Transcript of a Press Conference on the Spring 2009 Global Financial Stability Report
IMF News, April 22, 2009
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- Authors: José Viñals
- Published: April 22, 2009
Overall assessment of the global financial system
- Key message: "The unprecedented policy response in both the financial and macroeconomic domains is gradually beginning to restore market confidence, but continued decisive and effective action is needed to preserve and strengthen these first signs of improvement and to help provide a more stable and resilient platform for sustained global growth."
- Risk to policy success: political—whether sufficient public resources can be marshaled and allocated effectively.
- Emphasis on transparency and cross-border consistency of national measures to avoid distortions and unintended consequences.
Deleveraging, writedowns, and credit contraction
- Deleveraging pressures could lead to a credit contraction in the United States and Europe "of up to 4 percent at its most negative point."
- Estimated writedowns on U.S.-originated assets:
- Increased from $2.2 trillion (interim update in January) to about $2.7 trillion (current report).
- Top-down, broadened analysis suggests:
- Global writedowns, actual and potential, could be as large as $4 trillion.
- About two-thirds of those global writedowns could be borne by banks.
- Timing split of pending writedowns for the banking system:
- About one-third already incurred in 2007 and 2008.
- Two-thirds are potential writedowns for the period of 2009 and 2010.
- Alternative figure cited during Q&A: "the financial institutions will need to write down $4.1 trillion worldwide"—the presenters noted estimates may be revised and carry great uncertainty.
- Conditionality noted: writedown magnitudes depend on economic recovery, early authorities’ actions, banks' earnings, and market valuations.
Emerging markets, financing needs, and regional differentiation
- Global financing needs for emerging markets described as "important."
- Specific figure referenced in Q&A: financing needs of US$1.8 trillion for this year (emerging markets).
- Effects of deleveraging on emerging markets:
- Curtails international capital flows.
- Shifts financing burden to domestic markets and raises the cost of credit.
- Retracement strains economies reliant on foreign-financed credit growth and raises expected bank writedowns.
- Regional differentiation:
- Emerging Europe generally hit hardest because of higher reliance on cross-border and wholesale funding, weaker balance-of-payment positions, and higher credit risk.
- Latin America is described as "much better placed" relative to past episodes and to emerging Europe due to prior financial strengthening: reduced vulnerabilities, movement from current-account deficits to surpluses, and reserve accumulation.
- Policy tools highlighted:
- Augmentation of IMF resources and new lending facilities, including the Flexible Credit Line, as helpful external support for countries with large financing gaps.
Emerging Europe and parent-bank relationships
- Outlook for emerging Europe improved following IMF resource augmentation and creation of the Flexible Credit Line.
- Role of Western European parent banks:
- After Lehman Brothers, pressure on parent banks impacted subsidiaries in Eastern Europe.
- Western European governments’ decisive actions have helped parent banks honor cross-border commitments; no significant retreat observed.
Systemic risk, measurement, and macroprudential regulation
- Chapters 2 and 3 focus areas:
- Chapter 2: traditional view of systemic risk where one institution's failure affects others.
- Chapter 3: detecting systemic crises to guide choice of policy tools.
- Emphasis on developing a macro-prudential approach that accounts for system-wide effects of macroeconomic policies.
- Work to identify systemically important institutions to define regulatory perimeter, in line with G20 mandates.
Policy recommendations and approaches to facilitate orderly deleveraging
- Three basic approaches promoted:
- Supply liquidity to the banking system to validate loanable funds.
- Cleanse banks' balance sheets of impaired assets.
- Recapitalize viable but undercapitalized banks while promptly resolving non-viable institutions.
- Importance of credible loss recognition:
- Promptly identify and address impaired assets, provide adequate funding, and implement approaches transparently.
- Banking supervisors to determine viability; temporary public ownership may be necessary in some cases to restore capital ratios and market confidence.
- Capital-raising channels:
- Market-raised capital preferred.
- Some capital needs could be satisfied via conversion of preferred shares to common shares.
- Government guarantees to cover losses on selected asset pools could indirectly meet capital needs.
- MS. KODRES noted implicit guarantees already in place for certain asset pools were not included in the recapitalization numbers and could act as additional buffers.
Public intervention, ownership, exit strategies, and taxpayer protection
- Public ownership is not recommended as a general rule but may be the most effective stabilization tool in limited cases and for a limited period.
- Exit strategy advice:
- Formulate clear, well-designed plans for eventual exit of the public sector.
- Exit timing should be as soon as possible once stabilization and market confidence permit; avoid prolonging public ownership.
- Prefer cross-border coordination of exit conditions to minimize distortions and level-playing-field concerns.
- Consideration of fiscal implications:
- Public interventions involve costs for taxpayers and affect public debt and deficits.
- Countries with delicate fiscal positions need credible medium-term exit strategies to preserve fiscal sustainability and public confidence.
- Public capital can catalyze private capital under certain circumstances.
- Example: conversion of government-held preferred stock into common equity identified explicitly as a possible way to raise higher-quality capital for banks.
- Guarantees: governments can use guarantees covering specific asset pools to buffer capital depletion, but these entail contingent risks for taxpayers.
Accounting, mark-to-market, and transparency
- IMF work for the exercise was conducted on a mark-to-market basis.
- Clarification of accounting changes: recent rule clarifications require transparent presentation distinguishing liquidity risk versus credit risk.
- Importance of transparent communication about accounting rules and valuation methods, especially for illiquid securities, to provide clarity on potential losses and writedowns.
- IMF encourages more information disclosure about valuations to reduce uncertainty and procyclicality.
Stress tests, PPIP, and U.S. bank results
- U.S. stress-test results were pending at the time of the press conference; IMF representatives deferred judgment until results were available.
- Public-Private Investment Partnerships (PPIPs) seen as useful to attract private capital back into banking system and help cleanse the balance sheets of banks participating in the scheme (19 banks mentioned under the scheme).
- Observed recent bank profits possibly encouraging, but with caution due to ongoing uncertainties.
Country-level indicators and Nigeria reference
- The report contains Table 1.1 (page 10) comparing macro and financial indicators for selected emerging market countries, including Nigeria.
- Nigeria’s stylized facts from the table:
- Relatively high current-account balance.
- Relatively fast growth of credit in past few years.
- Some lending not fully covered by deposit base.
- The report does not provide country-specific judgments; macro assessments are covered in the World Economic Outlook.
Uncertainty and scenarios
- Present estimates are conditional and subject to considerable uncertainty; outcomes could be worse or better depending on policy actions and economic recovery.
- If decisive, effective measures are taken, writedown estimates (e.g., $4 trillion or US$4.1 trillion cited) could decline; conversely, inadequate policy response could increase losses.
- Market stabilization and price recovery could reduce mark-to-market losses and lower aggregate writedowns.
Transcript of a Press Conference on the Spring 2009 Global Financial Stability Report, IMF — April 22, 2009