International Monetary Fund

Group of Twenty - Ministerial Meeting

IMF Note on Stocktaking of the G-20 Responses to the Global Banking Crisis — Executive Summary

March 19, 2009

About the Executive Summary

The Following executive summary is from a note by the Staff of the IMF prepared for the March 13-14, 2009 meeting in London of the Group of Twenty Ministers and Central Bank Governors. Read the Full text PDF Format

Executive Summary

National responses to banking sector weaknesses have been successful in restoring creditor confidence but more needs to be done to restore financial stability. The immediate focus has been on addressing liquidity needs of the system and forestalling widespread panic. Bank restructuring efforts, however, have appeared piecemeal, responding to market disruptions rather than to a full diagnosis of the underlying soundness of institutions.

Some of the key limitations of the policy response to date include:

  • Creditor protection may not be adequate if economic conditions continue to deteriorate. Markets disruptions were particularly acute following the failure of Lehman Brothers in September 2008. G-20 countries responded with selective, rather than comprehensive, creditor protection. Such containment strategies may not be robust to a deepening crisis.
  • Inconsistent capital injection programs: Although the number of troubled financial institutions rose sharply over the past six months, they were often addressed without a well-defined set of criteria. Moreover, capital injections were not part of a coherent restructuring or rehabilitation plan.
  • Asset disposal policies have not been put in place: While this has been a critical issue for two years, institutional arrangements for dealing with bad assets are only just emerging (e.g., the U.S. public-private investment fund and the UK asset purchase scheme), and difficult operational issues related to the valuation and disposal of these assets still need to be addressed.

Critical aspects of crisis management frameworks need to be strengthened in the context of a comprehensive and internationally coordinated strategy that does not shrink from government takeovers of nonviable institutions. Such a program would include the following elements:

  • A framework of international coordination of restructuring and recapitalization policies.
  • International cooperation on a framework for valuing and disposing of toxic assets.
  • Quick action to inspect major financial institutions to determine their financial health and remediate as necessary.
  • Institutional frameworks for public holdings of banks that ensure that banks that have been recapitalized operate on sound business principles and without undue government influence.
  • An effective communications strategy explaining the overall approach and objectives.

Many G-20 members have yet to feel the full brunt of the crisis, but even in these countries it will be important to avoid complacency and to take early and pre-emptive steps in these areas.