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Mr. Roger Nord

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.

Mr. Paul Louis Ceriel Hilbers, Mr. Alfredo Mario Leone, Mr. Mahinder Singh Gill, and Mr. Owen Evens

Abstract

Substantial progress has been made during recent years in forging a consensus on the importance of strengthening the architecture of the international financial system. The international community, acting through various forums, has identified a number of priorities in this work, including the need to enhance its own—and the markets’—ability to assess the strengths and vulnerabilities of financial systems, and to develop the analytical and procedural tools needed to perform this task. In particular, the importance of assessing the soundness of financial systems as part of the IMF’s surveillance work was given prominence by the Group of Twenty-Two finance ministers and central bank governors in the Report of the Working Group on Strengthening Financial Systems in October 1998. The working group recommended that financial sector surveillance be anchored to the IMF surveillance process, with expert support from the World Bank and elsewhere. This process is now well under way as part of the joint World Bank-IMF Financial Sector Assessment Program (FSAP), and the related Financial System Stability Assessments (FSSAs).1 The development and possible dissemination of so-called macroprudential indicators (MPIs)—defined broadly as indicators of the health and stability of financial systems—have been encouraged recently by both the Group of Seven (G–7) and the IMF Interim Committee.2 Such indicators will be critical in producing reliable assessments of the strengths and vulnerabilities of financial systems as part of IMF surveillance, and to enhancing disclosure of key financial information to markets.

Mr. Paul Louis Ceriel Hilbers, Mr. Alfredo Mario Leone, Mr. Mahinder Singh Gill, and Mr. Owen Evens

Abstract

The ability to monitor financial soundness presupposes the existence of indicators that can be used as a basis for analyzing the current health and stability of the financial system. These macroprudential indicators comprise both aggregated microprudential indicators of the health of individual financial institutions, and macroeconomic variables associated with financial system soundness. Aggregated microprudential indicators are primarily contemporaneous or lagging indicators of soundness;4 macroeconomic variables can signal imbalances that affect financial systems and arc, therefore, leading indicators. Financial crises usually occur when both types of indicators point to vulnerabilities, that is, when financial institutions are weak and face macroeconomic shocks.

Mr. Paul Louis Ceriel Hilbers, Mr. Alfredo Mario Leone, Mr. Mahinder Singh Gill, and Mr. Owen Evens

Abstract

This chapter reviews the theoretical and empirical literature, other than work done by the IMF,39 which would support the selection of a core set of MPIs. In general, these studies look at the features of crisis-prone systems, with a view to anticipating future crisis events. By attempting to identify leading indicators of crises, rather than contemporaneous indicators of financial soundness, much of the earlier literature did not specifically review the full range of potential MPIs. More recently, the focus of many studies has shifted toward contemporaneous indicators of financial health. No consensus has yet emerged, however, from this body of work on a set of indicators that is most relevant to assessing financial soundness, or to building effective early warning systems. The statistical significance of individual indicators is often found not to be strong, and some of the studies have produced conflicting results. This may be due to differences among crises, so that specific indicators may be more or less relevant to each case.

Mr. Andrew J Tiffin, Mr. Christian B. Mulder, and Mr. Charalambos Christofides
This paper examines the relationship between adherence to international standards of good practice in policy-making and two key indicators of access to capital markets and the cost of this access: spreads and sovereign ratings. In contrast to other work, this study reviews a broad set of indicators for adherence to international standards. The estimations are conducted for emerging market economies, and pay particular attention to issues of persistence in spreads and ratings and nonlinearities in the relationships. The main finding confirms the expectation that standards are indeed relevant. Accounting standards and property rights are especially important for spreads, in addition to data transparency (SDDS subscription). Accounting standards and corruption are especially important in explaining ratings in addition to trade protectiveness (not a standard).
Mr. Paul Louis Ceriel Hilbers, Mr. Alfredo Mario Leone, Mr. Mahinder Singh Gill, and Mr. Owen Evens

Abstract

In response to the recent crises, many institutions have initiated or intensified work on developing macroprudential indicators and macroprudential analysis capabilities. A selection of these efforts is summarized in this section. The statistical frameworks that are in place in some of the institutions are discussed in Appendix I.

International Monetary Fund

This 2008 Article IV Consultation discusses that Lesotho has made significant progress in macroeconomic performance, but the pace of implementation of key structural reforms has been slow. After a decade of low growth, economic activity surged above historic trends, averaging 6.6 percent during 2006–07, driven by the mining, textile, and construction sectors. However, poverty has seen only a modest decline. Executive Directors have commended the authorities for their prudent macroeconomic management, which has contributed to the recent strong economic performance and a continued build-up of international reserves.

International Monetary Fund

The fiscal crisis in the Kingdom of Swaziland emanating from a decline in revenue from the Southern African Customs Union and one of the largest public wage bills in sub-Saharan Africa has reached a critical stage. Faced with revenue shortfalls associated with slowing economic activity, uncontrolled public spending, and lack of financing, the authorities continued to deplete central bank reserves and accumulate domestic arrears. The authorities have been able to finance only a minimal amount of expenditure, including wages, utilities, and essential transfers.

Mr. Paul Louis Ceriel Hilbers, Mr. Alfredo Mario Leone, Mr. Mahinder Singh Gill, and Mr. Owen Evens

Abstract

Following the severe financial crises of the 1990s, identifying and assessing financial sector vulnerabilities has become a key priority of the international community. The costly disruptions in global markets underscored the need to establish a set of monitorable variables for evaluating strengths and weaknesses in financial institutions and to alert authorities of impending problems. These variables, indicators, of financial system health and stability known collectively as macroprudential indicators, are the subject of this Occasional Paper by the Monetary and Exchange Affairs Department and the Statistics Department. Macroprudential indicators take measures at both the level of aggregated financial institutions and at the macroeconomic level; financial crises often occur when weaknesses are identified in both. The authors provide a breakdown and explanations of these indicators and a review of the theoretical and empirical work done thus far. Work at other international and multilateral institutions is included as well as the experiences of several national central banks and supervisory agencies. This paper provides a valuable reference source of current knowledge about macroprudential indicators and issues related to their analysis, identification, measurement, and possible dissemination.

International Monetary Fund

In this study, economic growth and development of Nigeria after the crisis is discussed. Nigeria’s economy is projected to grow by 7 percent in 2011. Near-term risks to growth mostly relate to domestic factors. Nigeria’s strong external position and low debt helped mitigate the impact of the global financial crisis. Conflicting objectives of monetary policy and policy framework should focus more on price stability. Establishment of an asset management corporation to clean up the bank balance sheet is encouraged.