## Time For A Spring Cleaning: The Global Economy Will Thank You

_IMF Blog, February 25, 2013_

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**Canonical URL:** [Time For A Spring Cleaning: The Global Economy Will Thank You](https://www.imf.org/en/blogs/articles/2013/02/25/time-for-a-spring-cleaning-the-global-economy-will-thank-you)

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## Bibliographic details
- Authors: Jose-Vinals
- Published: February 25, 2013

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### 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.*

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## Content in this bundle

- **Chapter 4: Changing Global Financial Structures: Can They Improve Economic Outcomes?**
  - [Chapter 4: Changing Global Financial Structures: Can They Improve Economic Outcomes? (Markdown version)](/external/pubs/ft/gfsr/2012/02/pdf/c4.pdf.md){rel="alternate" type="text/markdown"}
  - [Chapter 4: Changing Global Financial Structures: Can They Improve Economic Outcomes? (PDF)](/external/pubs/ft/gfsr/2012/02/pdf/c4.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/wp-content/uploads/2011/03/jose-vinals.jpg](https://www.imf.org/wp-content/uploads/2011/03/jose-vinals.jpg)
- [macroprudential policies](http://blogs.imf.org/2011/04/08/macroprudential-policy-filling-the-black-hole/)

_Source: https://www.imf.org/en/blogs/articles/2013/02/25/time-for-a-spring-cleaning-the-global-economy-will-thank-you_