- International Monetary Fund. Independent Evaluation Office
- Published Date:
- February 2019
BP/18-02/01. “IMF Bilateral Financial Surveillance,” by Shinji Takagi
This paper assesses aspects of IMF bilateral financial surveillance, primarily drawing on 15 country case studies and also utilizing a desk review of IMF documents and interviews with additional member country officials. Following the global financial crisis, the Fund intensified its efforts to better integrate macroeconomic and financial analysis. This paper confirmed that the coverage of financial sector issues and macrofinancial linkages has expanded, especially in countries without systemically important financial sectors. Even so, the Fund faces obstacles to effective financial surveillance, not least including data gaps and the absence of a well-established, quantifiable model of real-financial linkages. The paper concludes that macrofinancial integration remains a work in progress despite recent improvements.
BP/18-02/02. “Assessing the FSAP: The Quality, Relevance, and Utility of the IMF’s Program,” by Gerard Caprio
This paper examines the technical quality, relevance, and usefulness of the Financial Sector Assessment Program (FSAP). The FSAP has become an increasingly sophisticated tool for evaluating the stability of financial systems since the Global Financial Crisis and is generally regarded by country authorities as a high-quality and rigorous exercise. Financial regulatory authorities, however, have also made great strides in their own ability to assess financial stability. To optimize the value added of FSAPs, this paper recommends greater focus, prioritization, and greater integration with Article IV consultations.
BP/18-02/03. “IMF Multilateral Financial Surveillance,” by Jeromin Zettelmeyer
This paper evaluates IMF multilateral financial surveillance during 2013–17 along five dimensions: GFSR vulnerability analysis, the GFSR’s risk warnings, consistency of the GFSR with the WEO and the G20 notes, the Early Warning Exercise, and consistency of GFSR with bilateral financial surveillance of the United States and the euro area. The main finding is that multilateral financial surveillance has come a long way since the crisis, particularly with respect to increasing consistency of messages and integration with bilateral surveillance. Nevertheless, there remains room for improvement both in the presentation and substance of vulnerability analysis.
BP/18-02/04. “Collaboration in Financial Regulatory Reform: The IMF, the Financial Stability Board, and the Standard Setting Bodies,” by Stephen Cecchetti
This paper examines the IMF’s role in financial regulatory reform, with a focus on its relationship to the Financial Stability Board (FSB) and the standard-setting bodies (SSBs). The IMF has contributed greatly to the global regulatory reform agenda, not only by monitoring implementation of standards but also by providing fundamental research and assessing the impact of reforms. Moreover, the IMF’s relationships with the FSB and SSBs are generally working well. There are, however, opportunities for the IMF to enhance its contributions, particularly in pre- and post-implementation impact assessments.
BP/18-02/05. “Strengthening IMF Financial Surveillance: Organizational and Human Resource Issues,” by Louellen Stedman
This paper assesses institutional arrangements aimed at enhancing financial surveillance in the IMF since 2010, in particular issues related to the IMF’s organizational structure and processes, budgetary resources, and human resource management. To support its financial surveillance objectives, the IMF has continued to adapt its organizational arrangements, to align its budget and human resources, and to enhance the skills of country teams. Nonetheless, the IMF’s efforts in this area remain a work in progress. The paper also provides recommendations to increase institutional knowledge of existing skills and enhance incentives related to financial skills and expertise.
BP/18-02/06. “Analytical Frameworks and Toolkits in IMF Financial Surveillance,” by Olivier Jeanne
This paper evaluates the analytical frameworks and tools used by the IMF in its financial surveillance. The IMF was a leader in developing models and tools to analyze various financial and macrofinancial issues, including stress tests. Since the Global Financial Crisis, central banks in advanced economies and some emerging markets have made large investments in developing models of their own economies that incorporate financial frictions, and stress tests that are tailored to their circumstances. To continue being a center of excellence on financial and macrofinancial issues, this paper recommends that the IMF increase its investment in research and development of tools in areas of its comparative advantage, including cross-border financial spillovers and global liquidity stress tests.
BP/18-02/07. “Emerging Technology-Related Issues in Finance and the Fund: A Stocktaking,” by Dimitri Demekas
This paper provides a stocktaking of the IMF’s work on three emerging technology-related issues in finance: (i) cyber risk and cyber security for financial systems; (ii) technology-driven innovation in the provision of financial services (“fintech”); and (iii) digital currencies or cryptocurrencies. The stocktaking shows that the IMF has been paying increasing attention to technology-related issues in finance and has sought to engage with them, both as analytical issues and as topics in surveillance. Together with the World Bank, the IMF has developed the Bali Fintech Agenda that sets out a framework to help members consider how they will be impacted by fintech developments and how they should respond.
BP/18-02/08. “IEO Evaluation of IMF Financial Surveillance: Survey Results,” by Chris Monasterski
This paper presents the results of IEO surveys of the Offices of Executive Directors (OED) and IMF staff. The OED survey focused on the goals and strategic directions of IMF financial surveillance and on perceptions of financial surveillance as undertaken via Article IV consultations, the Financial Sector Assessment Program (FSAP), and multilateral surveillance. The OED survey was sent to 211 recipients, of which 84 responded (39.8 percent). The staff survey focused on the goals and strategic direction of financial surveillance, respondent experience with integrating financial sector issues in IMF bilateral and multilateral surveillance, and individual skills and training. The staff survey was sent to 1,368 economist and specialized career stream staff (levels A12 to B4) in area departments, the Monetary and Capital Markets Department (MCM), and other select functional departments,1 of which 415 responded (30.3 percent).
BP/18-02/09. “IMF Financial Surveillance in Action: Country Case Studies from Europe and Sub-Saharan Africa”
Chapter 1: IMF Financial Surveillance of the Euro Area, by Jean-Pierre Landau
Chapter 2: IMF Financial Surveillance of Germany, by Jeffrey Anderson
Chapter 3: IMF Financial Surveillance of Italy, by Jeffrey Anderson
Chapter 4: IMF Financial Surveillance of the United Kingdom, by David Miles
Chapter 5: IMF Financial Surveillance of Ghana, Kenya, and Nigeria, by Mthuli Ncube
BP/18-02/10. “IMF Financial Surveillance in Action: Country Case Studies from Asia and the Western Hemisphere”
Chapter 1: IMF Financial Surveillance of Brazil, by Sanjay Dhar
Chapter 2: IMF Financial Surveillance of China, by David Dollar
Chapter 3: IMF Financial Surveillance of Japan, by Akira Ariyoshi
Chapter 4: IMF Financial Surveillance of Malaysia, Singapore, and Thailand, by Latifah Merican Cheong
Chapter 5: IMF Financial Surveillance of Mexico, by Monica de Bolle
Chapter 6: IMF Financial Surveillance of the United States, by John Murray
AndersonJeffrey2018a “IMF Financial Surveillance of Germany,” Chapter 2 in “IMF Financial Surveillance in Action: Country Case Studies from Europe and Sub-Saharan Africa” IEO Background Paper No. BP/18–02/09 (Washington: International Monetary Fund).
AndersonJeffrey2018b “IMF Financial Surveillance of Italy,” Chapter 3 in “IMF Financial Surveillance in Action: Country Case Studies from Europe and Sub-Saharan Africa” IEO Background Paper No. BP/18–02/09 (Washington: International Monetary Fund).
BrunnermeierMarkus andYuliySannikov2014 “A Macroeconomic Model with a Financial Sector ” American Economic Review104(2): 379–421.
CaprioGerard “Assessing the FSAP: The Quality, Relevance, and Utility of the IMF’s Program” IEO Background Paper No. BP/18–02/02 (Washington: International Monetary Fund).
CecchettiStephen2018 “Collaboration in Financial Regulatory Reform: The IMF, the Financial Stability Board, and the Standard Setting Bodies” IEO Background Paper No. BP/18–02/04 (Washington: International Monetary Fund).
CheongLatifahMerican2018 “IMF Financial Surveillance of Malaysia, Singapore, and Thailand,” Chapter 4 in “IMF Financial Surveillance in Action: Country Case Studies from Asia and the Western Hemisphere” IEO Background Paper No. BP/18–02/10 (Washington: International Monetary Fund).
ChungHessMichael T.Kiley andJean-PhilippeLaforte2010 “Documentation of the Estimated, Dynamic Optimization-based (EDO) Model of the U.S. Economy: 2010 Version” Staff Working Paper in the Finance and Economics Discussion Series 2010–29 (Washington: Federal Reserve Board).
de BolleMonica2018 “IMF Financial Surveillance of Mexico,” Chapter 5 in “IMF Financial Surveillance in Action: Country Case Studies from Asia and the Western Hemisphere” IEO Background Paper No. BP/18–02/10 (Washington: International Monetary Fund).
DollarDavid2018 “IMF Financial Surveillance of China,” Chapter 2 in “IMF Financial Surveillance in Action: Country Case Studies from Asia and the Western Hemisphere” IEO Background Paper No. BP/18–02/10 (Washington: International Monetary Fund).
DrehmannMathias andKostasTsatsaronis2014 “The credit-to-GDP gap and countercyclical capital buffers: questions and answers” BIS Quarterly Review March: 55–73.
G20 Eminent Persons Group on Global Financial Governance2018 “Update for the G20 Meeting of Finance Ministers and Central Bank Governors” presented to the G20 Meeting of Finance Ministers and Central Bank GovernorsBuenos AiresMarch.
GertlerMark andPeterKaradi2011 “A Model of Unconventional Monetary Policy” Journal of Monetary Economics Vol. 58: 17–34.
GertlerMark andNobuhiroKiyotaki2015 “Banking, Liquidity, and Bank Runs in an Infinite Horizon Economy” American Economic Review105(7): 2011–43.
GoodhartCharles2017 “Why regulators should focus on bankers’ incentives” Bank Underground.
Independent Evaluation Office (IEO)2006Financial Sector Assessment Program (Washington: International Monetary Fund).
Independent Evaluation Office (IEO)2011IMF Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance in 2004–07 (Washington: International Monetary Fund).
Independent Evaluation Office (IEO)2014IMF Response to the Financial and Economic Crisis (Washington: International Monetary Fund).
Independent Evaluation Office (IEO)2018a “IMF Financial Surveillance in Action: Country Case Studies from Europe and Sub-Saharan Africa” IEO Background Paper No. BP/18–02/09 (Washington: International Monetary Fund).
Independent Evaluation Office (IEO)2018b “IMF Financial Surveillance in Action: Country Case Studies from Asia and the Western Hemisphere” IEO Background Paper No. BP/18–02/10 (Washington: International Monetary Fund).
International Monetary Fund (IMF)1977 “Staff Operational Guidance Note Following the 1997 Biennial Surveillance Review” SM/97/178 (Washington).
International Monetary Fund (IMF)1998 “Guidance Note for the Monitoring of Financial Systems Under Article IV Surveillance” SM/98/151 (Washington).
International Monetary Fund (IMF)2002a “Global Financial Stability Report: Market Developments and Issues” March (Washington).
International Monetary Fund (IMF)2002b “Operational Guidance Note for Staff Following the 2002 Biennial Surveillance Review” SM/02/292 (Washington).
International Monetary Fund (IMF)2005 “Surveillance Guidance Note” SM/05/156 (Washington).
International Monetary Fund (IMF)2007 “IMF Executive Board Adopts New Decision on Bilateral Surveillance Over Members’ Policies” IMF Public Information Notice (PIN) No. 07/69 (Washington).
International Monetary Fund (IMF)2010a “Modernizing the Surveillance Mandate and Modalities” March (Washington).
International Monetary Fund (IMF)2010b “Integrating Stability Assessments Under the Financial Sector Assessment Program into Article IV Surveillance” August (Washington).
International Monetary Fund (IMF)2011 “2011 Triennial Surveillance Review—Overview Paper” August (Washington).
International Monetary Fund (IMF)2012a “Decision on Bilateral and Multilateral Surveillance” Decision No. 15203–(12/72)July (Washington).
International Monetary Fund (IMF)2012b “The IMF’s Financial Surveillance Strategy” August (Washington).
International Monetary Fund (IMF)2014a “Strengthening Surveillance of Financial Sector Issues in Article IV Consultations” prepared by David Marston and Dimitri G. Demekas June (internal; Washington).
International Monetary Fund (IMF)2014b “2014 Triennial Surveillance Review—Overview Paper” July (Washington).
International Monetary Fund (IMF)2014c “Review of the Financial Sector Assessment Program: Further Adaptation to the Post Crisis Era” August (Washington).
International Monetary Fund (IMF)2014d “Review of the Fund’s Strategy on Anti-Money Laundering and Combating the Financing of Terrorism” (Washington).
International Monetary Fund (IMF)2017a “Recent Trends in Correspondent Banking Relationships—Further Considerations” (Washington).
International Monetary Fund (IMF)2017b “Approaches to Macrofinancial Surveillance in Article IV Reports” March (Washington).
International Monetary Fund (IMF)2017cMemorandum to the First Deputy Managing Director on “Mainstreaming Macrofinancial Surveillance—Update” December (internal; Washington).
International Monetary Fund (IMF)2018a “2018 Interim Surveillance Review” March (Washington).
International Monetary Fund (IMF)2018b “The Bali Fintech Agenda” October (Washington).
International Monetary Fund–Financial Stability Board–Bank for International Settlements (IMF-FSB-BIS)2016 “Elements of Effective Macroprudential Policies: Lessons from International Experience” August.
JeanneOlivier2018 “Analytical Frameworks and Toolkits in IMF Financial Surveillance” IEO Background Paper No. BP/18–02/06 (Washington: International Monetary Fund).
KashkariNeel2018 “Big banks still threaten the economy. But Congress is asleep at the wheel” Washington Post March 8.
LagardeChristine2018 “Ten Years After Lehman—Lessons Learned and Challenges Ahead” September 5. Available at www.imf.blogs.
LandauJean-Pierre2018 “IMF Financial Surveillance of the Euro Area,” Chapter 1 in “IMF Financial Surveillance in Action: Country Case Studies from Europe and Sub-Saharan Africa” IEO Background Paper No. BP/18–02/09 (Washington: International Monetary Fund).
MonasterskiChris2018 “Main Findings from Surveys of Members of IMF Executive Board and IMF Staff” IEO Background Paper No. BP/18–02/08 (Washington: International Monetary Fund).
StedmanLouellen2018 “Strengthening IMF Financial Surveillance: Organizational and Human Resource Issues” IEO Background Paper No. BP/18–02/05 (Washington: International Monetary Fund).
TakagiShinji2018 “IMF Bilateral Financial Surveillance” IEO Background Paper No. BP/18–02/01 (Washington: International Monetary Fund).
Statement by the Managing Director
On the Independent Evaluation Office Report on the IMF Financial Surveillance: Executive Board Meeting January 14, 2019
I welcome the report of the Independent Evaluation Office (IEO) on the IMF’s financial surveillance. The report recognizes the substantial upgrade the Fund has made in its financial surveillance work since the Global Financial Crisis (GFC) and offers valuable and constructive insights on how to further improve its quality and impact. Accordingly, I broadly support the IEO’s recommendations to make IMF financial surveillance more effective.
The IEO report provides a welcome opportunity to reflect on the IMF’s initiatives to expand and deepen its financial surveillance work in response to the Global Financial Crisis, which were made explicit in the 2012 Integrated Surveillance Decision and the 2012 Financial Surveillance Strategy. Reflecting its macroeconomic and financial expertise, global membership and governance, the IMF is well placed to make members aware of global financial stability risks while advising them on policies tailored to their circumstances.
I welcome the report’s overall findings that the Fund’s efforts have delivered a substantial upgrade of its financial surveillance work, including by developing a broad range of diagnostic tools, exploring new policy approaches, and stepping up attention to macrofinancial linkages in bilateral surveillance. I am also pleased that the report recognizes that the Global Financial Stability Report (GFSR) and Early Warning Exercise (EWE) are leading sources of insights on the outlook for and risks to the global financial system; and that the IMF is now better prepared to detect financial vulnerabilities and risks.
At the same time, I agree that there remains room to improve the quality and impact of the Fund’s work in this area; therefore, I broadly support the report’s findings and suggested priorities. I wish to highlight that the 2020 Comprehensive Surveillance Review and Financial Stability Assessment Program (FSAP) Review will provide important opportunities to consider some of the report’s key recommendations, while recognizing the constrained resource environment for the Fund. To this end, I appreciate that the IEO identifies areas of highest priority and clarifies that fully implementing all recommendations to meet the IMF’s responsibilities and objectives would require significant additional resources. Below is my proposed response to each of the six recommendations presented in the IEO report.
Response to Recommendations
Recommendation 1—Strengthening financial and macrofinancial analysis in Article IV surveillance: To improve the relevance and traction of bilateral financial surveillance, the IMF needs to deepen financial and macrofinancial analysis, particularly in Article IV consultations, including by taking practical steps to better integrate FSAP analysis in Article IV consultations and by increasing financial skills and expertise among staff.
I agree with the objective of further strengthening financial and macrofinancial analysis in Article IV surveillance, which resonates with the conclusions of the 2018 Interim Surveillance Review. Further integrating FSAP analysis in Article IV consultations can help achieve that objective. The upcoming FSAP and Comprehensive Surveillance Reviews will consider this recommendation and the related specific suggestions laid out in the report. As major strides in improving financial analysis in Article IV consultations will also require further developing the skillset of country teams, I note that it could entail substantial additional resource costs (see also recommendations 5 and 6).
Recommendation 2—Refocusing FSAP country selection and scope: The IMF should revisit the current approach to allocating FSAP resources to achieve a more flexible, dynamic and risk-based allocation across countries and issues.
I broadly concur with the proposal to review the number of mandatory Financial Stability Assessments (FSAs). Without prejudging the outcome of the FSAP review, I would note that any revised approach to allocating FSAP resources would need to strike a balance among several factors, including evenhandedness and transparency in the selection process; the current voluntary nature of FSAs for most member countries; and the market signaling risks inherent in any selection of countries based on vulnerabilities.
While I agree with the proposal to review the scope and focus across FSAPs (to be considered in the FSAP review), I do not concur with the recommendation to cut back on Fund stress testing in jurisdictions and areas where the authorities already conduct detailed stress tests. The experience so far has shown that stress tests conducted by the authorities in advanced countries vary in quality and in ambition, while the Fund’s independent stress tests have continued to add value in many instances and are integral to the Fund’s bilateral surveillance.
Recommendation 3—Increasing traction of multilateral surveillance: The IMF should continue to work to enhance the impact of IMF multilateral surveillance by increasing rigor and transparency, and by deepening collaboration with international partners.
I welcome the conclusion that IMF’s work on multilateral financial surveillance is generally well regarded and agree with the recommendation to make more GFSR material available online, subject to copyright constraints. Disclosing more details and data would help improve the traction of the GFSR by ensuring more solid and transparent analytical and empirical backing of Chapter 1 narratives.
I also broadly support the recommendation to deepen collaboration with international partners. In fact, the improved cooperation in recent years between the IMF and the FSB on the EWE has been very successful in achieving the objectives outlined in the report. We plan to continue deepening this cooperation without compromising our capacity to raise out-of-the box issues. However, I continue to believe that further dissemination of the EWE would weaken its effectiveness.
On scaling up the Fund’s work with the international regulatory agencies to assess the impact of reforms, the Fund has undertaken several assessments of different aspects of the reforms following the 2012 Financial Surveillance Strategy. Some of these have been conducted jointly with the Standard Setting Bodies (SSBs). We will continue to conduct such assessments, subject to resource availability, while recognizing the challenges that emerge when there is a divergence of views between these regulatory agencies and IMF members that are not represented in them.
Recommendation 4—Enhancing the IMF analytical tools: To enhance the value added of its financial surveillance, the IMF should strengthen efforts to be a global center of excellence on financial and macrofinancial research.
Enhancing the Fund’s analytical toolkit is a constant endeavor. Improving the understanding of macrofinancial linkages remains a high priority for the Fund’s multilateral and bilateral surveillance. Exchange of views between the IMF and major central banks can further support that purpose. Furthermore, developing simplified tools and increasing internal outreach to further disseminate existing ones could help strengthen the monitoring of financial risks and assess their implications for financial stability and growth. Staff is currently working on deepening and broadening the application of the Growth-at-risk framework and is developing models to study specific issues related to the intersection of macroeconomics and finance.
The proposal to conduct global stress tests in partnership with the BIS and FSB (see also recommendation 3) is interesting. But I am not convinced that it is feasible, particularly considering the data constraints acknowledged in the report.
With respect to fintech, the Fund is gaining expertise and is active in building international support for cooperative action where appropriate. At the same time, staff is conducting significant analytical work, including recently on central bank digital currencies. These efforts are oriented toward delineating the Fund’s role in fintech and focusing on its comparative advantages, in line with its mandate.
Recommendation 5—Building financial skills and expertise: The IMF should intensify efforts to attract, develop and retain a deeper pool of financial talent, as well as to ensure that area department fungible macroeconomists have the knowledge and support to integrate financial and macrofinancial analysis into Article IV consultations.
I agree with the overall message that the IMF has made significant efforts to upgrade the macrofinancial skills of its economists, and that this area remains work in progress. Targeted enhancements from the HR strategy (including a talent inventory and a potential expert track) will help ensure that macroeconomists and experts combine their expertise to support effective macrofinancial surveillance across the membership. The talent management challenges to disseminate and strengthen macrofinancial skills, including through recruiting, will also be considered in the context of the forthcoming comprehensive compensation and benefits review.
Recommendation 6—Increasing budgetary resources: To fully meet its responsibilities and objectives, the IMF should consider devoting significant additional resources to financial surveillance.
I acknowledge that strengthening financial surveillance requires adequate resources. I take note of the recommendation to significantly increase the resource envelope for financial surveillance. Budgetary issues will be considered in the context of the IMF’s budget discussions and will need to reflect the areas of the Fund’s comparative advantages, medium-term trade-offs, and strategic objectives defined by the Executive Board. In this context, we should also acknowledge the importance of making sure that we assist our members in the most cost-effective way possible.
The Chairman’s Summing Up
IEO Evaluation—IMF Financial Surveillance Executive Board Meeting 19/2 January 15, 2019
Executive Directors welcomed the report of the Independent Evaluation Office (IEO) on IMF Financial Surveillance. They welcomed the IEO’s recognition of the substantial upgrade to the Fund’s financial surveillance work as a result of the many initiatives launched to strengthen the Fund’s work in this area since the Global Financial Crisis. At the same time, they shared the view that there is scope to further enhance the quality and impact of the Fund’s financial surveillance. In this regard, they welcomed the Managing Director’s broad support for the IEO findings and recommendations.
Directors supported Recommendation 1 on strengthening financial and macrofinancial analysis in Article IV surveillance, including by further integrating analysis from the Financial Stability Assessment Program (FSAP) in Article IV consultations and increasing the financial skills and expertise of country teams. Further progress in this area will require finding a right balance in the allocation of financial surveillance resources between FSAP and Article IV surveillance. A number of Directors supported the suggestion to strengthen the follow-up of FSAP-identified vulnerabilities and risks in Article IV consultations. Directors noted that the upcoming Comprehensive Surveillance Review and FSAP Review will provide an opportunity to consider Recommendation 1 and related specific suggestions.
Directors broadly concurred with Recommendation 2 to revisit the current approach to allocating FSAP resources to achieve a more flexible, dynamic, and risk-based allocation across countries and issues. Most Directors agreed with the proposal to review the number of mandatory financial stability assessments, but some were skeptical about reducing the number of jurisdictions subject to mandatory assessments (S29) or the frequency of their assessments, including because of the high speed of change in financial markets. Many Directors were open to reducing the number of jurisdictions subject to mandatory assessments every five years. A number of these Directors supported or were open to limiting mandatory assessments every five years to the five jurisdictions with the most systemically important financial sectors (S5). A number of other Directors, however, were opposed to limiting mandatory assessments to the S5. Directors stressed that the revised approach to allocating FSAP resources should strike a balance among several factors, including evenhandedness and transparency in the selection process, the systemic nature of national financial systems, the voluntary nature of financial stability assessments for most of the membership, and market signaling risks from selecting countries based on vulnerabilities. Directors also agreed that the scope and focus across FSAPs could be reviewed to better tailor assessments to country circumstances including risks and regulatory gaps while also avoiding over-reliance on off-the-shelf international best practice. This will help increase value added and make better use of staff and authorities’ time and resources. Many Directors agreed or were open to the suggestion that in jurisdictions that conduct sophisticated stress tests, FSAPs should focus on designing risk scenarios and reviewing authorities’ models to limit the resource burden on the Fund and the authorities. Other Directors felt, however, that the Fund should not cut back on stress testing in advanced economies to ensure a consistent quality of such tests. Directors looked forward to discussing the above issues in the context of the FSAP review.
Directors welcomed the finding that the Fund’s multilateral financial surveillance is well regarded and influential. At the same time, they noted room to enhance its traction by increasing rigor and transparency, and by deepening collaboration with international partners. Along these lines, they broadly supported Recommendation 3, including making more GFSR data and analysis available online, subject to copyright constraints, and adapting the GFSR presentation to make it an easier read for busy country officials, who are its main audience. Directors also supported continuing to deepen cooperation with international partners, such as on the Early Warning Exercise (EWE) with the Financial Stability Board (FSB), without compromising the Fund’s capacity to raise out-of-the-box issues. Some Directors supported wider dissemination of the EWE to senior officials, while others cautioned that wider dissemination could weaken its effectiveness. Directors stressed the need for the Fund to continue its work with international regulatory agencies to assess the impact of reforms, drawing on its areas of comparative advantage and subject to resource availability.
Directors supported Recommendation 4 that the Fund should continue to enhance its analytical tools to improve the understanding of macrofinancial linkages. They considered that exchange of views between the Fund and major central banks, as well as developing simplified tools and increasing internal outreach, is helpful for this purpose. While a few Directors encouraged staff to explore the feasibility of conducting global stress tests in partnership with the Bank for International Settlements and the FSB, others expressed doubts in view of data constraints.
Directors welcomed the recognition of the Fund’s significant efforts to upgrade the macrofinancial skills of its economists but agreed that this area remains work in progress. They underscored that it is critical to ensure that country teams have the knowledge and support to integrate financial and macrofinancial analysis into Article IV consultations. In supporting Recommendation 5, Directors noted that targeted enhancements from the HR Strategy can help ensure that Fund staff develop the expertise needed for effective macrofinancial surveillance. They also looked forward to discussing issues pertaining to attracting and retaining a deeper pool of financial talent in the context of the Comprehensive Compensation and Benefits Review.
Directors agreed that to fully meet its responsibilities and objectives, the Fund should devote adequate resources to strengthening financial surveillance and concurred with Recommendation 6 on the need for additional resources for this work. Most Directors considered that an increase in resources should come from reallocation of some resources from other activities and seeking efficiencies. A few Directors thought that there should be an overall budget increase. Many Directors called for costed options for resource reallocation to help the Board in making an informed decision. Directors noted that relevant tradeoffs will be considered in the context of the Fund’s budget discussions, the FSAP Review, and the Comprehensive Surveillance Review.
In line with established practice, management and staff will give careful consideration to today’s discussion in formulating the management implementation plan, including approaches to monitoring progress and to discussing the interrelated recommendations in an integrated manner.
Completed and Ongoing IEO Work Program
Evaluation of Prolonged Use of IMF Resources
The IMF and Recent Capital Account Crises: Indonesia, Korea, Brazil
Fiscal Adjustment in IMF-Supported Programs
Evaluation of the IMF’s Role in Poverty Reduction Strategy Papers and the Poverty Reduction and Growth Facility
The IMF and Argentina, 1991–2001
IMF Technical Assistance
The IMF’s Approach to Capital Account Liberalization
IMF Support to Jordan, 1989–2004
Financial Sector Assessment Program
The IMF and Aid to Sub-Saharan Africa
IMF Exchange Rate Policy Advice
Structural Conditionality in IMF-Supported Programs
Governance of the IMF: An Evaluation
IMF Involvement in International Trade Policy Issues
IMF Interactions with Member Countries
IMF Performance in the Run-Up to the Financial and Economic Crisis:
IMF Surveillance in 2004–07
Research at the IMF: Relevance and Utilization
International Reserves: IMF Concerns and Country Perspectives
The Role of the IMF as Trusted Advisor
IMF Forecasts: Process, Quality, and Country Perspectives
Recurring issues from a Decade of Evaluation: Lessons for the IMF
IMF Response to the Financial and Economic Crisis
Self-Evaluation at the IMF: An IEO Assessment
Behind the Scenes with Data at the IMF: An IEO Evaluation
The IMF and the Crises in Greece, Ireland, and Portugal
The IMF and Social Protection
The IMF and Fragile States
IMF Financial Surveillance
IMF Advice on Unconventional Monetary Policy
Prolonged Use of IMF Resources: Revisiting the 2002 IEO Evaluation
Fiscal Adjustment in IMF-Supported Programs: Revisiting the 2003 IEO Evaluation
IMF Technical Assistance: Revisiting the 2005 IEO Evaluation
Revisiting the IEO Evaluations of The IMF’s Role in PRSPs and the PRGF (2004) and The IMF and Aid to Sub-Saharan Africa (2007)
The IMF’s Approach to Capital Account Liberalization: Revisiting the 2005 IEO Evaluation
Multilateral Surveillance: Revisiting the 2006 IEO Evaluation
IMF Exchange Rate Policy Advice: Evaluation Update
Structural Conditionality in IMF-Supported Programs: Evaluation Update
Governance of the IMF: Evaluation Update
In this report FSAP is used for the mandatory financial stability assessments for the 29 jurisdictions with systemically important financial sectors, as well as the voluntary FSAPs for the rest of the membership.
The VEE is an internal exercise initiated in 2001 to identify EMEs vulnerable to an external or internal crisis in the following 6–12 months for discussion between IMF staff and Management.
The S29 are identified by a complicated exercise weighing countries’ financial system size and interconnectedness. This list is reviewed every five years. Currently, the S29 are: Australia, Austria, Belgium, Brazil, Canada, China, Denmark, Finland, France, Germany, Hong Kong SAR, India, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Norway, Poland, Russia, Singapore, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. For the purposes of this evaluation, the euro area is treated as part of the S29.
The ISD expanded the perimeter of financial surveillance beyond the 2007 Decision on Bilateral Surveillance. This decision defined the scope of IMF surveillance to include all member policies that “can significantly influence present or prospective external stability,” including “monetary, fiscal and financial sector policies” (IMF, 2007), but had implicitly limited the examination of outward spillovers only to those operating through the balance of payments channel (IMF, 2010a). Thus, in practice, effective integration of financial sector issues and policies had remained a challenge (IMF, 2010b).
During the past five years, MCM’s FTE envelope for surveillance rose from 125 to 140 FTEs (FTE represents the cost of an average full-time employee which during the evaluation period stood at about US$300,000). In addition, during the past three years, other departments (primarily area departments) directed 20–25 FTEs to a pilot program to support the mainstreaming of macrofinancial analysis into Article IV consultations (although part of these resources may have been redirected from other financial surveillance work). Spending on multilateral surveillance declined from FY2010 to FY2014 as cooperation with other international organizations was cut back or reclassified, but resources for the GFSR increased from 20 FTEs in FY2012 to 28 FTEs in FY2018.
Excludes travel and externally-financed resources, which are mainly used to fund capacity development work.
The selection of non-S29 countries for FSAPs is conducted in consultation with the World Bank by relying on criteria established by the Board, namely: systemic or regional importance of the country; external sector weaknesses or financial vulnerabilities; major reform programs that might benefit from a comprehensive financial sector assessment; features of the exchange rate and monetary policy regime that make the financial system more vulnerable, such as inconsistency with other macroeconomic policies; maintaining a balance across regions and different levels of financial sector development; and the time elapsed since the previous FSAP (IMF, 2014c).
Publication of FSSAs is voluntary but presumed; two-thirds of FSSAs completed since 2010 are listed by MCM as published (85 percent of S29 and 55 percent of non-S29). Publication of underlying technical notes and detailed assessment reports is also voluntary, although they can only be published if the corresponding FSSA is published.
In fact, in many countries, authorities indicated that lack of country knowledge had led to inappropriate assessments and policy advice. See, for example, Anderson (2018b), Landau (2018), and Cheong (2018).
According to the IEO survey of OED, 70 percent of LIC respondents and 38 percent of non-S29 respondents would welcome more frequent FSAPs.
In the IEO survey, half of IMF staff respondents reported that coordination with the World Bank was weak or needed improvement.
So far, the World Bank has not been involved in FSSRs. However, there is an ongoing consultation with World Bank managers on the coverage, countries, and topics. The World Bank also provides demand-driven TA on financial development.
According to the IEO survey, there are major differences in what authorities from AEs, EMEs, and LICs get from stress tests conducted by FSAP teams. In the view of OED respondents, while 90 percent of LIC authorities learn about emerging risks and vulnerabilities, only 22 percent and 44 percent do so in AEs and EMEs, respectively. At the same time, while 74 percent and 60 percent in EMEs and LICs, respectively, consider that FSAP stress tests provide a useful validation of their own stress tests, only 44 percent of authorities in AEs do so.
Article IVs also cover other financial sector issues. For example, the Fund has recently paid greater attention to the increased withdrawal of correspondent banking relationships from many member countries (IMF, 2017a). In collaboration with the FSB, World Bank, G20, and Financial Action Task Force (FATF), the IMF is supporting these members by providing policy advice, assessing implementation of standards, and building capacity to help strengthen regulatory and supervisory frameworks.
IMF (2014b), for example, concluded that financial and macroeconomic analysis remained fragmented, and that the lack of integration “reflects a longstanding tendency for the ’generalist’ macroeconomic perspective to be largely divorced from the ’specialist’ financial perspective [and] the absence of a unified model that links macro and financial variables….”
The pattern of assignments within area departments appears imbalanced in some cases; for example, there was an MCM participant in seven Article IV missions for Myanmar and six for Vietnam from 2010 to 2017, but none for Thailand (although Thailand received significant financial sector TA during this period).
IMF staff estimated that area departments spent 16–20 FTEs per year on work related to the macrofinancial pilot program, while MCM dedicated 7 FTEs and other functional departments 7–8 FTEs to this work. Some of this increase was repurposed within departments, possibly from other financial surveillance activities. The pilot program assisted through on-the-job training and direct support to area department teams. For example, MCM and SPR began brain- storming sessions on themes and country cases identified by area departments.
Specifically, 72 percent of respondents to the IEO survey of IMF staff thought it was an initiative of critical importance. In contrast, 16 percent thought that it was an important initiative but relevant only for relatively few countries; 5 percent thought that financial sector issues were already adequately covered in surveillance, and that the initiative had little or no value added (Monasterski, 2018).
Sixty-three percent of respondents to the IEO survey of IMF staff reported that they had integrated financial vulnerabilities and risk “significantly” in Article IV surveillance, while an additional 31 percent said that they had done so “to some extent.”
The quality of the analysis is also higher for the S5, although it is not clear that this is so relative to the analysis of the corresponding authorities.
In the IEO surveys, more than 90 percent of OED and 80 percent of staff respondents found the GFSR useful to understand global developments and risks. Also, OED respondents indicated that more than 80 percent of their authorities found it helpful to identify vulnerabilities and spillover risks.
The GFSR also warned about many other risks that did not materialize (Type II errors). However, Type II errors are generally of less concern than Type I errors, since the key goal of the GFSR is to discuss how risks would impact financial markets and economies if they were to materialize and to suggest mitigating policies. Moreover, one cannot rule out that GFSR warnings triggered pre-emptive policy responses that avoided the risk or lessened the repercussions from its realization.
As explained in Jeanne (2018), there are also methodological reasons to be skeptical of the Spidergram: it mixed information at very different frequencies, allocated variables to risk categories in non-transparent ways, and reflected judgment calls that are not made explicit.
For example, Kashkari (2018) noted that “the largest banks are still too big to fail, because they are bigger and more concentrated than ever…. The most efficient way to protect taxpayers would be to force the largest banks … to double their current levels of capital.” Goodhart (2017) discussed the need to revisit capital requirements, the increasing concentration in the banking industry, and incentives for board members and managers, noting that “[t]he regulatory framework should be refocused towards … reforming incentives.”
According to the IEO survey, more than 90 percent of OED respondents who expressed a view indicated that their authorities found the EWE presentation useful.
An exception was the IMF presentation at the October 2018 EWE, which did have a clear macrofinancial focus.
The IMF’s EWE presentation is prepared by an ad hoc team that operates outside the usual departmental structure of the IMF, is not subject to the interdepartmental review process, and reports only to the First Deputy Managing Director.
These include the Basel Committee on Banking Supervision, Committee on Payments and Market Infrastructures, International Association of Deposit Insurers, International Association of Insurance Supervisors, and International Organization of Securities Commissions.
This approach is consistent with the 2008 letter between the Managing Director and the Chair of the Financial Stability Forum (precursor of the FSB) on the respective roles of the two institutions.
The IMF also works closely with FATF, the standards setter for anti-money laundering and combating the financing of terrorism (AML/CFT), to conduct assessments of member’s compliance with AML/CFT standards. During the past 15 years, the IMF has been involved in more than 70 assessments, many of which are conducted by the Legal Department. Since 2012, Article IV surveillance must also include an AML/CFT assessment when these issues are judged relevant for domestic stability or when they can have a significant influence on the effective operation of the international monetary system. Additionally, FSAPs, to the extent possible, must incorporate an AML/CFT assessment conducted within 18 months of the FSAP mission. However, a 2014 review found that coordinating the timing of inputs from the FATF was a challenge since their assessment cycles were different than for the FSAP (see IMF, 2014d).
The FSB has been tasked by the G20 to lead this work. Two sectoral studies now underway are on the impact of reforms on infrastructure finance and on credit to small and medium-sized enterprises.
This chapter draws on Jeanne (2018).
See, for example, Gertler and Karadi (2011); Brunnermeier and Sannikov (2014); Gertler and Kiyotaki (2015) for academic contributions; Chung and others (2010) from the Federal Reserve; and Drehmann and Tsatsaronis (2014) from the BIS.
This section draws on Stedman (2018).
The 2001 Lipsky Report, the 2005 McDonough Report, IMF surveillance and FSAP reviews in 2008, 2011, and 2014, and IEO evaluations in 2006, 2011, and 2014, all pointed to the need for more financial sector experts and to upgrade the macrofinancial skills of IMF macroeconomists.
This includes financial sector experts on staff as well as experts on long-term contracts to provide TA while based at IMF headquarters. For FSAP (and TA) missions, MCM also draws on short-term consultants. These short-term experts come from central banks or supervisory authorities and have the necessary knowledge and credibility, but this arrangement creates problems of continuity.
Participation in the IMF’s structured curriculum for macrofinancial analysis grew very fast initially; it declined sharply in FY2017 and partially rebounded in FY2018. More broadly, participation in internal training focused on financial issues overall began a decline in FY2015 but recovered slightly in FY2018.
The 400 respondents are likely more knowledgeable and interested in financial issues than the overall population of about 1,300 economist and specialist staff at grades A12–B4 who received the survey.
According to IEO surveys, OEDs were more confident than authorities regarding IMF staff skills. Half of OED respondents reported that IMF staff working on Article IV teams were “well-qualified to analyze financial and macrofinancial issues,” but this ranged from almost 70 percent among OED LIC respondents to about one-third of OED AE respondents (another one-third of whom still found that IMF staff was only “minimally qualified” to perform this function) (Monasterski, 2018).
The proposed financial vulnerability matrix would identify the key financial vulnerabilities and would serve as a mechanism for monitoring evolution of these vulnerabilities over time. This matrix is different from the Risk Assessment Matrices (RAMs) that are part of the FSAP and Article IVs. The FSAP RAM focuses on tail risks to financial stability. The Article IV RAM covers risks to the country’s macroeconomic outlook, including to the financial sector. While different, these RAMs are supposed to be consistent.
There are many other approaches to achieve these goals beside the one recommended by this evaluation, but the key goal must be to substantially increase the scope for a more risk-based allocation of FSAP resources.
Fiscal Affairs Department, Finance Department, Legal Department, Research Department, Strategy, Policy and Review Department, and Statistics Department.