{
  "title": "Scanning the Horizon: Monitoring and Managing Financial Market Risks — Speech overview",
  "publication": "IMF News, June 19, 2007",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/sp061907",
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  "summary": "The world economy is experiencing an extended expansion described as \"the best season of growth and stability since the 1960s\" and \"seems likely to continue.\"",
  "publishDate": "2007-06-19",
  "sections": [
    {
      "heading": "Global economic outlook and macroeconomic context",
      "content": "- The world economy is experiencing an extended expansion described as \"the best season of growth and stability since the 1960s\" and \"seems likely to continue.\"\n- United States:\n  - U.S. economic prospects judged \"good.\"\n  - Expectation that the U.S. economy will \"regain momentum gradually\" as the drag from the housing correction and business-sector softness dissipates.\n  - Recent data indicate a recovery in manufacturing in the first quarter of this year.\n  - Sub-prime mortgage risk premia have experienced \"a striking fall\" in recent months; effects on general financial market conditions \"seem to be limited so far.\"\n- China and India growth projections:\n  - China: growth \"likely to be around 10 percent in 2007 and 2008.\"\n  - India: growth \"likely to be around 8 percent.\"\n  - Both imply continuation of \"the very strong growth of 2006.\"\n- Role of macro policy frameworks:\n  - Fiscal consolidation cited as a foundation of global success.\n  - Canada reduced public debt by 30 percentage points of GDP over the past decade.\n  - Central bank independence and inflation targeting (New Zealand and Canada cited) have reduced inflation risk premia and supported lower real interest rates and higher growth.\n  - Recent monetary policy moves: European Central Bank raised policy rates; Bank of Canada signaled concern about increased inflation risks and potential near-term rate increases.\n  - Emphasis on the need for pre-emptive action to contain inflation risks."
    },
    {
      "heading": "Canada-specific analysis and recommendations",
      "content": "- Canada characterized as a \"highly successful participant in the global economy\" with decade-long growth exceeding that of the United States, the euro area and Japan, founded on openness to trade and investment.\n- Investment and financial sector development:\n  - Investment in the financial sector identified as important over the next few years.\n  - Canada's banks described as \"sound and well capitalized.\"\n  - Recommendations to deepen markets for high-yield bonds and venture capital to strengthen the financial sector as an engine for growth.\n  - Suggested policy actions:\n    - Make the banking system more open to foreign investment and mergers to improve competition.\n    - Strengthen investment framework and supporting legislation.\n    - Update regulation of securities; note that \"Canada is currently the only G-7 country without a common securities regulator.\"\n    - Establishment of a common securities regulator recommended to improve investor protection and enable mutual recognition with other countries, including the United States.\n- Sensitivity to U.S. growth:\n  - A 1 percent change in U.S. output affects Canada's GDP by \"somewhere between 0.3 and 0.7 percent of GDP\"; the Fund believes \"the true figure is at the higher end of that range.\""
    },
    {
      "heading": "Financial globalization: scale, benefits, and vulnerabilities",
      "content": "- Financial globalization measured by the sum of gross external assets and liabilities as a share of GDP has \"increased threefold since the mid-1970s,\" with acceleration since the mid-1990s and the most dramatic increases in high-income countries.\n- Fund calculations (as of 2004):\n  - Average sum of external assets and liabilities was \"more than 100 percent of GDP in low-income countries.\"\n  - \"More than 1½ times GDP in middle-income countries.\"\n  - \"More than 5½ times GDP in high-income countries.\"\n- Benefits listed:\n  - Wider pool of investments for global savers.\n  - Broader market for borrowers lowering cost of capital.\n  - Encouragement of local capital market and financial sector development.\n  - Foreign direct investment fostering technology transfer, improved productivity, and employment.\n- Risks highlighted:\n  - Large capital inflows into emerging and developing countries can reverse abruptly, exposing recipients to shocks.\n  - Fund study finding: recipient countries best positioned to benefit from foreign inflows if they have stronger financial infrastructures, stronger institutions, sound macroeconomic policies, and more open trade systems."
    },
    {
      "heading": "Financial market developments and systemic risk concerns",
      "content": "- General observation: greater willingness to take risks in financial markets driven by search for yield and greater ease of transferring risk.\n- Specific areas of concern:\n  - Sub-prime and Alt-A U.S. mortgage markets:\n    - Many borrowers appeared to assume continued house-price appreciation and ignored downturn consequences.\n    - Lenders sometimes \"cynically encouraged\" such behavior while passing most risks to other investors.\n  - Growth in risk-transfer markets:\n    - Global issuance of loan securities expanded from \"around $0.5 trillion in 2000 to $2.75 trillion in 2006\" and became more geographically widespread.\n    - Banks' lending behavior increasingly driven by the price at which loans can be sold in securities markets.\n    - Risk-transfer markets can enhance stability by spreading exposures, but often lack transparency about ultimate risk holders and their capacity to manage risks.\n  - Two systemic unknowns specified as unanswered:\n    - How well liquidity in credit risk transfer or securitized loan markets will hold if defaults rise sharply.\n    - The aggregate effects of increasingly sophisticated hedging strategies combined with high leverage on the system's ability to dynamically hedge risks.\n  - Hedge funds:\n    - Assets under management estimated \"to be over US$1.4 trillion by the end of 2006,\" more than three times the level in 2000.\n    - Estimated \"more than 9,500 hedge funds—fourteen times more than in 1990.\"\n    - Rapid proliferation raises concerns about the quality of late entrants and potential systemic significance of individual failures.\n  - Large private equity buyouts:\n    - Dramatic growth in large buyouts financed by a rising proportion of debt.\n    - Potential risks:\n      - Banks underwriting deals could be exposed if deals fail before completion.\n      - Failures could trigger a reappraisal of risk, curtail market access more broadly, and adversely affect investment and growth.\n    - Call for investors to exercise due diligence and for regulators to remain vigilant regarding systemic implications."
    },
    {
      "heading": "Policy recommendations and institutional responses",
      "content": "- Strengthen transparency and oversight:\n  - Increase transparency of hedge fund operations to enable counterparties to exercise market discipline and help regulators monitor cross-border spillovers.\n  - Complement counterparty monitoring with measures that improve visibility into hedge fund activities.\n- International monitoring and cooperation:\n  - Adequate international monitoring and cooperation urged to identify and address potential cross-border spillovers quickly.\n  - The Fund is deepening work on financial globalization and integrating financial market/sector analysis with macroeconomic policy analysis.\n  - The Fund's role as a forum for multilateral discussion of common problems emphasized.\n- For emerging and developing countries receiving large inflows:\n  - Strengthen financial infrastructures and institutional frameworks quickly.\n  - Interim macroeconomic policy mix recommended: \"a combination of reserve accumulation, nominal currency appreciation, lower interest rates, and, in some cases, fiscal tightening.\"\n- For Canada specifically:\n  - Move to a common securities regulator to improve investor protection and enable mutual recognition.\n  - Encourage openness to foreign investment and mergers in the banking sector, and strengthen investment frameworks and supporting legislation.\n- For market participants and regulators more broadly:\n  - Preserve risk diversification and innovation (including hedge funds) while ensuring precautions against systemic problems.\n  - Exercise due diligence on leveraged private equity activity and monitor potential systemic exposures.\n\nSource: Speech by Rodrigo de Rato, Managing Director of the International Monetary Fund, Economic Club of Toronto, June 19, 2007.\n\n---\n\n\n References\n\n- Canada and the IMF\n- Japan and the IMF\n- United States and the IMF\n- Speeches\n- Rodrigo de Rato y Figaredo\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp061907"
    }
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    "Published: June 19, 2007",
    "The world economy is experiencing an extended expansion described as \"the best season of growth and stability since the 1960s\" and \"seems likely to continue.\"",
    "United States:",
    "China and India growth projections:",
    "Role of macro policy frameworks:",
    "Canada characterized as a \"highly successful participant in the global economy\" with decade-long growth exceeding that of the United States, the euro area and Japan, founded on openness to trade and investment.",
    "Investment and financial sector development:",
    "Sensitivity to U.S. growth:",
    "Financial globalization measured by the sum of gross external assets and liabilities as a share of GDP has \"increased threefold since the mid-1970s,\" with acceleration since the mid-1990s and the most dramatic increases in high-income countries.",
    "Fund calculations (as of 2004):",
    "Benefits listed:",
    "Risks highlighted:",
    "General observation: greater willingness to take risks in financial markets driven by search for yield and greater ease of transferring risk.",
    "Specific areas of concern:",
    "Strengthen transparency and oversight:",
    "International monitoring and cooperation:",
    "For emerging and developing countries receiving large inflows:",
    "For Canada specifically:",
    "For market participants and regulators more broadly:",
    "[Canada and the IMF](http://www.imf.org/external/country/CAN/index.htm)",
    "[Japan and the IMF](http://www.imf.org/external/country/JPN/index.htm)",
    "[United States and the IMF](http://www.imf.org/external/country/USA/index.htm)",
    "[Speeches](https://www.imf.org/en/news/searchnews)",
    "[Rodrigo de Rato y Figaredo](https://www.imf.org/external/np/omd/bios/rrf.htm)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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