IMF Survey: Policymakers Need to Address Systemic Risk, says IMF

IMF News, May 15, 2009

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Global cooperation in financial sector supervision needs to improve to address systemic risks, said IMF Managing Director Dominique Strauss-Kahn in a speech to bankers in Vienna.
He anticipated a recovery in the world economy next year, with the “beginning of the turning point in October, November, or December" this year.
Further tests for the global economy remain ahead.

A first step is to delineate a global set of rules-of-the-road to mitigate systemic risks.
“We need an agreed framework of cooperation for dealing with cross-border firms that would address conflicts of interest—this would include harmonizing national legislation where necessary,” said Strauss-Kahn.

Regulation: Regulatory arbitrage must be avoided and key parts of prudential regulations must be applied consistently across countries and financial activities.
Resolution tools: Common criteria need to be established for triggering early action when a firm is in trouble.
Depositor and investor protection: Consistent protection for depositors and investors should be part of the framework.
Information Sharing: Financial supervisors in home and host countries must be granted legal obligations and powers to share information among themselves and with local counterparts. The possibility of joint inspections should also be considered.

The IMF, through its surveillance work, would make sure the framework was translated into day-to-day practices and to check whether it was followed in a crisis.
The IMF will focus surveillance on systemic risks “from all quarters,” and better monitor the effects of policy decisions in monetary and fiscal policy on financial sectors, markets, and institutions.
Strauss-Kahn said the IMF is developing a vulnerability exercise covering both advanced and emerging market countries along with the Financial Stability Board.
He said the early warnings must be “tough, and not shy away from naming and shaming”, when warranted.

Countries coordinated fiscal and monetary policy effectively during the crisis, but weaknesses in cross-border financial sector supervision and regulation revealed room to improve cooperation.
Central banks acted quickly and in coordination, providing a needed boost to confidence.
When monetary policy alone proved insufficient, fiscal measures were deployed to avoid erosion of central bank gains.
“Countries acted in a coordinated manner and moving together, they delivered a global fiscal stimulus of 2 percent of GDP in 2009, exactly what we had asked for a year ago,” said Strauss-Kahn.
Working in tandem, policymakers did the “same thing at the same time for the same reason,” an unprecedented achievement.

The crisis is not over yet and further tests remain; countries need exit strategies from crisis policies.
“With fiscal policy, there is a time to sow and a time to reap, and loose policies today must go hand-in-hand with tight policies tomorrow. Complacency on this front will only lay the groundwork for serious fiscal solvency problems down the road,” he stated.
Exit strategies will require coordination and face politically difficult choices: “These exit strategies will also entail coordination—perhaps even greater coordination because the choices become more politically difficult. The big challenges lie ahead. Let’s not lose the momentum.”

Anticipated recovery timing: “beginning of the turning point in October, November, or December" (this year).
Global fiscal stimulus delivered: 2 percent of GDP in 2009.
Emphasis on naming and shaming in early warnings when warranted.
Specific crises cited as exposing supervisory weaknesses: failure of investment bank Lehman Brothers and the collapse of the Icelandic banking system.

Source: IMF Survey: Policymakers Need to Address Systemic Risk, says IMF (May 15, 2009).