Time For A Spring Cleaning: The Global Economy Will Thank You
IMF Blog, February 25, 2013
Source details
- Canonical URL
- Time For A Spring Cleaning: The Global Economy Will Thank You
Other formats
Bibliographic details
- Authors: Jose-Vinals
- Published: February 25, 2013
Overview
- Author: José Viñals
- Publication date: February 25, 2013
- Central recommendation: Policymakers should de-clutter their to-do lists by focusing on three priorities—strong banks, strong regulation, and strong central banks—to support growth and improve financial and monetary stability in 2013 and beyond.
Strong banks
- Findings
- Financial institutions in advanced economies look healthier today, but the cleanup of the banking sector is not complete.
- Weak banks are a drag on growth, particularly in Europe.
- Non-performing loan ratios continue to rise in several countries in the euro area periphery and emerging economies in Europe amid high unemployment and anemic growth.
- Some banks may need extra capital cushions to offset deterioration in loan quality.
- Some banks may be beyond repair and must be restructured or wound down to prevent “zombie” banks that:
- have little or no capacity to provide fresh loans to companies and households;
- tend to avoid writing down bad loans, masking inevitable losses and creating “zombie” companies that are unviable in the longer term.
- Policy recommendations
- Weak banks in Europe should complete their spring cleaning this year to get the real economy back on track.
- Cleanup requires a joint commitment by management, investors, regulators, and political leaders.
- Direct recapitalization of weak euro area banks through the European Stability Mechanism should be a viable option in some cases.
Strong regulation
- Findings
- Progress has been made, but regulatory work remains incomplete.
- The new international banking rules known as Basel III need to be implemented.
- Significant differences across countries remain in banks’ calculations of basic Basel III metrics such as risk-weighted assets.
- Wider use of central counterparties will increase transparency in the over-the-counter derivatives market and help make the financial system less risky.
- Recent scandals involving complex derivatives suggest banks’ internal risk controls are often inadequate.
- Some banks remain “too-important-to-fail” because of size, complexity, and interconnectedness.
- Evidence and research
- IMF research shows that larger, shock-absorbing capital and liquidity buffers contribute to lower financial stress and higher and more stable economic growth, particularly when buffers consist of high-quality capital and more liquid assets.
- Policy recommendations
- National authorities must implement Basel III capital and liquidity requirements and encourage an internationally consistent buildup of new capital and liquidity buffers to avoid regulatory arbitrage.
- Reform of the market for derivatives must accelerate, including wider use of central counterparties.
- Policymakers must remove moral hazard associated with “too-important-to-fail” institutions by establishing effective resolution regimes that allow unviable banks to die safely.
- Financial centers should swiftly adopt resolution regimes; the United States and the United Kingdom have agreed to coordinate contingency plans for winding down failing cross-border banks.
- Strengthen supervisors so they can enforce new rules fairly and effectively and address systemic risks.
- Many national authorities will need to press ahead with implementation of new macroprudential policies and make national decisions on their institutional and operational aspects.
- The IMF will support implementation by integrating macroprudential concepts into surveillance and technical assistance work.
Strong central banks
- Findings
- More than five years after the onset of the financial crisis, central bankers face the challenge of responding to changing demands while preserving credibility and confidence.
- Public debate focuses on the effectiveness of monetary policy in a world of ultra-low interest rates, anemic growth, and high unemployment.
- The focus on price stability—avoiding both inflation and deflation—remains the most appropriate goal of monetary policy.
- Using increased inflation to address high public debt ratios is ineffective unless inflation shocks are large and unanticipated, and such a strategy risks pushing up real interest rates and imposing unacceptable costs; historical examples underscore the devastating impact of high inflation on economic growth and social stability.
- Empirical evidence strongly suggests that central bank independence is associated with lower inflation.
- Some commentators argue that extraordinary actions like quantitative easing may have undermined central bank independence, but there is little evidence to support this claim.
- Policy recommendations
- Preserve independent central banks with a mandate and tools to maintain price stability.
- Reinforce commitment to price stability and independence even while modifying the traditional monetary policy toolkit.
- Strong, independent central banks that deliver price stability will be well equipped to navigate the new policy environment.
Perfecting the plan
- Conclusions
- The three priorities—strong banks, strong regulation, and strong central banks—are “must-haves,” rather than “nice-to-haves.”
- These priorities will support growth and significantly improve financial and monetary stability in the medium term.
- Policymakers can muster the necessary resolve to stick to these priorities.
Source: Time For A Spring Cleaning: The Global Economy Will Thank You — José Viñals, February 25, 2013.
Content in this bundle
- Chapter 4: Changing Global Financial Structures: Can They Improve Economic Outcomes?
