Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform
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- Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform
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Bibliographic details
- Published: December 19, 2017
Background and motivation
- Heightened and protracted global uncertainty combined with frequent episodes of capital flow volatility have intensified demand for liquidity support.
- In response to calls from the IMFC and the G20, the Fund identified gaps in the global financial safety net (GFSN) and the Fund’s lending toolkit for crisis prevention, including insufficient coverage against liquidity pressures resulting from volatile capital flows.
- The proposals in this paper draw on previous Fund work on the adequacy of the GFSN, the review of the Fund’s current toolkit for crisis prevention, and extensive consultations with the membership.
Review of the Flexible Credit Line (FCL)
- The review concludes that the FCL has been effective in providing precautionary support against external tail risks.
- Successor FCL arrangements and associated access levels have been in line with the assessment of external risks and potential balance of payments needs.
- Identified scope for improvement:
- Strengthen transparency and predictability of the qualification framework by adding indicator-based thresholds to complement and inform judgment.
Proposed toolkit reforms (three complementary reforms)
- Establishment of a Short-term Liquidity Swap
- Purpose: provide renewable and reliable liquidity support against potential short-term moderate volatility of capital flows.
- Target users: members with very strong fundamentals and economic policies.
- Design intent: tailored to improve reliability and appeal to users.
- Use of a core set of indicators with thresholds to guide judgment in FCL qualification
- Expected effect: improve predictability and transparency while keeping the standards unchanged.
- Elimination of the Precautionary and Liquidity Line (PLL)
- Rationale: maintain a streamlined and coherent toolkit.
- Observed factor: low use of the PLL, likely reflecting issues of tiering with the FCL.
Commitment fee policy considerations
- The paper discusses possible reforms of the current commitment fee policy to promote a more balanced use of Fund resources.
- Possible options highlighted:
- Increasing the commitment fee at high access levels.
- Introducing a new time-based commitment fee.
Publication details
- Publication title: Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform
- Publication date: December 19, 2017
- Format: Policy Paper
International Monetary Fund — Adequacy of the Global Financial Safety Net—Review of the Flexible Credit Line and Precautionary and Liquidity Line, and Proposals for Toolkit Reform (December 19, 2017).
Content in this bundle
- Policy Paper