Global crisis has exposed data gaps that arose from the deepened integration of economies and markets (photo: Jens Norgaard Larsen/AFP)
Financial Stability
The panelists shared their views on emerging data needs and priorities useful for identifying risks in the financial sector. They were in general agreement that the recent financial crisis had exposed various shortcomings in the global financial system, including data gaps that arose from the deepened integration of economies and markets.
“As markets evolve, it’s always a challenge to keep pace with the degree of innovation,” said Agustín Carstens, Governor of the Bank of Mexico and former Deputy Managing Director of the IMF at the seminar on “Financial Stability—The Data Challenge.”
Philipp Hildebrand, Chairman of the Governing Board of the Swiss National Bank, urged policymakers to use this “window of opportunity to push forward a number of initiatives both on the regulatory and data fronts.” But he stressed that the lack of data was not the main cause of the crisis. “It is true that we did not fully understand all the connections of financial institutions…but not clear that we could have avoided the crisis had we had more data,” he said.
Continuous monitoring
Taoufik Baccar, Governor of the Central Bank of Tunisia, discussed how Tunisia has for many years placed a high priority on the quality and assessment of financial sector data. For example, Tunisia was one of the first Arab countries to adhere to the Special Data Dissemination Standard (SDDS), part of the first pilot group to undergo a data module of the Report on the Observance of Standards and Codes (ROSC), and has twice undergone a Financial Sector Assessment Program (FSAP). While this has helped policymakers ensure that Tunisia meets or exceeds international standards, he noted that continuous vigilance is required to stay ahead of developments.
Seminar by IMF brought together senior policymakers to discuss emerging priority data needs (IMF photo)
Luckily, Tunisia was insulated to some degree during this financial crisis by its limited exposure to international markets and its prudent approach to financial innovation, Baccar said. However, the crisis has pushed the central bank to go further than the traditional methods of collecting financial sector statistics toward a system that alerts policymakers to financial stresses well in advance.
Monitoring interconnections
Carstens said that his country had learned many valuable lessons from the 1995 Mexican crisis. At that time, the country had a lot of information that was “essentially useless.” Subsequently, Mexico strengthened coordination among agencies—with the central bank coordinating all the interactions with all the financial intermediaries—and enhanced significantly its data collection exercise to focus on key vulnerabilities, including on network connections among banks and with key financial markets. “It’s far less costly to have a good financial information system than not having the right information when you need it,” he noted.
But when the global crisis erupted, Carstens pointed out important information was missing on the amounts and characteristics of over-the-counter derivative operations carried out by large Mexican nonfinancial firms with foreign counterparties. “In the end, this lack of data represented a factor of volatility in our foreign exchange market. It didn’t represent any systemic risk but nevertheless it was a hiccup that we didn’t need to have at that time,” he said.
Carstens added that his country’s main challenges remain how to appropriately capture the “non-linearities involved in complex derivatives and cross-border information sharing.”
Four key priorities
While Hildebrand welcomed the 20 recommendations put forward by the Group of 20 (G-20) advanced and large emerging market economies for closing information gaps, he pointed to the need to set key priorities.
He therefore urged policymakers to focus on four key areas:
• Improving the accessibility of existing data. The Principal Global Indicators (PGI) website for G-20 economies is a major first step and should be enhanced by including more countries and indicators.
• Putting more focus on consolidated data. The natural starting point for enhancing data on a consolidated basis is the international banking statistics of the Bank for International Settlements (BIS). This would require more information on maturity and currency mismatches in the revised BIS statistics.
• Increasing collaboration among authorities within a country. This calls for increased collaboration between supervisors and central bankers. But enhancing the availability of data should not increase the reporting burden of financial institutions. However, Carstens noted that it is also very costly not to have the information when needed.
• Sharing information internationally on systemically important global financial institutions. The Swiss central bank uses domestic bank’s balance sheet exposures to simulate first and second round effects of bank failures, Hildebrand said. Such an approach could be used internationally, even though it is a more modest proposal than the one put forward by the IMF.
But more important than these priorities, Hildebrand pointed out that the biggest challenge remains addressing the “too-big-to-fail problem.” “Once these institutions are failing, better data is not going to be the answer,” he added.
Incomplete information
Darmin Nasution, Governor of Bank Indonesia, explained that Bank Indonesia has produced a semiannual Financial Stability Review publication since 2003 to keep all stakeholders informed of the condition of the financial system. Further, Bank Indonesia also employs a set of Financial Soundness Indicators, originally developed by the IMF, to assess the strength and vulnerability of the financial system.
But despite these efforts and the dominance of banking in Indonesia’s financial system, Nasution acknowledged that his country’s central bank does not have all the necessary information to make an objective assessment of the entire financial system. “There is still indeed the data gap in connecting the banking system with the non-bank financial system and with capital markets,” he said.
Limited information of large groups of nonfinancial firms (the conglomerates) is also another challenge, Nasution noted. Such groups may not have direct exposures to banks or nonbank financial institutions but may have a significant presence in the economy and capital markets, such that their failures could adversely impact market sentiments and subsequently capital flows, the exchange rate, and domestic market liquidity. “Ultimately, this could potentially cause banks as well as nonbank financial institutions to fail,” he noted.
Murilo Portugal, IMF Deputy Managing Director and moderator of the seminar, echoed in his closing remarks a point made by several panelists—that the availability of timely, consistent, and comparable statistics is a necessary but not sufficient condition for making good economic policy and financial decisions. “It’s an important building block for supervisory work and surveillance but is not enough to ensure financial stability,” he said.
