Strengthening Surveillance—Lessons from the Financial Crisis
September 23, 2015
In recent years, the IMF has undertaken major initiatives to strengthen surveillance to respond to a more globalized and interconnected world. These initiatives include revamping the legal framework for surveillance, deepening analysis of risks and spillovers, strengthening financial surveillance of systemic risk, stepping up assessments of members’ external positions, and responding more promptly to concerns of the membership. The 2014 Triennial Surveillance Review, furthering initiatives launched in the 2011 Review, proposes steps to strengthen implementation of reforms in these areas, and also to ensure that surveillance is well-equipped to address emerging challenges and support sustainable growth in an interconnected
post-crisis world. This factsheet outlines recent actions in priority areas.
The global crisis underlined the need for more analysis of linkages among economies, which the IMF now provides through a number of channels:
- Spillover reports, prepared since 2011, analyze key global spillovers, focusing in particular on the impact of policies in systemic economies. The 2015 report focused on spillovers from lower oil prices, the U.S. dollar appreciation, and macroeconomic policies implemented in systemic advanced economies to close their output gap, including differences in their monetary policy stances.
- Individual country surveillance, as well as multilateral surveillance reports such as the IMF’s World Economic Outlook (WEO), Global Financial Stability Report (GFSR) and various Regional Economic Outlook, have deepened their analysis of interconnections and spillovers. Cluster reports are also prepared occasionally on common issues facing groups of countries (e.g., capital flows, macroprudential policies, and unconventional monetary policies).
- The IMF draws on its analysis of cross-border risks and spillovers in international fora, such as the Group of Twenty (G20) industrialized and emerging market economies and the Financial Stability Board, to promote policies that support sustainable global growth and financial stability.
In July 2012, the IMF’s Executive Board adopted an Integrated Surveillance Decision that strengthens the legal basis for surveillance in a highly integrated world economy. This decision enables more systematic coverage of spillovers from members’ economic and financial policies in Article IV consultations and better integrates surveillance at the bilateral and multilateral levels. It helps the IMF to engage members at an earlier stage in the buildup of risks and vulnerabilities, and encourages them to be mindful of the impact of their policies on other countries and global stability.
The IMF is sharpening risk assessments so that potential problems can be spotted, and appropriate policy responses developed, more effectively.
- The IMF conducts a semi-annual Early Warning Exercise to identify and assess low probability but high impact risks to the global economy. It also conducts Vulnerability Exercises to assess vulnerabilities and emerging risks in individual advanced, emerging market, and low-income countries.
- Most Article IV reports focus on risks. They incorporate risk assessment matrices that identify key domestic and external risks, and draw more systematically on the results of the Early Warning Exercise, the Vulnerability Exercises, the WEO, and the GFSR.
Given the potential for financial sector developments to rapidly ignite and propagate crises, effective financial sector surveillance is critical. The IMF now gives more emphasis to financial sector issues in its multilateral and bilateral surveillance, in line with the Financial Surveillance Strategy, approved by the IMF's Executive Board in 2012.
- To make financial surveillance a more central element of bilateral surveillance, the IMF is assigning financial sector experts to most systemically important and vulnerable economies, intensifying internal training, improving analytical tools, and strengthening macro-financial analysis in Article IV consultations. This enhanced focus on linkages between the financial conditions and the macroeconomic stability is combined with more systematic advice on macroprudential policies.
- Another major continuing initiative is the Financial Sector Assessment Program (FSAP). Under this program, comprehensive financial stability assessments are conducted every five years for economies with systemically important financial sectors. The analysis on FSAPs is followed up on in the context of Article IV consultations. The latest review of this program was completed in September 2014.
- The IMF is a member of the Financial Stability Board, which enhances collaboration on macro-financial and supervisory issues.
Assessing external stability and external imbalances remains a core component of the IMF’s mandate, as external imbalances can have a significant impact on the operation of the global economy.
- In July 2015, the IMF published the third Pilot External Sector Report (ESR) covering the world’s largest economies. The Report contains a multilaterally consistent assessment of members’ external balances, currencies, and policies. The analysis broadens external sector surveillance by more systematically assessing exchange rates, current accounts, balance sheet positions, reserves adequacy, capital flows, and capital flow measures.
- The ESR relies on the External Balance Assessment methodology, introduced in 2012, which assesses the current accounts and exchange rates in a multilaterally consistent manner.
For its advice to have the most impact, the IMF seeks to provide strong economic analysis, candid and evenhanded advice that is tailored to country circumstances, and clear messages.
- The IMF’s major findings and policy messages are published twice a year in the Managing Director’s Global Policy Agenda. This report highlights the top-line messages from the IMF’s multilateral surveillance products (e.g., the WEO, GFSR, Fiscal Monitor, Pilot ESR, and Spillover Reports) and sets the agenda for the IMF’s key priorities.
- Other initiatives to improve IMF surveillance focus on strengthening coverage of macro-relevant structural and social issues (such as unemployment and inequality). They include a recent comprehensive report on jobs and growth; early consultations with country authorities on relevant policy questions prior to Article IV consultations; and systematic follow-up on past advice.