International Monetary Fund. Monetary and Capital Markets Department and World Bank
This joint IMF-World Bank note provides a set of high-level recommendations that can guide national regulatory and supervisory responses to the COVID-19 pandemic and offers an overview of measures taken across jurisdictions to date.
To live up to its growth potential and secure its inclusive social model, the euro area must make better use of its available labor. In the aftermath of the crisis, boosting growth is essential to prevent unemployment from becoming a long-term problem and to facilitate the return to fiscal sustainability. Labor utilization in the euro area has been lagging considerably behind its best performing peers. While fewer hours worked may, to some extent, reflect a social choice, higher unemployment rates and lower participation rates, on the other hand, cannot easily be attributed to individual preferences. Here, policies and institutions matter more. And there is little excuse for relatively low labor productivity, a particular bane in southern Europe and an increasing challenge everywhere. Kick-starting growth requires a comprehensive approach to labor and service market reforms. Different circumstances call for different approaches across countries. Countries in southern Europe need to focus on regaining competitiveness, while some in the core should promote higher labor force participation or more open service sector markets. Improving access to the labor market should be high on the priority list everywhere—including through some harmonization of key features of the labor market, which will help deal with intra-euro area imbalances. Differences in labor taxation, unemployment benefit systems, and employment protection will need to be reduced. Improving regulation and reforming taxes and social benefits will be essential to make inroads. For the longer term, focus should be on innovation, education, and on continuing financial sector reforms.
Mr. Athanasios Vamvakidis, Mr. Francis Vitek, Ms. Mwanza Nkusu, Mr. Reginald Darius, Mr. Alun H. Thomas, and Edouard Vidon
The human cost of the recent global crisis is reflected in its impact on the labor market. Explaining why economies with similar downturns had very different employment trends can help design policies to reduce such costs and improve labor markets. This paper analyzes the recent employment experiences of six economies: Germany, Korea, Mexico, New Zealand, Spain, and Sweden. These economies represent a wide range of labor market institutions, policy responses, and outcomes to the crisis. The divergence of labor market outcomes and of the effectiveness of policies during the crisis can be explained by the interaction between the nature of the shocks and differences in the structure and institutions of each country’s economy. The worst job losses compared to the drop in output followed permanent shocks, particularly in dual labor markets and in the presence of wage rigidities. Policies to avoid job cuts were much more effective when they were well-targeted and responded to temporary shocks. In contrast, policies to facilitate labor movements were more appropriate following permanent shocks.
Recessions leave scars on the labor market. Over 200 million people across the globe are estimated to be unemployed at present resulting from the Great Recession of 2007–09. We assess the human cost of increased unemployment by surveying what is known about the effects of past recessions. If past is prologue, the cost to the unemployed (and society) could be high. The focus of this paper is on advanced economies. To their credit, most countries mounted strong policy responses to minimize the human costs, and the policy actions were notable also for their consistency and coherence across countries.
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.
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.