Reforming the Financial Landscape After the Crisis
IMF Blog, April 13, 2010
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Bibliographic details
- Published: April 13, 2010
Publication and release
- Title: Reforming the Financial Landscape After the Crisis
- Date: April 13, 2010
- Format: Three analytical chapters from the upcoming Global Financial Stability Report released (Chapter 2 published on April 13, 2010; Chapter 1 comes out next week; Chapter 3 and Chapter 4 referenced).
- Institutional context: IMF blog post on IMFBlog.
Chapter 2 — central questions and framing
- Focus: Two questions for policymakers reforming the financial landscape:
- Whether systemic risk would be reduced by placing all regulatory functions under the purview of one entity—be that a single agency or an overseeing council?
- If capital surcharges on financial institutions were used to limit systemic risk associated with domino-like failures, how would such surcharges be constructed?
- Analytical stance:
- "we do not have “the” answer to these difficult questions, but we think we have been able to frame the debate in a constructive way and provide guidance to policymakers on these important issues."
- Capital surcharges on systemically important institutions are presented as one method within a multipronged approach, not necessarily the only solution.
- Policy implication:
- There is a need to examine a number of approaches to determine which one or combination will best reduce systemic risk.
Chapter 3 — market infrastructure and OTC derivatives
- Focus: Improving market infrastructure to help limit systemic risk.
- Specific market examined: over-the-counter derivatives market, with attention to problems revealed by Lehman’s bankruptcy and AIG’s near miss in the credit default swap market.
- Analytical point: The IMF examines how central counterparties for clearing these contracts can act as shock-absorbers in the financial system.
- Multimedia: The chapter release is accompanied by a video (YouTube link embedded in the source).
Chapter 4 — global liquidity and capital inflows
- Focus: Vulnerabilities that may be building up in some countries partly as a result of low interest rates and ample liquidity in the main advanced economies’ monetary policy stances.
- Key findings:
- The chapter documents that global liquidity plays a role in capital inflows to emerging and some other advanced countries where interest rates are higher and growth prospects are stronger.
- An increase in capital inflows is positive following their dramatic decline during the height of the crisis, but excessive inflows can exacerbate inflation pressures or asset price bubbles.
- Policy recommendations and options for liquidity-receiving economies:
- First-best solution: macroeconomic policies, including flexible exchange rates, and enhanced prudential regulations for the financial sector, can go a long way in managing a surge of capital inflows.
- The chapter also reviews international experience with capital controls as part of the policy toolkit.
- Multimedia: The chapter release is accompanied by a video (YouTube link embedded in the source).
Overarching messages and guidance to policymakers
- The released chapters aim to frame debates and provide guidance on systemic risk reduction, market infrastructure improvement, and management of capital inflows.
- Emphasis on a multipronged approach: capital surcharges are one tool among several; flexible macroeconomic policies and prudential regulation are highlighted as first-best responses to surges in capital inflows.
About the blog and institutional note
- IMFBlog is a forum for the views of IMF staff and officials on pressing economic and policy issues of the day.
- The IMF is based in Washington D.C. and is an organization of 191 countries, working to foster global monetary cooperation and financial stability around the world.
- Disclaimer: The views expressed are those of the author(s) and do not necessarily represent the views of the IMF and its Executive Board.
Source: Reforming the Financial Landscape After the Crisis — IMFBlog, April 13, 2010.
Content in this bundle
- Chap2
- chapter 3 MakIng over-the-counter derIvatIves saFer: the role oF central counterpartIes
- chapter 4 global lIquIdIty expansIon: eFFects on “receIvIng” econoMIes and polIcy response optIons