Selected Decisions and Selected Documents of the IMF, Thirty- Eighth Issue -- The Acting Chair’s Summing Up—Review of the Flexible Credit Line, the Precautionary and Liquidity Line, and the Rapid Financing Instrument—Specific Proposals, Executive Board Meeting 14/46, May 21, 2014

Prepared by the Legal Department of the IMF
As updated as of February 29, 2016

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ARTICLE V, SECTION 3(a), (b), AND (c)
Use of Fund Resources

The Acting Chair’s Summing Up— Review of the Flexible Credit Line, the Precautionary and Liquidity Line, and the Rapid Financing Instrument—Specific Proposals

Executive Board Meeting 14/46, May 21, 2014

Executive Directors welcomed the discussion of specific proposals to enhance the Flexible Credit Line (FCL) and the Precautionary and Liquidity Line (PLL), completing the review of these instruments, as well as that of the Rapid Financing Instrument (RFI), which began in February. They considered the proposals aimed at improving the transparency and predictability of qualification assessments and further informing access and exit discussions, which are central to the use of the FCL and PLL instruments.

Directors generally supported the proposal for aligning the qualification criteria for the FCL and the PLL through the adoption of the nine specific FCL criteria to assess PLL qualification. At the same time, they supported retaining the requirement of strong performance in most of the five broad qualification areas for the PLL. A number of Directors saw the benefits of precise, detailed assessments against each of the nine criteria in enhancing the richness and transparency of assessments, as well as comparability across arrangements. A few Directors noted that improving transparency requires a change in implementing the qualification framework rather than modifying the qualification criteria themselves.

Most Directors supported strengthening the bank solvency qualification criterion so that it is based on the soundness of the overall financial system and the absence of solvency problems that may threaten systemic stability. A few Directors pointed to the practical difficulties in conducting a comprehensive assessment of the financial system in a short timeframe.

Most Directors concurred with the use of additional indicators of institutional strength outlined in the paper to complement the existing quantitative indicators already used in qualification assessments for FCL and PLL arrangements. At the same time, they underlined that these indicators, when considered, would not constitute a new criterion or be used mechanistically, but could help inform the judgment made by Fund staff when assessing institutional policy frameworks for qualification for these instruments. These Directors urged staff to exercise caution and judgment in using these indicators, given the subjectivity of third-party data and the need to take account of country-specific circumstances and policy regimes. A number of Directors remained unconvinced of the usefulness of the proposed indicators, which, in their view, have conceptual and methodological shortcomings, including limited empirical evidence supporting the choice of proxies and use of data that are outside the Fund’s core areas of expertise, while a few also noted their limited applicability given members’ specific conditions. A few Directors expressed particular concern about the appropriateness of relying on the indicators developed by the International Country Risk Guide, and could not support using them in FCL or PLL qualification assessments.

Most Directors endorsed the proposal to use an external stress index in future FCL and PLL staff reports to inform the discussion of the external environment facing a member. They concurred that, while this index would provide a richer backdrop for the Board to discuss access and exit prospects, final decisions should continue to reflect broader considerations. Most Directors agreed that country teams should have the responsibility of constructing this index, following consultations with country authorities. They underscored, however, that the choice of index should be justified in a thorough manner, with many also noting the desirability of striking the right balance between flexibility that allows for country-specific considerations and standardization that ensures evenhandedness and consistency over time. Some Directors saw scope for further improving the methodological robustness of the index, including by incorporating more forward-looking elements to capture potential risks.

Directors looked forward to continuing the discussion on access limits, as well as revisiting issues related to exit strategies at the next opportunity. In this context, a number of Directors would have preferred a more thorough discussion of exit issues in the current review and continued to call for stronger incentives to discourage prolonged large precautionary arrangements, including commitment fees. In line with the general view held at the February Board discussion, a few Directors underscored that all staff reports for members using the FCL or the PLL should include a clear exit strategy and a well-articulated communication plan. A few Directors reiterated their interest in considering greater use of ex post conditionality as a way to address remaining vulnerabilities in PLL users. Many Directors reiterated their call for raising RFI access limits, which will be considered carefully in the follow-up discussion on policies regarding access limits and surcharges.

In adopting decisions amending the FCL and the PLL instruments, Directors broadly supported the proposal for the alignment of the qualification criteria for the FCL and the PLL and the amendment of the bank solvency criterion to become effective for new arrangements immediately. Most Directors also generally supported implementing the proposals on the use of indicators of institutional strength and the index of external stress from September 1, 2014, allowing staff time for adequate preparations and discussions with relevant country authorities. At the request of a few Directors, staff would re-circulate Annex I in a form that identifies the modifications to the existing annex that are needed in light of the decisions adopted by the Executive Board today, and the Board would have an opportunity to discuss these modifications in a subsequent meeting on June 11. As agreed at the meeting in February, Directors will review the experience with the use of the three instruments within three years, although a number of Directors expressed a preference for the next review to be conducted earlier than three years.

BUFF/14/50

June 12, 2014

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