Transcript

Transcript of a Press Conference on the Analytic Chapters of the Global Financial Stability Report

September 25, 2012

Webcast of the press conference

MS. STANKOVA: Good morning and good afternoon for those who are joining us from other parts of the world via the IMF’s Press Center. This is the press conference on the release of the Analytical Chapters of the Global Financial Stability Report, Chapter 3 and Chapter 4.

Let me introduce our speakers today. Jan Brockmeijer, is the Deputy Director in the Monetary and Capital Markets Department and Laura Kodres is the Assistant Director in the same department. Their colleagues in the Monetary and Capital Markets Department, Jennifer Elliott and Srobona Mitra were working on Chapter 3, and Tao Sun on Chapter 4. I will now pass the microphone over the Jan for his remarks.

MR. BROCKMEIJER: Thank you very much, Olga. I must apologize. I will not be able to stay for the entire press conference, but I'd very much like to take this opportunity to say a few introductory remarks. It's important to place these chapters in perspective.

They are Chapters 3 and 4 of our Global Financial Stability Report the chapters that tend to focus on the more longer-term structural developments in the financial sector and I think it's fair to say that what they've covered this time around truly is a set of very fundamental questions that are facing the financial sector. They looked this time at how the structure is changing, whether the regulatory reforms that are underway are succeeding in moving the financial sector in a direction that we associate with greater safety. And they also tackle the question what the implications of these structural changes are for economic activity, in essence, the core questions, what it is all about.

But these questions are not only fundamental. They are also extremely difficult to answer. This is the case in the best of times if you're in a steady state. The transmission mechanisms through which developments in the financial sector translate themselves into the real economy is a major challenge, but this is particularly difficult in the present juncture because we are in a period of transition still with the consequences of the financial crisis for the sectors still unfolding, to some extent also these consequences being shrouded by the necessary policies that are still being implemented to contain the fallout of the crisis and with a very extensive regulatory reform agenda that is underway but is still far from being fully implemented.

So all in all, under the present circumstances it is extremely difficult to really assess and detect the impact of these changes. I would stress that it would be unrealistic to expect that we could provide definite answers to the two fundamental questions we posed at the beginning. Laura Kodres and her teams have given it her best shot. They have systematically looked at the presently available evidence in order to take stock of where we now stand. It's clear this is not the end of the story.

There will have to be sequels to this work. As more information becomes available it has to be updated with the information coming from the implementation of the reform agenda. And in a way you could say we are at the beginning of a journey. There are first signs of the direction in which this journey is heading. They seem to be going in the right direction, but we are not at the point of destination by a long shot and much perseverance and commitment will still be needed to complete the regulatory reform agenda and to fully implement it.

With those remarks I pass the floor to Laura Kodres who will present the main findings of the chapters and together with her colleagues will be happy to answer any questions that you have. Thank you very much.

MS. STANKOVA: Thank you, Jan. We will now pass the microphone to Laura for her introductory remarks.

MS. KODRES: Thank you first for attending the conference here this morning. Let me dig in starting with Chapter 3 titled, "The Reform Agenda," an interim report on progress toward a safer financial system.

The findings suggest that despite a host of regulatory reforms aimed in the right direction, the financial structures present before the crisis have not actually changed that much. Let me unpack this conclusion a bit. First, we tried to pay attention to those features of the financial systems that were related to the crisis, the heavy role of nonbanks, large dominant highly interconnected institutions and the development of complex products for instance, features that need to be addressed in some way. To do this we needed to construct measures of these features, these structural parts of the financial system, in a way that would allow us to gauge how well the reforms are working toward changing them.

We looked at a lot of data, but we focused on three types of features. One, the extent to which financial intermediation is market based, a hallmark trait of the United States with a large nonbank financial sector, active capital markets and banks conducting activities other than borrowing and lending. Two, features related to the size and scope of different financial activities within a country like the size and concentration of its banking system and how connected certain parts of the financial system are say through interbank markets. And three, measures about how connected the financial system is to the rest of the world through banking systems and the importance of the country in global markets.

A second element is to try to tie the reform agenda to how it could reasonably be expected to alter these chosen structures. The reform agenda for the most part is aimed at recalibrating the costs of the riskiest activities, not explicitly at altering medium-term structures. Hence, this step requires an assessment about the expected and perhaps unanticipated ways financial institutions and markets are going to respond to those reforms. We used some hard data and some softer information about the stated intentions of financial system actors to obtain our conclusions.

What did we conclude? Are the reforms moving the structures in the right direction to a safer financial system? Our answer so far is somewhat, but not enough. We do not yet see the impact of the reforms. They have long implementation lags and the crisis is ongoing. There are elements such as Basel 2.5 and the markets' anticipation of Basel 3 implementation that are promising. Many banks have managed to become better capitalized and have begun to divest themselves of activities they view as less profitable. However, the basic financial structures that we found problematic before the crisis are still with us. Financial system are still overly complex, banking assets are highly concentrated with strong domestic interlinkages and the too-important-to fail issues are unresolved. Moreover, as some activities become more costly, some banks will get out of those businesses but others with enough scale economies will stay in making these activities even more concentrated. The fixed income currency and commodities trading business line is one such activity. The good news is that globalization has not been seriously harmed as yet except in crisis hit economies in Europe. But this also means that in the absence of proper policies, bad outcomes from one country can easily affect the financial system in another.

Why do we see so little progress? It is worth recognizing that we are still in the crisis in some regions and crisis intervention measures to prevent deeper financial system distress and those to bolster nascent economic growth remain in place.

The recent introduction of further central bank efforts along these lines, QE3 from the Fed, OMT from the ECB and similar quantitative easing from the Bank of Japan, attests to the need for ongoing crisis fighting efforts. While these need to be in place, this is also the time to think about their inadvertent side effects on financial stability. Some of the cleansing of the financial system has not yet taken place, preventing a reboot along a safer path. Even if the needed restructuring had taken place, financial structures tend to move slowly and the reform agenda had built in rather generous implementation schedules in part to allow the economy to recover. So we want to emphasize that while we cannot definitely say financial systems are safer than 4 years ago, we want to emphasize the somewhat part of our answer. Going forward, we provide in this chapter a framework that can be used to assess the effects of reforms on the structure of financial intermediation when the dust has fully settled.

Lastly, what can we learn from the analysis about what we can do? Taking stock of all the regulatory reforms to date, we can see some areas that still need to be addressed. These areas include, one, more discussion on what it takes to break the too-important-to-fail conundrum including a global level discussion of the pros and cons of direct restrictions on business models. We can already see that the Volker Rule in the United States which aims to force banks to divest their trading businesses and the Vickers Commission proposals in the United Kingdom which would -- retail banking from investment banking activities will have effects beyond their respective jurisdictions and a global perspective is sorely needed.

Two, as part of this issue, we need to have further progress on recovery and resolution planning for large institutions especially cross-border ones. Three, better monitoring, and if needed, a set of prudential standards for nonbank financial institutions posing systemic risks within the so-called shadow banking sector. And four, careful thought about how to encourage simpler products and simpler organizational structures. More importantly, the success of the current and prospective reforms depend on enhanced supervision, the political will to implement regulations, incentives for the private sector to adhere to the reforms and the resources necessary for the task of making the financial system simpler and safer.

Our second chapter entitled "Changing Global Financial Structures: Can they Improve Economic Outcomes?" ties the financial structure elements examined in this earlier chapter to economic outcomes, what we really care about. This is a very difficult endeavor. As you can appreciate, there are lots of elements that affect countries' economy growth, its volatility and its financial stability, and isolating those associated with financial structures is quite challenging. The work represents a first step in this direction and we emphasize a number of its limitations up front and particularly in Box 4.2.

Even with the various provisos, we do find there are associations between financial structures and economic outcomes. Note I used the word associations so as to make clear that we cannot demonstrate a causal relationship. We cannot say that certain types of financial structures drive better growth or harm financial stability. Taken in that spirit, we do find some connections.

First, higher financial buffers such as a basic capital ratio and a liquidity ratio are associated with higher economic growth, lower growth volatility and lower financial stress. In reading the report, you may notice that this result is mainly found for the same of emerging economies and not for the sample of advanced economies. We think the reason for this is that during the crisis, financial buffers in the advanced economies were somewhat illusory, without the loss-absorbing capacity or the amounts of truly liquid assets needed to withstand the shocks to their balance sheets. Emerging market economies' banking systems had real buffers, solid measures of capital and adequate liquidity. This result is comforting in that it gives us higher confidence that the Basel 3 process that is moving banks to hold higher-quality capital and more capital is associated indeed with better economic performance. So our analysis reinforces the lesson from the crisis that high-quality regulation and supervision should be at the forefront of reform efforts.

Second, some features were associated with poorer economic outcomes. The influence of foreign banking is intriguing. In the crisis we found foreign banks were a source of transmission of problems. This suggests there can be some economic costs to foreign banks, but this need not be the case during normal times as there is no damaging effect then. So the lesson is not that foreign bank presence should be avoided, but that their activities should be well managed so they can be sources of strength. For instance, we have advised in the past that supervisory colleges be established for home and host countries and that better cross-border resolution regimes be put into place. Our newest results strengthen those policy messages.

Third, we find evidence that at some point there may be a tradeoff between growth and financial stability. We observe that buffers beyond extremely high levels can be associated with lower growth, higher growth volatility and higher financial stress. In essence, a system that is too safe may limit the funds available for lending and hinder growth. These thresholds however are very high, over 25 percent for quality to asset ratios for instance, and only a few countries exceed them. We caution that these thresholds should not be used as a prudential maximum as they will vary depending on the strength of the financial system.

A key takeaway from the chapter is that no particular financial system can best assure economic performance all the time. It depends on a confluence of factors, and what may work well during one period may not work well in another. This first tentative step to identify structural components and the relationship with economic outcomes should be reviewed as a place to begin other research so that policies affecting financial structures can be tailored to deliver better economic outcomes.

One finding that appears in both chapters is the importance of globalization. In Chapter 3 we found that global interconnectedness runs still very high and that fragmentation we see in the Euro Area is not, at least not yet, widespread. From Chapter 4 we see there may be adverse connections between some types of globalization and economic outcomes during crises. So a key message here is there is still work to do to ensure globalization provides routes for risk sharing and not conduits for contagion. The crisis is a global one and the solutions need to be global as well. We can ill afford to turn back the clock to a world where fragmentation of finance prevails. Indeed, current technology with the ability to transfer information at millisecond speeds will mean that if cross-border financial flows do not occur through well-managed and well-conceived means, they will happen below the surface in unsafe ways.

At the Fund we are enhancing our surveillance in exactly this area. Our recently adopted strategy for financial surveillance provides support for deeper analysis of spillovers and cross-border effects and critical, candid assessments of countries policies from a multilateral perspective including exchange rates. All this means that even though progress on the reform agenda appears slow and uneven, policymakers need to press ahead. We are not encouraging a sprint, simply a brisk, purposeful walk toward the goal of a safer financial system. Most reform items are well in train, but some others need attention. The current environment of subpar growth and ongoing financial distress means some unconventional interventions are still needed. But the sooner the financial system can move to its new path, the better. Good, solid growth cannot be sustained unless healthy financial intermediation structures are in place. We welcome your questions.

MS. STANKOVA: Thank you, Laura, for the comprehensive summary of the chapters. Now we welcome questions.

SPEAKER: I have two questions. The first question, the financial crisis is kind of triggered by overleveraging. Your study showed that higher financial buffers are associated with better economic growth like the situations in some emerging markets. Can we say some developed countries can draw from this lesson and develop a less debt-driven and less leveraged economic growth model? My second question is about the open-ended QE programs of the ECB and the U.S. Federal Reserve. They have provided sugar high stimulus effects to commodity and capital markets, but how much -- when is the best time to retreat from this ultra loose monetary policy, this might cause inflation pressure, capital flow volatility, speculation and also -- systemic risk down the road? Thank you.

MS. STANKOVA: If you have more questions, we'll take one or two more and then we'll distribute them.

SPEAKER: Could you elaborate a little bit more about the process and the effects of deleveraging of Spanish banks especially in Latin America? I see that you quote and you mention it in Box 3.2 --

SPEAKER: I may be mistaken, your report doesn't mention offshore banking and I was wondering if it was still a matter of concern regarding financial regulation. Thank you.

MS. KODRES: Starting with the first question about whether the advanced economies can take lessons from the emerging markets in terms of overleveraging and in terms of financial buffers, I would say there are some lessons that the advanced economies should take to heart and some of them are in fact embedded in Basel 3. The notion that capital should be loss-absorbing.

What does that mean? That means essentially that the capital that represents equity capital is the most solid type of capital and many of the advanced economies had various types of hybrid capital on their balance sheets which were not as loss-absorbing In fact, Basel 3 is in the process of making those less available to count as capital and that should in fact help those buffers be more withstanding of losses and I think that is one important lesson.

In terms of leverage, I think there is a general recognition that the system was overleveraged prior to the crisis and we see the response to that in the reform agenda in the framework of higher capital ratios that should reduce leverage. There is also a basic leverage ratio in Basel 3 which will set what I would call a guardrail against overleveraging. Then we see a host of other types of reforms that should help to manage leverage within the banking system and even in the nonbanking system.

Looking at the open-endedness of some of the advanced economy central banking policies, we don't have an answer in our chapter. What I would point to though in terms of the analysis of our chapter and hopefully analysis we would do in the future is to discuss what the longer term repercussions of a very lengthy low interest rate environment is. I would point to a couple of chapters we've done in the past. We did one on global asset allocation a while ago, and we did one just last time on longevity risk where we pointed out the risks to some of the real money investors to a low interest rate environment and the difficulties they will have in terms of acquiring the returns they need to pay out their fixed payouts particularly for pensions and insurance companies. So there are these other effects of an elongated low interest rate policy. At the moment, the low interest rate policy is very much needed, but we're willing to look carefully at the financial stability implications of that in the longer run.

On Spanish banks, I'll take part of this and then I'll turn to one of my colleagues. I think the basic message that we're finding in our global analysis of financial flows is that financial flows are still relatively healthy globally. We do see some retraction in parts of Europe as the distress there takes its toll, and we see that through various banks including the Spanish banks. But I would note that the Spanish banks are moving and most banks are moving where they are investing and not pulling back in total. If you look at the data that we have from 2006 through 2011, you'll see that overall global flows are up from this pre-crisis period and that what we see are people deciding more carefully where they're going to place their assets. It's not so much as a retreat from globalization per se. It's a transfer or rebalancing of that globalization. Perhaps, Srobona you'd like to make a comment.

MS. MITRA: Beyond what Laura has already mentioned, I think we can emphasize that the overall exposure -- if you look at it from 2006 to 2011, it hasn’t really diminished. What has happened is that they have changed their exposures, moving this group of activities there. And where they have deleveraged, other banks have taken those exposures up. So overall, globalization has not diminished vis-à-vis Latin America.

MS. KODRES: The last question on offshore banking. It’s true we haven’t focused necessarily on offshore centers in our report. It’s worth noting that the international regulatory reforms apply to all jurisdictions, not just those in advanced economies or those in emerging markets, but also those in offshore centers. We don’t have any particular advice in the report about them. I would add that in the global financial system and lots of funds flow through offshore centers, and so they are definitely worth examining in some detail. So we continue to do that through our normal process of examining various types of vulnerabilities, but they don’t serve any special role in this particular report. I don’t know if my colleagues have any other comments.

MS. ELLIOT: Just to add that we do look at offshores the same way we do other jurisdictions in our FSAP program. And you wouldn’t want to lump them all into one basket because as you’ll see in the FSAP results, there’s varying degrees of implementation of international standards just as there are in any other countries. And one of the emphases that we make in the chapter is on the need for this to be a global solution to global problems and that includes offshore jurisdictions.

MS. STANKOVA: And we will now turn to questions on the Press Briefing Center. “Figure 3.4 in chapter 3 doesn’t cover the U.K. in regards to reliance on wholesale funding. Is the U.K. one of the countries that is just as reliant or more reliant on wholesale funding than before the crisis and if so, do you have any numbers to support this?”

MS. ELLIOTT: The U.K. is not part of our dataset, but the U.K. certainly has a recognized heavy reliance on short-term wholesale funding markets, which peaked at the crisis and has since come down. But it still remains an issue and the authorities are well aware of that issue.

In terms of data, I think we could say that the way datasets come out from different places, it’s not always easy to put them together and that’s why you don’t see the U.K. in that dataset.

MS. STANKOVA: Okay, thank you, Jennifer. Do we have any more questions in the room? I think something is coming on the Media Briefing Center again. “Brazil has grade of 8.0 in Basel progress liquidity index according to IMF. Does this mean that Brazil is a country in the world better prepared to implement Basel III norms?”

MS. KODRES: I’ll let Srobona take this question.

MS. MITRA: Sure. Let me emphasize that the Basel liquidity rules have not been implemented as yet, and it is still under observation. So we are not in a position to say whether countries are well positioned to take up, implement, Basel III rules. But what we do is score countries according to their domestic regulatory initiatives on liquidity rules, and Brazil is pretty good in it.

MS. STANKOVA: All right, thank you. And one more question from the Briefing Center. “Can you make any conclusions about whether the regulations being implemented in the EU, U.S., and elsewhere, are causing more convergence or divergence in the frameworks?”

MS. KODRES: This is a difficult question, and I think one of the difficulties we had in addressing this kind of question is to try to find comparable data. So you can see that we have several charts in the report that point to different elements. I stressed three of those different elements. And many of those elements in the advanced economies are, in fact, moving in the same direction. So you can see among the charts that we have in the reports that among the advanced economies, we do see that things sort of peaked in certain negative directions, if you will, right around the crisis and have subsided a bit since then.

One area, however, that we are concerned about is whether the global regulatory system is moving in the same time frame. We see that some countries are moving a little bit faster than other countries, and that can cause flows to go from one country to another as people attempt to monitor which is the most preferable area that they would want to invest in.

So we are concerned that these implementation strategies go more or less hand in hand across the countries together so that everyone is on the same playing field as we move toward this safer financial system.

MS. STANKOVA: Thank you, Laura. One more question from the Briefing Center. “Can you give some concrete examples of major reforms needed, but not yet implemented, and where? Can you give five examples of products that are designed to circumvent new rules?”

MS. KODRES: I would say there are three areas in which we would like to see the reforms take up a little bit faster pace. One of them is addressing this too-important-to-fail issue. We’ve left this on the table. It’s a very difficult one. But we need to think about what it means to have an institution that is difficult to unwind. We’ve emphasized very concretely that we would like to see better resolution regimes in place, particularly cross-border resolution regimes. There are now some guidelines under the FSB rules that we would like to see being implemented in a more concrete way. So that’s issue number one.

Issue number two is the non-banking area, the so-called shadow banking. This is an area in which other institutions, non-banks, act like they were banks. They extend credit. They may take certain things that look like deposits. U.S. money market funds is one example of that. Finance companies can be another example. We see other types of institutions doing this that don’t even have the same names. So this is an area where we need more monitoring. This is an area where there is insufficient data to be able to detect whether or not these non-bank institutions are, in fact, acting as if they were banks. And are they large enough and are they important enough to cause an issue?

So this is an ongoing area of reform. It’s still very nascent. There’s not a lot of direct reform in this particular area, and we think there needs to be somewhat more attention to this area.

The third area is to make sure that globalization continues in a safe and sound manner. We have a number of recommendations here; the notion that there should be better coordination among supervisors in home and host countries. We’ve put on the table again this global resolution concept that needs to take place. We have produced in the Fund a number of documents now about how best to manage capital flows. Those are areas that are ongoing.

So those are the three areas where I think we really need to move forward on the concrete reform agenda.

MS. STANKOVA: And I think the second part was about examples of when new rules get circumvented.

MS. KODRES: Yes, are there activities that are going to circumvent new rules. This is one of those things where market intelligence is the area where you attempt to see these issues come about. I think there are a couple of areas where we have our eyes open, if you will. One is the structured credit products area, to see exactly how people are coping with some of the regulations in Basel III having to do with counterparty credit risk, whether or not people are trying to somehow get that risk in some sort of structured credit product and then on-sell it.

There’s nothing wrong with attempting to pull together risks and transfer them. In fact, that’s a bulk of what the financial sector is about. The question mark is whether or not the people that are buying those types of products fully understand what’s in them. And that was the main problem that we had with structured credit products that were built on mortgage products in the up-run to the crisis.

So again we’ll be watching for areas where risks are being transferred and not priced properly because there might not be enough information to be able to price those types of securities properly.

MS. STANKOVA: Thank you, Laura. One more question from the Briefing Center. “Before the crisis IMF research suggested boom-bust economies with strong capital markets had better and longer term growth than stable bank-based economies. Has this view changed?”

MS. KODRES: I think one of the features of chapter 4, which I would like to stress, is that we don’t think of the world as being just a markets-based and a bank-based world anymore. It’s a little bit more complex than that. And so we have a number of measures that try to nail how to talk about a financial system as being bank-based ornot. So there’s a lot of underpinning numbers now that we are looking at. We’re looking at, for example, banks doing nontraditional activities. How strong is that? How much of their balance sheet is not in the traditional lending and borrowing? So what may seem like a capital markets-based activity is actually taking place inside the banking system.

Another area that we didn’t recognize before the crisis with nearly as much attention as we should is interconnections. So again we’re trying to measure interconnections and how they work.

And so the messages of chapter 4 are not so much about bank based versus non-bank, they’re about certain features of financial systems which are more or less conducive to good growth prospects. And the ones that are conducive to good growth end up being things like having large buffers, things like having good information flow. So these are the kinds of things that are encouraging to growth prospects. And the things that are less encouraging are things like having a lot of wholesale funding or nontraditional bank liabilities on the banks’ balance sheets. There is a question mark about foreign banks where, again, very specific measures are being used to think about that.

So I think now we move on, hopefully, from our traditional tests of looking at bank-based and non-bank-based and look at the features of the banking system. I think we have a nice box in chapter 3 that examines four different countries -- Malaysia, India, Canada, and Australia -- comprisinga smattering of bank-based countries that did very well. Why did they do so well during this crisis, both emerging and advanced economies? So we’re trying to get beyond the overly-used nomenclature into a little bit deeper analysis and hopefully that will help.

MS. STANKOVA: We have 10 more minutes, and we have one question on the Briefing Center and I see one question in the room. From the Briefing Center “You say long low interest rates encourage excessive risk taking. Do you have to worry about the existing central bank policies?”

MS. KODRES: In short, yes, it is a concern. The low interest rate environment has a lot of other effects besides lowering interest rates to consumers and through borrowing. So the good news is that, indeed, this should lower interest rates for credit and it should encourage credit, which is exactly one of the reasons that central banks are undertaking this policy. But at the same time, obviously low interest rates mean savers earn less and some institutions are on the savings side and they need to attain reasonably high rates of return in order to pay back their fixed liabilities. And I pointed to pension funds and insurance companies as a classic example of those that are likely to be at a disadvantage in this low interest rate environment.

So what is it that they do? Well, they can take it for a while and they have been essentially sort of suffering from the low interest rate environment and they have very low returns. But at some point they will feel the need to take on riskier activities in order to be able to earn enough returns to pay what they need to pay to their holders of insurance policies or pensioners. And that’s when we need to look very closely and use prudential rules and use other types of oversight to make sure that those things don’t get out of hand.

So, yes, we are concerned at the moment. These are necessary policies, but we will be looking at what types of vulnerabilities that might put into the system overtime.

MS. STANKOVA: And we have a question from (inaudible).

SPEAKER: During the crisis and after the crisis, I think state-owned enterprises played more important role in global financial service. What do you think about how to supervise and how to monitor the state-owned enterprises? Some of this is large investment company and some of this is huge banking, they do kind of like a banking business. What to monitor -- what the IMF thinks to monitor that kind of state-owned enterprise?

MS. KODRES: Perhaps maybe you can specify whether you’re thinking of state-owned banks or state-owned other types of enterprises?

SPEAKER: Yes, I’m from Japan and Japan has, for example, Japan --

MS. KODRES: I think our general line and spin for a very long time that state-owned enterprises that function as financial institutions need to be monitored carefully and to be supervised almost in the same way as a normal non-state-owned enterprise. And we find that if that isn’t the case, that’s often when difficulties arise. So when we do our FSAPs, for example, we would review those along the same lines as normal institutions. Maybe, Tao, do you have a comment maybe on this?

MR. SUN: Following Laura’s comments. Yes, the IMF’s FSAP does some review work on large banks. In this kind of review, we do encourage the FSAP team to follow some basic rules like market discipline, reducing the moral hazard, and reducing the potential costs related to a bailout. So in that sense, many countries will now have a similar situation or challenges. So there is the potential to encourage the authorities to do more work. We encourage more market discipline and more competition.

MS. STANKOVA: And that will be the last question for the day.

SPEAKER: The topic before is quite interesting and new to me. So I wonder what motivated your group to choose the topic relationship between economic outcome and the financial structure and what highlights you want to stress on the studies about the United States and China?

MS. KODRES: It’s a good question. I think what motivated us to look at this question is a constant question that arises about how financial institutions and financial markets are related to the real economy, to the economy in terms of its growth potential, in terms of its volatility, in terms of financial stability, and in terms of how we would look at, say, income distributions and what not.

This is an ongoing research agenda at the IMF. We call it macro financial linkages. And it’s an important one because the finance area has gotten to be so important in global markets and in terms of the global growth prospects. So it was natural for us to try to take a deeper dive into how to connect the two, how financial structures evolve in a county, and what they mean for that growth potential. Most of the research in this particular area has looked at something called financial deepening. And usually financial deepening is measured as amount of credit to GDP in a particular country, perhaps the stock market capitalization of that country, perhaps the bond market capitalization of that country. And those results are now fairly well established; that sort of deeper financial systems tend to raise growth prospects.

But it’s not just about having lots of credit. And we know that having lots of credit can be destabilizing as well, and we’ve seen that in both the advanced economies and we’ve seen that through these various boom-bust cycles that we have in other types of countries. So we wanted to spend more time thinking hard about what it is that makes a financial system produce a good growth environment, one that promotes growth, that has good intermediation qualities. And that’s why we started to sort of look underneath the surface and see what characteristics of a system might add to growth.

Now what would that add to growth in the U.S. and other specific countries? I think we don’t have the answer for that. I think our results are enough diverse across different kinds of countries and across different kinds of structures that we have this no-size-fits-all answer, which is perhaps not as comforting as one would like. One always like black and white answers, but the answer is not so black and white. Certain types of financial structures work well for different countries during different time periods and that’s because there are other factors that have an impact on growth. And so it will depend on what those other factors are like during the time period in which those financial structures are in place.

So we can’t give a sort of nice answer that country A is best because of qualities X, Y, and Z. We have to be a little bit less categorical about it. But I encourage all of you to take a careful look at the results that we do have and ask lots of questions amongst people that are doing this work because it’s very important stuff.

MS. STANKOVA: Thank you everybody. I’d like to remind you that the embargo will be lifted in 10 minutes, at 10:30 a.m. Washington time.