIs (as recommended in paragraph 62) to build rapport, exchange views, and agree on areas of mutual interest. - Reduce resistance to sharing data as CEOs and national authorities “see how the data can help to create a better ‘global risk map’.” - The authors judge this gradual, cooperative strategy “is likely to be a more effective approach than taking a more aggressive stance from the start.” ### Strengthening legal foundations for macro-financial surveillance (paragraph 71) - Options to strengthen legal foundations: - Amend the Articles of Agreement. - Adopt a Multilateral Surveillance Decision clarifying the Fund’s role in financial stability, namely, “to promote global economic and financial stability.” - A suggested Board decision should make clear that “the financial sector is an integral, even if derived, part of the Fund’s systemic oversight mandate.” - In the context of the legal framework review underway, it is important that the scope of multilateral surveillance be clarified to include both the macroeconomic and financial sectors, including all matters covered in FSAP’s and ROSC’s. - Clarification should include financial sector supervision and regulation, to clarify the Fund’s right to include the impact of such issues in its surveillance activities. - Ideally, the Fund’s responsibility to carry out surveillance of the financial sector should be clarified in the Articles of Agreement. - Consideration when amending the Articles: - Amend Article VIII, Section 5, which precludes the Fund from requiring its members to report certain information required for effective surveillance, such as information relating to financial groups. - Permit the Fund to protect confidential supervisory information, addressing one factor blocking the Fund’s access to information about individual financial groups. - To promote timely and independent non-mainstream work, incorporate into a multilateral surveillance decision a review process that is fast-tracked and separate from the Board. - Consider reviewing “the role of the Board in the context of its ability to support the revised mandate and all aspects of the Fund’s role as Global Financial Stability Advisor.” - Ultimately, clarify the Articles of Agreement “to reflect these changes so as to cement the legitimacy of the Fund’s advice in the financial sector.” ### Seize the day: the Fund’s overarching role and next steps (paragraph 72) - Ultimate recommendation: the Fund must shape its multilateral surveillance and financial stability efforts based on a commitment to act as the Global Financial Stability Advisor. - The Fund should: - Work cooperatively with other actors in the financial stability space to support their efforts. - Fill gaps and carry out work that no other groups can effectively accomplish, leveraging the Fund’s unique capacity to link macroeconomic and financial expertise to understand contagion channels between the real economy and financial sector. - Current state: - The Fund is “already filling this overarching role” despite it not being clearly articulated or fully supported by the Fund’s existing mandate. - Even if the Fund’s mandate is strengthened (as recommended), a strengthened mandate alone will not be enough; the Fund must “muster the will to assume this expanded role and take a number of actions to fulfill it.” - Because immediate amendment of the Fund’s mandate may not be possible, the final recommendation is that the Fund should “seize the day, without waiting for a change in mandate, and redouble its efforts to explore emerging risks and encourage action to prevent future financial crises.” ### Conclusion (paragraphs 73–74) - Quoting John Maynard Keynes’s hopes for the Fund’s founders: a many-coloured coat (belonging to the whole world), a box of vitamins (energy and a fearless spirit), and “a spirit of wisdom ... so that their approach to every problem is absolutely objective.” - As the world deals with legacies of the GFC, the Fund needs to muster “the wisdom, energy and fearless spirit to perform its role as the guardian of global economic and financial stability.” *Source: _072511 - 69. Play an active role in encouraging more data disclosure and surveillance of global SIFI’s. We (PDF).* ### 14. After the crisis, there was a renewed effort by international organisations to fill the data gaps ### 14. After the crisis, there was a renewed effort by international organisations to fill the data gaps ### Data gaps and the Fund’s role in LCFI surveillance - For the Fund to carry out meaningful surveillance of Large Complex Financial Institutions (LCFI), it would require institutions-specific data for LCFIs. - Countries greatly resisted sharing institutions-specific data because most supervisors were prevented by law from sharing the data with outside parties. - The Fund pushed hard, through FSB and the international data gathering initiatives, to collect this data but progress had been slow. - One reason for slow progress: “nobody trusts the Fund with the data as the Fund is a leaky place.” - The argument to use what’s available in published financial statements was only valid to some extent because not all Financial Institutions practises the same degree of disclosure. ### Communications on flagship IMF products - EXR had a comprehensive communications program for IMF’s flagship products: WEO, GFSR and the Fiscal Monitor. - Challenges identified: - Ensuring that messages were consistent across the three reports when the departments did not seem to be working together to check for consistencies. - Staff members were prone to writing long papers without first thinking of the audience and the key messages. - Recommendation for communications process: - The communications process should ideally begin at the time of writing where the audience and key messages were identified from the start. ### Membership demand for cross-country analysis and Fund progress - The membership has repeatedly called for the Fund to: - identify cross-country issues, - share cross-country experience, and - do more cross-border analysis such as inward and outward spillovers and analysis of macro-financial linkages and transmission channels. - Since the GFC, the Fund has made some progress in this area. ### Cross-cutting thematic reports (since 2009) - The Fund started producing thematic reports on topics relevant to a group of countries such as: - Cross-Cutting Themes in Major Article IV Consultations and - Cross-Cutting Themes in Economies with Large Banking Systems. - These reports have been useful in distilling important issues and identifying common factors for success and failure on key policy issues. - Example: “Cross-Cutting Themes in Economies with Large Banking Systems” - Used the highly financial integrated Benelux region to illustrate how the absence of cross-border resolution frameworks and burden sharing arrangements led to ad hoc and inefficient solutions. - Used Fortis, a bank which was split on national, rather than business lines, as an effective illustration. - Simulated cross-border spillovers through bank exposures for economies with large banking systems in Europe and the US which are major global liquidity and capital providers in the interbank network. - Simulations enabled realistic assessments of inward and outward cross-border spillovers and provided useful benchmarks for comparison. - Two hypothetical shocks were simulated: - (1) a credit shock in which the initial default by an institution may trigger additional rounds of defaults; and - (2) a credit and liquidity shock, in which each credit shock is compounded by a liquidity shock. ### GFSR April 2010 — Box 1.1: measuring risk transmission among Euro Zone Sovereigns - Key conclusion quoted: - “The main sources of risk transfer— shown by the sum of the percentage contributions in the last row—were Austria, Ireland, Italy, and the Netherlands. In other words, the euro zone members that faced the greatest concerns regarding their exposures to eastern Europe, domestic financial systems (e.g., Ireland), or general fiscal conditions (in the case of Italy) transmitted the most sovereign risk to other countries. In contrast, during the latest sovereign risk phase (see second table), Greece, Portugal, and, to a lesser extent, Spain and Italy became the main contributors to inter-sovereign risk transfer, reflecting the shift in market concerns from financial sector vulnerabilities to fiscal vulnerabilities”. ### Understanding Financial Interconnectedness - The Fund contributed to emerging work on macro-financial linkages and spillovers by mapping out: - the global architecture of funding networks and cross-border financial linkages. - Findings highlighted: - the highly concentrated nature of the global financial system, - the increased scope for transmission of shocks across networks, and - the importance of conducting spillover assessments across common lenders and borrowers. - The paper explored two related fault lines that played a pivotal role in the global financial crisis: - funding models and - ratings. *Source: _072511 - 14. After the crisis, there was a renewed effort by international organisations to fill the data gaps* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2011/_072511.pdf_