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International Monetary Fund. Monetary and Capital Markets Department

Abstract

The following remarks by the Acting Chair were made at the conclusion of the Executive Board’s discussion of the Global Financial Stability Report on March 30, 2009.

scott Roger

For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

International Monetary Fund. External Relations Dept.

In the two decades since János Kornai first coined the phrase, soft budget constraints have entered the lexicon of mainstream economics. Soft budget constraints, as Gérard Roland noted, are frequently identified with moral hazard, confused with the absence of budget constraints, and thought to be synonymous with subsidies. They are not, however, a form of insurance or guarantee (the types of activities most associated with moral hazard). They are, Roland explained, an ex ante—but crucially not an ex post—budget constraint that may ultimately take the form of a subsidy but is not planned as a subsidy.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Systemic risks remain high and the adverse feedback loop between the financial system and the real economy has yet to be arrested, despite the wide range of policy actions and some limited improvement in market functioning. Further effective government action—particularly geared toward cleansing balance sheets and strengthening institutions—will be required to stabilize the global financial system and to provide the foundation for a sustainable economic recovery. The banking system needs additional equity to absorb further writedowns as credit deteriorates, and risks are broadening to encompass nonbank institutions. The crisis has spread to emerging markets with the collapse of international financing, posing challenges to corporates, households, and banks as well as raising sovereign risk. The global policy response, including the IMF’s enhanced lending framework, should help to mitigate crisis risks. There remains considerable scope for further public commitments in larger economies, but extensive provision of financing and the transfer of balance sheet risk from the private to the public sector have increased tail risks for certain mature market sovereigns.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

The rise in the complexity and globalization of financial services has contributed to stronger interconnections or linkages. While more extensive linkages contribute to economic growth by smoothing credit allocation and allowing greater risk diversification, they also increase the potential for disruptions to spread swiftly across markets and borders. In addition, financial complexity has enabled risk transfers that were not fully recognized by financial regulators or by institutions themselves, complicating the assessment of counterparty risk, risk management, and policy responses. Thus the importance of assessing the systemic implications of financial linkages.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

The current crisis demonstrates the need for tools to detect systemic risks. Given that there are many facets and causes of such risks, this chapter presents a range of measures that can be used to discern when events become systemic. The chapter first reviews the standard financial soundness indicators’ ability to highlight those financial institutions (FIs) that proved to be vulnerable in the current crisis. For the sample of global FIs examined, leverage ratios and return–on–assets proved the most reliable indicators, while capital asset ratios and nonperforming loan data lacked predictive power.

Sanjay Kalra

Asia Leading the Way explores how the region is moving into a leadership role in the world economy. The issue looks at Asia's biggest economy, China, which has relied heavily on exports to grow, and its need to increase domestic demand and to promote global integration if it is to continue to thrive. China is not the only Asian economy that heavily depends on exports and all of them might take some cues from the region's second-biggest economy, India, which has a highly developed services sector. Min Zhu, the new Special Advisor to the IMF's Managing Director, talks about Asia in the global economy, the global financial crisis, correcting imbalances, and the IMF in Asia. And "People in Economics" profiles an Asian crusader for corporate governance, Korea's Jang Hasung. This issue of F&D also covers how best to reform central banking in the aftermath of the global economic crisis; the pernicious effects of derivatives trading on municipal government finances in Europe and the United States; and some ominous news for governments hoping to rely on better times to help them reduce their debt burdens. Mohamed El-Erian argues that sovereign wealth funds are well-placed to navigate the new global economy that will emerge following the world wide recession. "Back to Basics" explains supply and demand. "Data Spotlight" explores the continuing weakness in bank credit. And "Picture This" focuses on the high, and growing, cost of energy subsidies.

Nagwa Riad, Mr. Luca Errico, Christian Henn, Christian Saborowski, Mika Saito, and Mr. Jarkko Turunen
Changing Patterns of Global Trade outlines the factors underlying important shifts in global trade that have occurred in recent decades. The emergence of global supply chains and their increasing role in trade patterns allowed emerging market economies to boost their inputs in high-technology exports and is associated with increased trade interconnectedness.The analysis points to one important trend taking place over the last decade: the emergence of China as a major systemically important trading hub, reflecting not only the size of trade but also the increase in number of its significant trading partners.
Mr. David S. Hoelscher, Mr. Michael W Taylor, and Mr. Ulrich H Klueh

Abstract

This paper describes recently established deposit insurance systems, identifying emerging trends. In line with previous IMF work on the subject, it argues against the development of "best practices" applicable to all systems. Rather, it stresses the importance of incorporating each country’s individual objectives in adopting a deposit insurance system, as well as that country’s characteristics, to ensure an effective system that minimizes disincentives and distortions to financial sector intermediation. The paper includes a summary of the academic literature.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

The Global Financial Stability Report identifies potential fault lines in the global financial system that could lead to crisis, while providing comprehensive coverage of mature and emerging financial markets. The GFSR focuses on current conditions in global financial markets, highlighting issues that could pose risks to financial market stability and market access by emerging market borrowers.