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Ms. Marina Moretti, Mr. Aditya Narain, Ms. Laura E. Kodres, Ceyla Pazarbasioglu, José Vinãls, and Jonathan Fiechter
Three years after the onset of the global financial crisis, much has been done to reform the global financial system, but there is much left to accomplish. The regulatory reform agenda agreed by G-20 leaders in 2009 has elevated the discussions to the highest policy level and kept international attention focused on establishing a globally consistent set of rules. Comprehensive reform, once agreed and implemented in full, will have far-reaching implications for the global financial system and the performance of the world economy. In designing the reforms, it is imperative that policymakers keep their focus on the overarching objective of creating a financial system that provides a solid foundation for strong and sustainable economic growth. This paper argues that the current reforms are moving in the right direction, but many policy choices lie ahead—nationally and internationally?which are both urgent and challenging. Policies need to address not only the risks posed by individual banks but also, importantly, those posed by nonbanks and the system as a whole. The recent proposals of the Basel Committee on Banking Supervision (BCBS) represent a substantial improvement in the quality and quantity of bank capital, but these apply only to a subset of the financial system.
Mr. Christian B. Mulder, Phil De Imus, Ms. L. Effie Psalida, Jeanne Gobat, Mr. R. B. Johnston, Mr. Mangal Goswami, and Mr. Francisco F. Vazquez
This paper outlines some of the key information gaps in the information used in the assessment of financial institution and financial system stability and the priorities for filling them. Key areas for attention include the granularity of disclosures on exposures by large and complex financial institutions; disclosures and assessments of complex structured products; revamping of indicators used in financial stability analysis to focus on indicators with greater early warning content; and improving transparency in over-the-counter derivatives markets. Recommendations have been made by several institutions and forums to address gaps in information that contributed to the crisis. One of the key recommendations is to adopt good practices for disclosures by banks on activities affected by the financial turmoil, including meaningful information on exposures and impacts, with appropriate levels of granularity. It is imperative to strengthen public disclosure practices of systemically important financial institutions by making reporting information more granular and consist.
Ms. Laura E. Kodres and Mr. Aditya Narain
This paper explores the private- and public-sector responses to the crisis and some of the probable outcomes. Aside from improved supervision of individual institutions, greater emphasis needs to be put on financial regulations that reflect the systemic nature of financial risks and the role that macroeconomic policies play. Global consistency of regulation and financial sector taxation will be essential to mitigate systemic risks, avoid unintended distortions, and help ensure a level playing field. This note suggests the key aspects of the future contours will likely be: ? Banks are expected to return to their more traditional function as stricter regulation will limit the risks and activities they can undertake. ? The nonbanking sector will likely have a greater competitive advantage—both in supplying credit and providing investors with nonbank services—and will thus grow. ? The perimeter of regulation will need to expand to take into account risks in the nonbank sector. ? Market infrastructure will be reinforced to protect investors and will need to provide simplicity and transparency to make risks clearer and the financial system safer. ? The global financial system is likely to be smaller and less levered than in the recent past, and could well be less innovative and dynamic, at least for a while.
Thomas Laryea
This paper starts from a discussion of the economic case for moderated government intervention in debt restructuring in the nonfinancial corporate sector. It then draws on lessons from past crises to explain three broad approaches that have been applied to corporate debt restructurings in the aftermath of a crisis. From there, it addresses challenges in designing and implementing a comprehensive debt restructuring strategy and draws together some key principles.
Ms. Inci Ötker and Ceyla Pazarbasioglu
Financial sector reforms are being considered to address the risks posed by large and complex financial institutions (LCFIs). The vast majority of global finance is intermediated by a handful of these institutions with growing interconnections within and across borders. Common trends that contributed to the recent global crisis included sharp increases in leverage, significant reliance on short-term wholesale funding, growth of off-balance-sheet activities, maturity mismatches, and increased share of revenues from complex products and trading activities. The key objective of the financial sector reforms is to promote a less leveraged, less risky (or better cushioned), and thus a more resilient financial system that supports strong and sustainable economic growth. The recent proposals of the Basel Committee on Banking Supervision (BCBS) on capital standards represent a substantial improvement in the quantity and quality of capital in comparison with the pre-crisis situation. The analysis of this paper suggests that, subject to usual caveats associated with limited data disclosures and availability, phase-in arrangements will allow most banks to move to these higher standards through earnings retention, assuming a modest economic and earnings outlook. It also suggests that should banks generate strong earnings in the coming years, and distribute lower dividends, they could rebuild common equity capital ratios faster than required under the current phase-in periods. The analysis of the paper also suggests that the new capital standards will have a significant impact on investment-banking-type activities, including through tighter requirements for trading book exposures. Investment banking activities will also be affected by a host of other regulatory initiatives, including the new accounting rules and higher standards for securitization, derivatives, and trading businesses, as well as measures to restrain certain activities. Yet, LCFIs with an investment banking focus have flexible business models and can adjust their strategies easily to mitigate the effects of the regulatory reforms, notwithstanding a multitude of regulations affecting their activities. The ultimate effect of the reforms on business models remains to be seen until the regulations take their final shape.
Mr. Antonio Spilimbergo, Mr. Steven A. Symansky, Mr. Carlo Cottarelli, and Mr. Olivier J Blanchard
The current crisis calls for two main sets of policy measures. First, measures to repair the financial system. Second, measures to increase demand and restore confidence. While some of these measures overlap, the focus of this note is on the second set of policies, and more specifically, given the limited room for monetary policy, on fiscal policy.
John Brondolo
The global financial and economic crisis presents major challenges for tax agencies. With the economic downturn, tax agencies are encountering emerging compliance problems and greater demands for taxpayer support in the face of prospective budget cuts. To help address these challenges, this paper encourages tax agencies to develop a tax compliance strategy for the crisis by (1) expanding assistance to taxpayers, (2) refocusing enforcement on emerging compliance risks, (3) enacting legislative reforms that facilitate tax administration, and (4) improving communication programs. In each of these areas, the paper identifies specific measures to underpin the strategy, drawing on practices from leading tax agencies and experiences from IMF technical assistance. The paper also highlights emerging tax compliance issues in the financial sector.
Mr. Alun H. Thomas
This chapter discusses various aspects of financial crises and emerging market trade. The current global financial crisis and the sharp reduction in trade flows have raised questions about the extent to which access to capital affects the ability of companies to produce and sell exports and to buy imports. The results presented in this chapter imply that financial conditions play a significant, however, not dominant role in stimulating trade volumes among emerging market countries. Estimates presented in this paper suggest that the combination of zero net private capital flows to emerging markets and a domestic banking crisis could lower import volume growth by between 5 and 6 percent on impact, with a slightly lower effect on export volumes. It is also important to recognize that trade finance is not the only form of credit with implications for trade volumes. Conditions in credit markets more generally, including for working capital and long-term investment financing also have an impact on international trade, including through their impact on industrial production more generally. As such, it is probably sensible for policymakers to support credit flows in general rather than to focus specifically on increasing trade finance.