## Learning from the Crisis: Future IMF Lending Role

_IMF Blog, April 22, 2010_

## Source details

**Canonical URL:** [Learning from the Crisis: Future IMF Lending Role](https://www.imf.org/en/blogs/articles/2010/04/22/learning-from-the-crisis-future-imf-lending-role)

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## Bibliographic details
- Authors: RezaMoghadam
- Published: April 22, 2010

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### Context and crisis response (October 2008–post-crisis)
- In October 2008, following Lehman’s bankruptcy, emerging markets experienced large sell-offs and investors fled, undermining “decoupling” theories.
- The IMF, with strong support from its membership, provided large and upfront financial assistance to help countries weather the crisis.
- The IMF overhauled its lending toolkit, notably by establishing the Flexible Credit Line (an instrument allowing countries with very strong policies to tap IMF resources unconditionally).
- The membership committed to tripling its resource base.
- These actions contributed to putting out the fire and set emerging market spreads on a downward trajectory.

### Multilayered global financial safety net: roles and complementarities
- The recent crisis increased perceptions of volatility and contagion risks, prompting calls to strengthen the global financial safety net.
- Key elements and responsibilities:
  - Increasing resilience to shocks of countries receiving capital flows through improved policies; adequacy of reserves is important but benefits have diminishing returns.
  - Avoiding excessive risk-taking through better supervision in countries generating capital flows.
  - Leveraging financing vehicles: central bank swap lines, regional financing arrangements (e.g., the Chiang Mai initiative), multilateral development bank lending, and IMF financial assistance.
- Comparative roles of facilities:
  - Central banks: natural advantage in alleviating short-term liquidity pressures; swap lines recycled dollar liquidity during the recent crisis.
  - Regional financing arrangements: by pooling reserves, can help address idiosyncratic shocks.
  - Multilateral development banks (e.g., the World Bank): primarily support long-term growth.
  - IMF: provides countercyclical lending, distinguished by global reach, preferred creditor status, large resources, and ability to catalyze private lending through agreed policy frameworks.

### Enhancing IMF crisis prevention and management toolkit
- Further leverage the IMF’s unique characteristics to enhance crisis prevention capability.
- Flexible Credit Line (FCL):
  - Used by Mexico, Colombia, and Poland during the recent crisis.
  - Could be made more effective by lengthening its duration (currently six months) and making country qualification more predictable.
- Precautionary Credit Line (PCL) proposal:
  - Option to introduce a new crisis prevention instrument for well-performing countries that do not qualify for the FCL.
  - Would provide upfront access to financing as in the FCL but would allow for some (light and focused) policy conditionality.
- Systemic crisis management and firewalling:
  - IMF should be able to proactively erect a firewall to protect innocent bystanders from virulent systemic shocks.
  - Rationale for improvement:
    - National central bank responses are necessarily ad hoc; a transparent and predictable standing facility is needed.
    - Systemic crises have global reach; a global solution is preferable to national or regional responses.
    - The nature of the next systemic crisis may differ, and central banks may not be called into action.
  - Multicountry Swap Line (MSL) proposal:
    - A mechanism enabling the IMF to make a unilateral and simultaneous offer of short-term liquidity lines to a limited set of systemically important countries with strong policy track records.

### Moral hazard considerations and conditionality
- Enhanced IMF financing instruments increase crisis prevention and mitigation capacity but raise moral hazard concerns for some observers.
- Distinction by shock type:
  - Less moral hazard when IMF lending addresses “exogenous” shocks (shocks not influenced by the country or its creditors), e.g., a systemic liquidity shock affecting “innocent bystanders” as in the MSL.
  - Greater moral hazard concerns for idiosyncratic shocks.
- Policy on conditionality:
  - Financial assistance to members with weaker track records needs to be subject to the observance of policy conditions.
  - Instruments providing upfront financing should be dedicated exclusively to countries with stronger policy track records.

### Next steps
- The IMF will undertake further work to distill specific proposals on revamping the IMF lending toolkit by the fall.
- Ongoing solicitation of feedback is welcomed.

*Authored by Reza Moghadam — April 22, 2010.*

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## References

- [financial assistance](http://blogs.imf.org/2009/09/30/imf-crisis-programs-assessment/)
- [overhauled its lending toolkit](http://www.imf.org/external/pubs/ft/survey/so/2009/new032409a.htm)
- [resource base](http://www.imf.org/external/np/exr/facts/imfresources.htm)
- [https://www.imf.org/wp-content/uploads/2010/04/moghadam042210a.jpg](https://www.imf.org/wp-content/uploads/2010/04/moghadam042210a.jpg)
- [new paper](http://www.imf.org/external/pp/longres.aspx?id=4439)
- [IMF mandate](http://www.imf.org/external/np/exr/consult/2010/SPR/index.htm)
- [https://www.imf.org/wp-content/uploads/2010/04/moghadam042210b.jpg](https://www.imf.org/wp-content/uploads/2010/04/moghadam042210b.jpg)
- [https://www.imf.org/wp-content/uploads/2010/04/moghadam042210c.jpg](https://www.imf.org/wp-content/uploads/2010/04/moghadam042210c.jpg)
- [blogged](http://blogs.imf.org/2010/04/19/emerging-market-countries-and-the-crisis-how-have-they-coped/)
- [Flexible Credit Line](http://www.imf.org/external/np/exr/facts/fcl.htm)
- [https://www.imf.org/wp-content/uploads/2010/04/moghadam042210d.jpg](https://www.imf.org/wp-content/uploads/2010/04/moghadam042210d.jpg)

_Source: https://www.imf.org/en/blogs/articles/2010/04/22/learning-from-the-crisis-future-imf-lending-role_