Speech

Welcoming Remarks by José Viñals, Director, Monetary and Capital Markets Department, International Monetary Fund
At the IMF/Federal Reserve Bank of Chicago International Banking Conference
September 23, 2010

On behalf of the IMF, it is my honor and great pleasure to welcome you to this thirteenth annual International Banking Conference on macro-prudential regulatory policies jointly organized with the Federal Reserve Bank of Chicago. On behalf of the Fund, I also would like to extend our gratitude and compliments to our host, the Chicago Fed, for taking such good care of the practical preparations for the conference.

With such an international audience, perhaps I need not belabor my first point, but let me nevertheless note that the present crisis is truly global. Financial institutions are globally connected—across banks and nonbanks and more so than we anticipated prior to the crisis. Capital account openness means capital flows—and in the crisis it flowed rapidly from perceived risks into safe havens. And, as has been apparent for some time, financial markets are indeed global and information conveyed by them is transmitted across the world in literally nanoseconds, allowing financial spillovers to occur in a matter of minutes and hours.

The global nature of crisis implies that our solutions need to be global as well. So, in my introductory remarks, I would like to focus on the international dimension of macro-prudential regulations. After all, we are now in a global market and just as the safety and soundness of individual financial firms do not necessarily add up to the stability of the domestic financial system, macroeconomic and financial stability at the national level do not necessarily add up to global financial stability.

Since the onset of the crisis, there have been a number of success stories of international cooperation in enhancing global financial stability and financial market regulation. We should build on these. At the policy level, the sheer intensity of the crisis helped mobilize international cooperation, with the G–20 summit process taking the policy lead, and the Financial Stability Board being established to enhance policy coordination in the regulatory field.

In our own institution, we have seen international agreement to triple our financial resources to deal with the crisis and a strengthening of the global financial safety net through such innovations as the Fund’s Flexible Credit Line, which was recently augmented in terms of duration and credit availability, and the recently established Precautionary Credit Line for members with sound policies who nevertheless may not meet the FCL’s high qualification requirements.

In the EU, in addition to the measures taken earlier in the crisis to avoid a financial meltdown, the recent adoption of the European Stabilization Mechanism and the liquidity measures undertaken by the European Central Bank supported the financial markets when they came under severe pressure last May. The unprecedented extensive central bank swap arrangements put in place during the crisis to support global market liquidity, some of which are still doing good today, is yet another success story. All of these results have amply demonstrated the potential gains from strong international collaboration.

Still, the crisis also highlighted important weaknesses in cross-border coordination and our “to do list” is still quite long. We must adopt international standards for better regulation. The Basel Committee on Banking Supervision’s release of Basel III is a substantial step forward in addressing the micro-prudential failings in the areas of capital and liquidity buffers in banks, but more needs to be done in the broader reform agenda. Effective supervision of global financial firms is moving forward as well, with the establishment of supervisory colleges, but again there is a need to assure that adequate resources and incentives are in place for supervisory agencies to effectively execute their job of overseeing the most globally interconnected firms well. Frameworks for the resolution of non-viable cross border financial institutions are under discussion, but due to the complexity of the issues involved advancing this work requires a firmer commitment at the highest political levels. The IMF has put forth a practical way forward in this area, and we hope to convince a small number of countries, home to most cross-border financial institutions, to adopt it.

Another difficult item on the “to do list” is to bring macro-prudential regulations into center stage. This will require further cooperation, persistence, and commitment. In particular, macro-prudential regulations, including those aimed at reducing excessive procyclicality and addressing the challenges posed by systemically important financial institutions, will need to be globally consistent in order to achieve a level regulatory playing field.

We have made some progress here already, with a workable definition of systemically important financial institutions (or SIFIs). Having defined them, we will need to address the systemic risks they collectively generate—both in terms of solvency and liquidity—by giving these institutions incentives, perhaps through capital surcharges, liquidity insurance premia, contingent capital instruments or levies, to avoid contributing to these risks. We, at the Fund, have put on the table for discussion some of the practical methods to do so―like the Financial Sector Contribution― and more of them are to be discussed over the next two days.

Similarly, we need to tackle excessive procyclicality at a global level—are financial or business cycles synchronous across countries and, if not, how do policies to address procyclicality in one jurisdiction help or hinder policies in another? For markets, rules on central counterparties for clearing over-the-counter derivatives need to ensure that interoperability is not impeded and strong minimum standards are set to ensure consistently robust clearing infrastructures regardless of the location.

We will discuss these issues over the next two days, in particular in the context of cross-border coordination, harmonization, burden sharing, and failure resolution, but also in terms of the interactions between monetary policy and regulatory reforms. We should take care to recognize that while regulations must be nationally appropriate, they will also need to be internationally consistent. As experience shows, in a financially globalized world uneven regulations across borders will inevitably lead to a migration of riskier activities to those countries with the lightest requirements, endangering the global financial system.

To conclude, it is time to move beyond a conceptual discussion of the various definitions of macro-prudential objectives and consider practical policy options in several key domains like: identifying and measuring systemic risk; designing macro-prudential tools to effectively address tem; and putting in place robust institutional arrangements for macro-prudential governance.

In my view, adequately designing a global macro-prudential framework is essential for ensuring lasting financial stability and to support strong and sustained growth.

I am confident that this Conference will help us move towards achieving these goals.

Thank you.