Last year IMF examined roles of U.S. risk management techniques and of weakening standards in mortgage loan origination (photo: Alexis Glenn/UPI)
RESPONDING TO FINANCIAL CRISIS
In response, the IMF is working with its member countries and other international institutions to help develop and implement sound policy responses to the crisis.
One contribution, emphasized by IMF Managing Director Dominique Strauss-Kahn, has been the Fund's role in helping countries understand the channels of transmission and feedback between the real and financial sectors.
In carrying out this work, the IMF is drawing on its expertise in the area of financial stability and macro-financial linkages. The IMF has stepped up its work in these areas in recent years and, while it has further to go, the focus of these efforts has shifted to reflect lessons from the ongoing crisis.
Consensus-building on policy lessons
In its April 2008 report to the International Monetary and Financial Committee on The Recent Financial Turmoil—Initial Assessment, Policy Lessons, and Implications for Fund Surveillance, the IMF identified a set of preliminary policy lessons. This report focused, in particular, on the need to strengthen risk management practices; credit rating methodologies and use; valuation, disclosure, and accounting; central bank liquidity frameworks; and supervision and crisis management.
These priorities are consistent with the recommendations formulated by the Financial Stability Forum (FSF), which also cover a range of related policy areas, including with regard to prudential oversight, transparency, credit ratings, authorities' responsiveness, and dealing with stress in the financial system.
This convergence of views on key preliminary lessons and recommendations from the crisis reflects the close collaboration between the IMF and other international fora, including the FSF and its various working groups (such as those on procyclicality, valuation, and leverage), as well as working groups of the Basel Committee on Banking Supervision (on Basel II implementation, for example), the Joint Forum (on Risk Assessment and Capital), and other standard setters.
Multilateral surveillance
Recent issues of the IMF's Global Financial Stability Report and World Economic Outlook have provided in depth assessments of vulnerabilities in the financial system and offered policy advice that have been shaped by the recent crisis and the multilateral consensus on needed policy responses. The GFSR, in particular, has documented the origins and evolution of the crisis and the sources of the current vulnerabilities, and formulated explicit recommendations for both the public and private sectors, for the short and medium term.
For example, the September 2007 issue of the GFSR examined the roles of weakening standards in mortgage loan origination in the United States and of risk management techniques used by market participants during the crisis, and the Spring 2008 issue provided early estimates of potential losses from subprime exposures. The 2008 issues also included recommendations in the areas of valuation and disclosure of structured products; stress in interbank markets and monetary policy transmission; and fair value accounting in the current credit cycle.
In addition, the IMF's other flagship publication, the World Economic Outlook addressed in 2008 the changing housing cycle and implications for monetary policy, as well as the relationship between financial stress and economic downturns.
Bilateral policy dialogue
IMF has built on international policy recommendations and lessons from the crisis, as well as other work under way internally, to shape its bilateral policy advice:
• Recent assessments in mature and emerging market countries for its Financial Sector Assessment Program (FSAP) have focused on exposures to subprime-related financial instruments and tighter funding conditions, crisis management frameworks, and supervisory arrangements. In particular, teams have provided detailed advice on areas where financial safety nets, cross-border coordination, and internal communications may need to be strengthened. In addition, stress tests have assessed the potential for contagion through financial channels highlighted by the crisis, benefiting from the IMF's enhanced capacity for financial stability modeling—for example, with regard to credit risk, second-round effects, and liquidity risk.
• Article IV consultations (the IMF's annual economic checkups for member countries) have adapted to the needs of its membership in the wake of the global turmoil. As with the FSAP assessments, crisis management frameworks were often a key focus, as were in some countries the challenges faced by central banks and regulatory authorities in stabilizing disrupted money markets. More broadly, the range of reforms adopted or envisaged in response to the crisis have been increasingly discussed under bilateral surveillance, which has been especially evident in the case of recent consultation reports for advanced economies.
• The IMF's capacity-building activities have also aimed to meet the shifting priorities of its members in the wake of the crisis. Although this shift has been less visible, partly reflecting the fact that the bulk of IMF technical assistance is directed to lower-income countries that have until now been less affected by the global financial turmoil, there has been increased effort to focus IMF capacity building more on supervision and crisis management systems, as well as central banks' operational frameworks.
Work program ahead
Recent financial market developments illustrate the importance of the IMF's work in helping build international consensus on appropriate policy responses to financial crises, identifying global financial risks, and disseminating best practices across its membership.
To fulfill its mandate in helping maintain global monetary and financial stability, the IMF has taken further steps to adapt to today's market realities. Indeed, building on its comparative advantages, it is enhancing its financial sector expertise in a number of core areas, such as bank regulation and supervision (transition to Basel II, for example, and supervisory structures) and crisis management (for example, deposit insurance schemes and interagency coordination).
At the same time, especially in view of resource constraints, the emphasis will also be on leveraging such expertise and maximizing its impact, including by more effectively integrating the IMF's country-specific activities with its regional and global analyses, putting policy challenges in a broad macro-financial stability perspective, and enhancing the IMF's early warning capacities.
In sum, the IMF's unique mandate—which covers both macroeconomic and financial stability—as well as its near universal membership, mean that it will continue to play a central role in facilitating effective national and international responses to the crisis.
Comments on this article should be sent to imfsurvey@imf.org
