International Monetary Fund. Monetary and Capital Markets Department
Much of the work of the Financial Sector Assessment Program (FSAP) was conducted prior to the COVID-19 pandemic. Given the FSAP’s focus on medium-term challenges and vulnerabilities, however, many of its findings and recommendations for strengthening policy and institutional frameworks remain pertinent. This report reflects key developments and policy changes since the FSAP mission work was completed, and includes illustrative scenarios to quantify the possible implications of the COVID-19 shock on the solvency of systemically important financial institutions (SIFIs). Prior to the COVID-19 pandemic, the Danish authorities had taken important steps to improve financial system resilience. The authorities had actively used macroprudential tools to bolster the robustness of the financial system. The supervision of the banking and insurance sectors had improved. Likewise, recent legislation has strengthened anti-money laundering and combating the financing of terrorism (AML/CFT) supervision. Major reforms such as a new bank resolution framework had also considerably improved Denmark’s financial safety net and crisis management frameworks.
Adalgiso Amendola, Mario di Serio, Matteo Fragetta, and Mr. Giovanni Melina
We build a factor-augmented interacted panel vector-autoregressive model of the Euro Area (EA) and estimate it with Bayesian methods to compute government spending multipliers. The multipliers are contingent on the overall monetary policy stance, captured by a shadow monetary policy rate. In the short run (one year), whether the fiscal shock occurs when the economy is at the effective lower bound (ELB) or in normal times does not seem to matter for the size of the multiplier. However, as the time horizon increases, multipliers diverge across the two regimes. In the medium run (three years), the average multiplier is about 1 in normal times and between 1.6 and 2.8 at the ELB, depending on the specification. The difference between the two multipliers is distributed largely away from zero. More generally, the multiplier is inversely correlated with the level of the shadow monetary policy rate. In addition, we verify that EA data lend support to the view that the multiplier is larger in periods of economic slack, and we show that the shadow rate and the state of the business cycle are autonomously correlated with its size. The econometric approach deals with several technical problems highlighted in the empirical macroeconomic literature, including the issues of fiscal foresight and limited information.
This Selected Issues paper summarizes Nordea’s operations and business model; the macroeconomic and prudential implications of the move; and policy responses taken so far. The IMF staff’s assessment is that banking supervision in the euro area has improved significantly following the creation of the Single Supervisory Mechanism, which should mitigate potential risks from Nordea’s move; meanwhile, the Nordic authorities have done much, in conjunction with the European Central Bank, to ensure that potential gaps and fragmentation across national jurisdictions are avoided. The resolution framework is designed to prevent taxpayers having to bail out banks, but is new, and work on building the crisis preparedness of euro area banks is still under way. The banking union is not yet complete, details of the backstop for the Single Resolution Fund need to be finalized and a common euro area deposit insurance should be made fully operational. At the same time, Nordea is also operating in non-euro area member states—maintaining cooperation between euro area and noneuro area institutions remains important.