Member of a corporate group that controls, is controlled by, or is under the same control as another company. In Chapter 2, “affiliates” refers to bank subsidiaries and branches.



Member of a corporate group that controls, is controlled by, or is under the same control as another company. In Chapter 2, “affiliates” refers to bank subsidiaries and branches.

Agency problem

Also called the principal-agent problem, this problem occurs when one person or entity (the “agent”) is able to make decisions on behalf of another person or entity (the “principal”). In such situations, agents may be motivated to act in their own best interest rather than in that of the principal.

Asset management company/asset managers

Delegated manager who manages portfolios, risk, and trading of securities and off-balance-sheet positions on behalf of clients under an investment management agreement for a fee. These companies handle day-to-day operations of various collective investment vehicles and of a portion of the assets held by institutional investors.

Asset price bubble

Sharp rise in the price of an asset above its economically fundamental value for reasons other than random shocks.

Assets under management (AUM)

Financial assets managed by a fund manager on behalf of end investors. These assets may be direct loans or securities and may be leveraged (for example, by hedge funds).

Authorized participant

Typically major broker-dealers who play a key role in exchange-traded funds (ETFs). Only authorized participants trade with ETF sponsors in the primary ETF share market. Authorized participants hold ETF shares or trade shares with end investors or on stock exchanges and engage in arbitrage trading between the securities held by the ETF sponsor and ETF shares.


Statutory power of the government to restructure the liabilities of a distressed financial institution by writing down its unsecured debt and/or converting it to equity.


Transfer of funds (or commitment to transfer funds) from public sources to a distressed firm. Examples include recapitalization, asset purchases, subsidized loans, and the provision of guarantees. A bailout benefits primarily creditors but may also benefit shareholders, managers, and employees. The business of the supported entity may be reorganized or merged with that of other entities.

Banking union

Policy response to the financial crisis by the European Commission, establishing a single supervisory and regulatory framework, harmonized national resolution regimes for credit institutions, and harmonized standards across national deposit insurance schemes for the euro area.

Basel Committee on Banking Supervision (BCBS)

Committee of banking supervisory authorities that provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The committee also develops guidelines and supervisory standards in various areas, including the international standards on capital adequacy, the Core Principles for Effective Banking Supervision, and the Concordat on cross-border banking supervision.

Basel III

Comprehensive set of reform measures introduced in the aftermath of the global financial crisis to improve the banking sector’s ability to absorb financial and economic shocks, enhance banks’ risk management and governance, and increase banks’ transparency and disclosure. These measures revise the existing definition of regulatory capital under the Basel Accord; enhance capital adequacy standards; and introduce, for the first time, minimum liquidity adequacy standards for banks.

Bid-offer (or bid-ask) spread

Difference between the price at which an instrument is simultaneously quoted for immediate purchase (bid) and sale (offer or ask).


Legally dependent part of a bank that, unlike a subsidiary, is separated from its head office only geographically.

Brand name effects

Spillover of operational and reputational concerns about one fund to others in the same fund family. See fund family.

Capital buffer

Capital that banks must hold in excess of their minimum capital requirements. In particular, Basel III introduced a capital conservation buffer (designed to ensure that banks build capital buffers outside periods of stress, which can be drawn down as losses are incurred); a countercyclical capital buffer (aimed at building financial resources during periods of excess aggregate credit growth); and capital surcharges for global systemically important banks (G-SIBs). Domestic SIBs are also often expected to hold additional resources to meet capital surcharges, as established by national regulations. More broadly, capital buffers are the capital banks hold to absorb losses should they occur.

Closed-end fund

Collective investment vehicle that has a fixed number of shares. Unlike open-end funds, new shares in a closed-end fund are not issued nor are shares redeemed by managers to meet demand from ultimate investors. Instead, the shares are traded on secondary markets.


Element of a regression that shows the size of the relationship between a regressor and the dependent variable. If the regression takes the form Y = A + BX, B is the coefficient for regressor X.


Assets pledged or posted to a counterparty to secure an outstanding exposure, derivative contract, or loan.

Collective investment vehicle

Institution that sells its shares to retail and institutional investors and invests the proceeds in securities. These vehicles are often referred to as investment funds, management funds, mutual funds, or funds.

Commercial paper

Unsecured promissory note with a fixed maturity of 1 to 270 days.

Consolidated Banking Statistics

Statistics produced by the Bank for International Settlements that record the consolidated positions of reporting banks’ worldwide offices, excluding interoffice positions.


Transmission of economic and financial disturbances across countries and/or institutions.


A mathematical function is convex if the line segment between any two points on the graph of the function lies above the graph. In the context of Chapter 3, this property arises for a fund’s performance-inflow relationship if investors inject money following good performance to a greater extent than they withdraw money following poor performance.


Degree of comovement between two variables, taking values between +1 and -1: +1 means they move together perfectly, and -1 means they always move by the same amount but in opposite directions.

Correlation network

Type of financial network in which the nodes, generally stock prices, are linked by significant correlation coefficients. Correlation networks can be used to analyze market dynamics.

Credit default spread

Annual amount (“premium”) a protection buyer must pay a protection seller over the length of a credit default swap (CDS) contract, expressed as a percentage of the notional amount. See CDS.

Credit default swap (CDS)

Financial contract under which the seller agrees to compensate the buyer in the event of a loan default or other credit event. CDS settlements can be “physical” (the protection seller buys a defaulted reference asset at its face value from the protection buyer) or “cash” (the protection seller pays the protection buyer the difference between the reference asset face value and the price of the defaulted asset). A single-name CDS contract references a single firm or government agency, whereas CDS index contracts reference standardized indices based on baskets of liquid single-name CDS contracts.

Credit spread

Difference in yield between a benchmark debt security and another debt security that is comparable to the benchmark instrument in all respects except that it is of lower credit quality and, hence, typically returns a higher yield.

Credit-to-GDP ratio

Ratio that measures domestic credit to the private sector as a proportion of GDP. Domestic credit to the private sector refers to financial resources provided to the private sector, such as through loans, purchases of nonequity securities, trade credits, and other accounts receivable that establish a claim for repayment. For some countries these claims include credit to public enterprises.

Cross-border claim

Claim of a bank on a resident in another country (for example, a direct loan of a bank in a given country to a firm in another country). On a consolidated basis, cross-border claims do not include claims vis-à-vis affiliated entities.

Cross-sectional regression

Regression model in which dependent and explanatory variables are related in only one period, unlike in a time series regression, which relates dependent and explanatory variables over multiple periods.


Institution, usually a bank, in charge of safekeeping a firm’s or individual’s financial assets.


Reduction of the leverage ratio, or the percentage of debt in the balance sheet.


Financial contract whose value derives from underlying securities prices, interest rates, foreign exchange rates, commodity prices, or market or other indices. Examples of derivatives include stock options, currency and interest rate swaps, and credit default swaps.


Risk-management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique is that a portfolio of different kinds of investments will pose a lower risk than any individual investment found within the portfolio, because the positive performance of some investments will offset to some extent the negative performance of others.

EMBI Global or EMBIG

JPMorgan Emerging Market Bond Index Global, which tracks the performance of dollar-denominated sovereign bonds issued by a broad set of emerging market economies. Other versions of the index are assembled according to different criteria—with respect, for example, to liquidity requirements.


Issue that arises in a statistical model when an independent variable (regressor) is correlated with the error term. Endogeneity can be caused by, for example, omitted variables, simultaneity, and certain forms of measurement error.


Time deposits denominated in U.S. dollars at banks outside the United States and thus not under the jurisdiction of the Federal Reserve.

Excess returns

Total returns of a risky asset above those of a risk-free asset. For exchange rates it is the percentage difference between the forward exchange rate and the spot rate at maturity.

Exchange-traded fund (ETF)

Type of collective investment vehicle traded on an exchange. ETF shares are created or withdrawn only between the fund and authorized participants (usually large broker-dealers). ETFs may be attractive to investors because of their low costs and tax efficiency. ETFs started as passively managed funds following some market indices, but in 2008 the United States began to authorize actively managed ETFs.

Expected default frequency (EDF)

Measure of the probability of a firm’s default over a specified period (five years in Chapter 2). Chapter 2 uses the EDF model developed by Moody’s Credit Edge, in which a firm is considered in default when the market value of its assets (value of the ongoing business) falls below its liabilities payable (default point).


Cost or benefit arising from an economic activity that affects someone other than the people engaged in the economic activity, without compensation to the affected agent.

Financial deepening

Growing size of financial markets relative to economic activity, defined by the various functions those markets perform, including intermediation, price discovery, and hedging.

Fire sale

Panic condition in which many holders of an asset or class of assets attempt a market sale, thereby driving the price down to extremely low levels. The acceptance of a low price for assets by a seller facing bankruptcy or other impending distress may also characterize a fire sale.

First-mover advantage

Advantage to early redeemers, whose payoff from a fund is higher than that of those who wait longer to redeem.

Fit and proper

Process through which a person is evaluated as suitable for employment, especially as an executive in a financial institution. A fit and proper person is generally considered to be financially sound, competent, reputable, and reliable.

Fixed-effects panel data estimation

Econometric panel data technique that accounts for possible time-invariant unobserved characteristics in the underlying data.

Follow-your-customer strategy

International expansion strategy through which banks choose to set up branches or subsidiaries to serve their domestic customers in the countries in which they operate.

Foreign claims

Sum of cross-border claims and local claims denominated in both foreign and local currencies.

Fund family

Group of funds with the same asset management company.

Fund flows

Difference between total purchases and sales of fund shares by end investors over a given period.

Group of Twenty (G20)

Group of Twenty finance ministers and central bank governors established in 1999 as a forum for officials from systemically important advanced and emerging market and developing economies to discuss key issues related to the global economy. It consists of leaders from the European Union and the following 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, the Republic of Korea, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and the United States.

Hedge fund

Investment pool, typically organized as a private partnership, that faces few restrictions on its portfolio and transactions. Hence, compared with more regulated financial institutions, hedge funds use a wider variety of investment techniques—including short positions, derivatives transactions, and leverage—in their effort to boost returns and manage risk.


Behavior characterized by decisions investors would not make if they did not observe other investors making them.

High yield

Credit rating considered speculative grade. A—credit rating of BBB or better (Baa3 on Moody’s scale) is considered investment (high) grade.

Immediate risk basis

Claims allocated to the country of residence of the immediate counterparty. See ultimate risk basis.

In kind

Type of settlement method involving the exchange of securities rather than the exchange of securities for cash.

Institutional investor

Professional financial institution that pools money and makes investments. In Chapter 2, institutional investors are defined narrowly as those with a long-term investment horizon, such as pension funds, insurance companies, and official sector institutions. Banks, hedge funds, and mutual funds are excluded from this narrow definition.

Instrumental variable approach

A method that allows consistent estimation when the explanatory variables are correlated with the error terms of a regression relationship. Such correlation may occur when the dependent variable affects at least one of the explanatory variables (“reverse causality”), when there are omitted explanatory variables, or when the explanatory variables are subject to measurement error. An ideal instrument is highly correlated with the original explanatory variable but should have little correlation with the dependent variable.


Linkage between entities or markets within the financial system that drive financial contagion and risk concentration.


Transfer of funds from a source to a user. A financial institution, such as a bank, intermediates when it obtains money from depositors or other lenders and onlends to borrowers.

International claims

Sum of cross-border claims and local claims denominated in foreign currencies.


Proportion of debt to equity (also assets to equity or capital to assets in banking). Leverage can be built by borrowing (on-balance-sheet leverage, commonly measured by debt-to-equity ratios) or through off-balancesheet transactions.

Liquidity mismatch

Difference between the liquidity of an institution’s assets and liabilities. If liabilities are more liquid than assets (for example, a bank with illiquid loans and demand deposits), the institution must perform liquidity transformation and therefore is exposed to a liquidity mismatch.

Liquidity transformation

Function of financial intermediaries to fund illiquid assets (such as loans) with liquid liabilities.

Local claims

Claims of foreign banks’ affiliates on residents of the host country, that is, the country in which the affiliates are located.

Macroprudential oversight

Regulatory and supervisory framework of financial institutions aimed at maintaining the safety and soundness of the financial system as a whole (fostering financial stability and minimizing systemic risk).

Market liquidity

Degree to which an asset or security can be bought or sold in the market without affecting its price. Liquidity is characterized by a high level of trading, a tight bid-ask spread, and ample market depth (quantities available for trading). Assets that are easily bought and sold are known as liquid assets.

Microprudential oversight

Regulatory and supervisory framework of individual financial institutions aimed at maintaining the safety and soundness of each institution.

Momentum strategy

Type of trading strategy in which investors buy securities that have recently performed well and sell securities that have recently performed poorly. It is also known as positive-feedback trading.

Money market fund

Collective investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in short-term debt markets (money markets) such as commercial paper and certificates of deposit.

Moral hazard

Tendency of an individual or institution to act less carefully because the consequences of a bad outcome will be largely shifted to another party. Such behavior is often the result of the other party’s inability to observe the actions. For example, financial institutions can be motivated to take excessive risks if they believe the government will step in with support during a crisis and cannot observe the risky behavior and prevent it.

Multinational banking model

Model according to which banks operate through branches and subsidiaries in several host countries. The activities of the bank’s foreign affiliates are at least partially locally funded. This model is different from a cross-border banking model in which international banks conduct mostly cross-border business from their home country.

Mutual fund

Collective investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in financial assets such as stocks and bonds.

Net asset value (NAV)

Value of a company’s total assets minus its total liabilities. For example, if an investment company has securities and other assets worth $100 million and has liabilities of $10 million, its NAV is $90 million.

Net stable funding ratio (NSFR)

Requirement introduced by Basel III to provide a sustainable maturity structure of assets and liabilities. It requires a minimum amount of stable sources of funding at a bank relative to the liquidity profiles of the assets, as well as to the potential for contingent liquidity needs arising from off-balance-sheet commitments, over a one-year horizon.

Nonbank institution or sector

Financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. These institutions facilitate banking-related financial services, such as investment, risk pooling, contractual savings, and market brokering, and may include money market mutual funds, investment banks, finance companies, insurance firms, pension funds, hedge funds, currency exchanges, and microfinance organizations.

Open-end fund

Type of collective investment vehicle that allows investors the flexibility to add to or redeem money from the fund.

Other depository corporation

Term used in the international methodology of monetary statistics to describe all financial corporations (other than the central bank) that incur liabilities included in broad money (such as traditional banks and money market fund investment funds).

Panel regression

Econometric technique to estimate relationships among variables in a panel data set. A panel data set is two dimensional: one for the time dimension (year, quarter, month) and the other for the cross-sectional dimension (people, firms, countries). Various estimation techniques can be used depending on the nature of these two dimensions.

Portfolio flows

Capital flows into or out of foreign portfolio investments (equity, debt, or other investments).

Price externalities

In the context of financial markets, price externalities are the result of economic agents’ decisions to buy or sell assets or to allocate or reallocate their asset portfolios without fully taking into account the impact of their actions on the market price.

Private equity fund

Collective investment vehicle that invests primarily in private equity. Private equity is a broad term that refers to any type of equity participation in which the equity is not freely tradable on a public stock market, such as equities of delisted or nonlisted private and public companies.

Probit model

Statistical binary response model in which the response probability follows a normal distribution and is evaluated as a function of the explanatory variables.


Tendency of changes in asset prices and capital flows to move in line with macroeconomic business and financial cycles.

R squared (R2)

Statistical measure that captures how much of the variability in a dependent variable is explained by the variability in the explanatory variables, in the context of a regression model. It ranges between zero and 1, with values closer to 1 implying a better fit of the model.


Return of money to an ultimate investor in a fund.

Redemption gate

Mechanism in asset management to slow money outflows and control run risk by imposing quantitative or qualitative restrictions on outflows.

Redemption side pocket

Mechanism in asset management to slow money outflows and control run risk by separating impaired or illiquid securities to keep them from affecting a fund’s return until market conditions stabilize.

Redemption suspension

Mechanism in asset management to slow money outflows and control run risk by fully closing a fund to redemptions.


Statistical technique for modeling and analyzing the relationship between economic variables.

Regulatory arbitrage

Reduction of regulatory capital requirements by taking advantage of differences in regulatory treatment across countries or across types of financial institutions, as well as of differences between economic risk and risk as measured by regulatory guidelines.

Regulatory perimeter

Entities or activities subject to regulation and supervision.


Procedures and measures to resolve the situation of an unviable institution in a way that protects its critical functions, government funds, and systemic stability.

Retail investors

Typically small individual investors who buy and sell financial assets for their personal account instead of for another investor, a company, or an organization.

Return chasing

Investor purchases (chasing) of assets or funds that have recently outperformed their peers.

Reverse causality

Two-way causal relationship or a direction of cause and effect contrary to a common presumption.

Ring fencing

Measures imposed by prudential supervisors with the objective of protecting the domestic assets of a bank so they can be seized and liquidated under local law in case of failure of the whole or part of an international banking group.

Risk aversion

Degree to which an investor who, when faced with two investments with the same expected return but different risk characteristics, prefers the one with the lower risk. In other words, it is a measure of an investor’s aversion to uncertain outcomes or payoffs.

Risk committee

Committee of the board of directors of a company that is tasked with risk management.

Risk shifting

In this report, actions by a manager that shift risk from shareholders to bond holders. Risk shifting is possible because of limited liability of shareholders.

Risk-weighted assets

Total of all assets held by a bank weighted by credit, market, and operational risk weights according to formulas determined by the national regulator or supervisor. Most regulators and supervisors adopt the Basel Committee on Banking Supervision capital standards in setting formulas for asset risk weights.


Regression results whose estimated coefficients change little among several differently specified regressions or among different estimation methods.

Run risk

Risk that many depositors or security holders will suddenly and simultaneously seek to redeem their investments placed with financial intermediaries.

Search for yield

Search by investors for investments with higher returns, usually within the context of a low-interest-rate environment.

Securities lending

Lending of a security by one party (the lender) to another (the borrower) against payment of a fee. Securities lending is typically collateralized with cash or other securities. Reasons for borrowing securities include the desire to establish a short position, dividend arbitrage, and hedging and settlement.

Separate account of an asset management company

Separate account services privately manage the money of institutional investors, including that of corporations, pension funds, insurance companies, sovereign wealth funds, and wealthy individuals. Clients provide an investment mandate, and asset managers manage the money within the mandate for a fee.

Single Resolution Mechanism (SRM)

Second pillar of the European Banking Union—provides for uniform application of a single set of resolution rules, together with access to a Single Resolution Fund by a central authority and an integrated decision-making structure aligning resolution under the SRM with supervision under the Single Supervisory Mechanism.

Single Supervisory Mechanism (SSM)

Common banking supervision framework under the aegis of the European Central Bank for the euro area banks, as proposed by the European Commission in September 2012.

Standard deviation

Measure of the degree of a variable’s potential movement. The variance of a variable is constructed by (1) calculating each observation’s deviation from the mean, (2) taking squares for each deviation, and (3) calculating the average of the squares. The standard deviation is the square root of the variance. In a regression analysis, standard deviation is computed for each coefficient estimate.

Statistically significant

Not merely the result of chance. For example, if the same policy spurs economic growth at least 95 times in 100 trials, the policy’s effect can be said to be statistically significantly different from zero at the 5 percent confidence level.


Separate legal entity that, unlike a branch, is independent of the parent bank and must fulfill regulatory requirements on a stand-alone basis.

Synthetic exchange-traded fund (ETF)

Type of ETF offered mainly in Europe. Instead of holding underlying assets directly (“physical ETFs”), synthetic ETF returns are generated through derivatives, especially total return swaps. Synthetic ETFs can be used for various investment strategies, ranging from simple index tracking to leveraged and short-selling strategies.

Systemic risk

Risk that the failure of a particular financial institution will cause large losses to other financial institutions, thus threatening the stability of the financial system.

Tail risk

Risk of an extremely rare event, in finance often defined as the risk that an asset price will move three standard deviations from its mean.


Availability of information that allows investors to properly assess risks and returns associated with investing in a country.

Ultimate risk basis

Claims allocated to the country in which final risk lies, thereby reflecting risk transfers. See immediate risk basis.

Unconventional monetary policy

Central bank policy, such as forward guidance on interest rates, long-term provision of liquidity to banks, and large-scale asset purchases, that is not part of the conventional central bank toolkit.

Vector autoregression (VAR)

Multivariate models often used in macroeconomics and finance to explore the dynamic relationships among variables. Each endogenous variable has a corresponding (autoregressive) equation, and each VAR is made up of two or more equations, one for each endogenous variable. Because each equation contains its own lags, as well as the lags of the other variables in the system, the model is said to be autoregressive.

Vienna initiative

European Bank Coordination (“Vienna”) Initiative (EBCI) launched in January 2009 to provide a framework for coordinating the crisis management and crisis resolution of large cross-border banking groups systemically important in emerging Europe. The European Bank for Reconstruction and Development, the IMF, the European Commission, and other international financial institutions initiated a process aimed at addressing the collective action problem. In a series of meetings, the international financial institutions and policymakers from home and host countries met with commercial banks active in emerging Europe to discuss what measures might be needed to reaffirm their presence in the region in general, and more specifically in countries receiving balance of payments support from international financial institutions.


Chicago Board Options Exchange Market Volatility Index, which measures market expectations of financial volatility over the next 30 days. The VIX is constructed from Standard & Poor’s 500 option prices.

Wholesale funding

Bank funding typically issued in money and capital markets, including interbank deposits, commercial paper, certificates of deposit, repurchase agreements, swaps, and various kinds of bonds. These are typically financed by institutional investors, including other banks.

IMF Executive Board Discussion Summary

Executive Directors noted that a moderate recovery continues in the global economy, with uneven prospects across countries and regions. Growth in emerging market economies is softening, reflecting an adjustment to weaker medium-term growth expectations, lower commodity prices and exports, and country-specific factors. The outlook for advanced economies shows some signs of improvement on the back of lower oil prices, continued support from accommodative monetary policy stances, and some moderation in the pace of fiscal adjustment. A number of Directors considered that global economic developments might turn out to be more positive than currently expected. A few other Directors emphasized the importance of decisive policy actions to counter the “new mediocre.”

Directors noted that global growth should continue to increase gradually as crisis legacies fade and advanced economies benefit from accommodative macroeconomic policies. Emerging market economies are likely to slow further in 2015, but growth should pick up again in 2016 and beyond, as the current setbacks to activity begin to dissipate. Directors agreed that the near-term distribution of risks to global growth has become more balanced, although most noted that it remains tilted to the downside. The decline in oil prices could boost activity more than expected, but geopolitical tensions continue to pose threats, and risks of abrupt shifts in asset prices—including exchange rates—have increased. In some advanced economies, protracted below-target inflation or deflation could affect activity and public and private debt dynamics. A few Directors considered that this risk has diminished. A few others urged greater focus on global imbalances.

Despite the expected improvement in the outlook, Directors broadly agreed that short-term financial stability risks have increased. Oil- and commodity-exporting countries and firms generally face revenue losses and higher risks. Emerging market corporations that have borrowed heavily in U.S. dollars and are not sufficiently hedged are now faced with potential balance sheet pressures from the appreciating U.S. dollar. A retrenchment of overinvested industries and property price declines—especially in China—could spill over to emerging markets more broadly. In advanced economies, the low-interest-rate environment poses challenges for long-term investors, including weaker life insurance companies in Europe. High debt levels and nonperforming loans in the private sector continue to pose headwinds to growth and financial stability in some advanced economies. Recent declines in liquidity in some markets may amplify financial stability risks.

At the same time, Directors also noted important medium-term risks to the global recovery. In emerging market economies, tighter financial conditions or unaddressed supply-side constraints represent significant risks. Growth prospects in advanced economies are held down by aging populations, weak investment, and lackluster productivity growth while sustained weakness in demand could weigh on potential output.

To address these risks and challenges, Directors underscored that boosting actual and potential growth remains a policy priority. In emerging market economies, macroeconomic policy space to support growth remains limited, but lower oil prices will alleviate inflation pressures and could increase fiscal space in oil importers. In oil exporters, adjusting public spending in view of lower fiscal revenues is a priority, although countries with strong financial buffers may adjust more gradually. Better fiscal frameworks with clear medium-term objectives are needed in many countries to anchor fiscal policy and avoid a procyclical policy stance. Directors also emphasized that lower oil prices provide an opportunity to reform inefficient energy subsidies and provide breathing room for more productive and equitable spending and growth-enhancing tax reforms.

Directors broadly concurred that continued accommodative monetary policy is essential in many advanced economies. To support credit markets, additional measures are needed to restore balance sheet health in the private sector, including in the euro area. At the same time, many Directors noted the limitations and risks of prolonged accommodative monetary policies and divergent monetary stances, and some underscored the need to better understand their implications for emerging market and developing countries. Fiscal policy could be used to support demand and contribute to global rebalancing, for example through infrastructure investment in some advanced economies, while countries constrained by high levels of public debt should pursue growth-friendly reforms affecting the composition of revenues and expenditures. Credible medium-term fiscal consolidation plans are still needed in a number of countries, especially in Japan and the United States.

Directors highlighted the importance of a sound international banking system, and noted that more progress on the implementation of regulatory standards and cross-border resolution is needed. Strengthening microprudential policies and building a macroprudential toolkit remains a priority in many emerging market and developing economies. In advanced economies, the oversight of certain parts of the nonbank financial sector needs to be strengthened, particularly the asset management industry, as well as the life insurance industry in Europe, with better microprudential supervision and stronger emphasis on systemic risk. A number of Directors noted progress in the international regulatory reform agenda and increased efforts to monitor financial risks and build resilience. They cautioned that additional regulation and oversight should be commensurate to the systemic risk posed and take into account both costs and benefits.

Directors emphasized the importance of exchange rate flexibility for emerging markets without currency pegs, while recognizing that measures may be necessary to limit excessive exchange rate volatility. Bolstering resilience to external shocks will also require stronger macroeconomic and macroprudential policy frameworks, and robust prudential regulation and supervision. In China, further progress to gradually shift the composition of demand toward domestic consumption and reduce reliance on credit and investment would help forestall medium-term risks of financial disruption or a sharp slowdown.

Directors called for further structural reforms to raise potential growth. In emerging market and developing economies, the main priorities are removing infrastructure bottlenecks, reforming labor and product markets, strengthening education, easing limits on trade and investment, improving business conditions, and enhancing government services delivery. In advanced economies, strengthening public infrastructure, increasing labor force participation, and enabling innovation and productivity-enhancing investment are key priorities. In the euro area, reforms need to tackle legacy debt overhang, barriers to product market entry, labor market regulations that hamper adjustment, and obstacles to investment activity. In Japan, there is scope to improve service sector productivity and support investment through corporate governance reform.

Directors also stressed that continued strong growth in low income developing countries calls for greater progress in diversification and structural transformation. Key requirements include boosting fiscal positions with stronger revenues and rationalized public spending, strengthening public financial management, achieving greater monetary policy independence, promoting financial deepening, and attracting capital flows. Infrastructure investment, anchored in well-designed debt management strategies, is essential to increase growth potential. Advanced and systemically important emerging economies should play a supportive role in maintaining an enabling external environment for low-income developing countries. Priorities include further trade liberalization, providing development aid and technical assistance, completing the global regulatory reform agenda, and cooperating on international taxation and climate change issues.