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Business and Economics > Banks and Banking

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Cover High-Level Summary Technical Assistance Reports
Bhutan: Development of an Interest Rate Corridor Framework
Oleg Churiy
and
Bernard J Laurens
At the request of the Royal Monetary Authority of Bhutan (RMA), an IMF South Asia Regional Training and Technical Assistance Center (SARTTAC) visited Thimphu during August 20-29, 2024. The mission’s objectives were to assist the authorities in setting up interest rate corridor (IRC) and operationalizing the related instruments, operations, liquidity forecasting, and collateral frameworks.
Keywords:
Monetary policy; International organization; IMF South Asia Regional Training and Technical Assistance Center; capacity development recipient; staff capacity; high-level summary; money market development; Interest rate corridor; Open market operations; Liquidity forecasting; Liquidity management
Cover Technical Assistance Reports
Bhutan: Technical Assistance Report-Development of an Interest Rate Corridor Framework
International Monetary Fund. Asia and Pacific Dept
and
International Monetary Fund. Monetary and Capital Markets Department
In August 2024, at the request of the Royal Monetary Authority of Bhutan (RMA), the IMF South Asia Regional Training and Technical Assistance Center (SARTTAC) conducted a Technical Assistance (TA) mission in Thimphu. The mission aimed to assist the RMA in establishing an interest rate corridor (IRC) and operationalizing related instruments, liquidity forecasting, and collateral frameworks. The mission identified that the RMA lacks necessary monetary policy instruments to effectively address changing systemic liquidity conditions and financial stability challenges. It emphasized the need to move away from reliance on administrative controls, as the absence of appropriate price incentives reinforces the preference for foreign exchange among Bhutanese residents, increasing pressures on the peg. To tackle these issues, the mission proposed a phased approach to introduce the IRC. Initially, relevant external and internal documents should be finalized, followed by mock operations. The first phase involves introducing a one-week main Open Market Operation (OMO), conducted weekly at the policy rate with full allotment. Automatic access to the IRC's standing facilities should be ensured. Later, fixed-quantity, variable-rate OMOs should be utilized, relying on liquidity forecasting to calibrate operations. Additionally, the mission recommended reinstating sweeping arrangements for government accounts and enhancing coordination with the Treasury to improve liquidity forecasting. These measures aim to strengthen the RMA's operational framework and enhance the effectiveness of monetary policy.
Keywords:
Monetary policy; International organization; Bhutan.; RMA money market contact group; IMF South Asia Regional Training and Technical Assistance Center; IMF's Monetary; expert of the IMF Monetary; interest rate corridor framework; Liquidity management; Interest rate corridor; Liquidity; Commercial banks; Central bank policy rate
Cover IMF Staff Country Reports
Indonesia: Financial Sector Assessment Program-Technical Note on Stress Testing and Systemic Risk Analysis
International Monetary Fund. Monetary and Capital Markets Department
The FSAP team undertook a thorough top-down corporate and bank solvency, bank liquidity stress tests as well as analysis of interconnectedness using mid-2023 data. This note covers the methodology and results of the scenario-based solvency test, the single factor sensitivity analysis, the liquidity test, and interconnectedness analysis. The stress test exercise was carried out on a sample of 105 commercial banks. The analysis is heavily dependent on supervisory data on individual banks’ positions shared by the OJK and BI as well as publicly available information on corporate sector. While FSAP results are not directly comparable to the authorities’ own stress testing results due to differences in scenarios, methodologies, and objectives, they provide an assessment of the system-wide resilience of the Indonesian banking sector at the current juncture.
Keywords:
banking sector characteristic; coverage ratio; interconnectedness ANALYSIS; capital markets department; bank credit risk; liquidity sensitivity analysis; FX LIQUIDITY ANALYSIS; Stress testing; Commercial banks; Liquidity; Loans; Securities; Global
Cover IMF Staff Country Reports
Albania: Selected Issues
International Monetary Fund. European Dept.
2024 Selected Issues
Keywords:
risk result; market liquidity; Albanian banking sector; banks' liquidity resilience; LCR value; Currency markets; Exchange rates; Commercial banks; Liquidity requirements; Capital adequacy requirements; Global
Cover IMF Working Papers
Portfolio Inertia and Expected Excess Returns in Currency Markets: Evidence from Advanced Economies
Bas B. Bakker
The economic literature has long attributed non-zero expected excess returns in currency markets to time-varying risk premiums demanded by risk-averse investors. This paper, building on Bacchetta and van Wincoop's (2021) portfolio balance framework, shows that such returns can also arise when investors are risk-neutral but face portfolio adjustment costs. Models with adjustment costs but no risk aversion predict a negative correlation between exchange rate levels and expected excess returns, while models with risk aversion but no adjustment costs predict a positive one. Using data from nine inflation targeting economies with floating exchange rates (2000–2024), we find strong empirical support for the adjustment costs framework. The negative correlation persists even during periods of low market stress, further evidence that portfolio adjustment costs, not risk premium shocks, drive the link between exchange rates and excess returns. Our model predicts that one-year expected excess returns should have predictive power for multi-year returns, with longer-term expected returns as increasing multiples of short-term expectations, and the predictive power strengthening with the horizon. We confirm these findings empirically. We also examine scenarios combining risk aversion and adjustment costs, showing that sufficiently high adjustment costs are essential to generate the observed negative relationship.These findings provide a simpler, testable alternative to literature relying on assumptions about unobservable factors like time-varying risk premiums, intermediary constraints, or noise trader activity.
Keywords:
Exchange Rates; Portfolio Balance; Uncovered Interest Parity; Portfolio Adjustment Costs; Risk Premium; Currency Markets; Expected Returns; excess return; portfolio adjustment; adjustment cost; portfolio balance framework; portfolio Inertia; Exchange rate adjustments; Return on investment; Currencies; Interest rate parity; Global
Cover Policy Papers
Considerations for the Comprehensive Review of Access Limits
International Monetary Fund. Strategy, Policy, & Review Department
,
International Monetary Fund. Finance Dept.
, and
International Monetary Fund. Legal Dept.
This paper provides background for an informal discussion to engage with Executive Directors, held on November 26, 2024, on the Comprehensive Review of GRA Access Limits. The General Resources Account (GRA) access limits are part of the Fund’s risk management framework. They help maintain a balance between the need to: (i) ensure that members have confidence in the availability of Fund financing; and (ii) preserve liquidity and the revolving nature of the Fund’s resources.
Keywords:
risk management framework; GRA lending commitment; transparency policy; managing transition; enterprise risk consideration; risk tolerance; financing needs; Credit; Liquidity; Credit risk; COVID-19; Global
Cover Global Financial Stability Report, October 2024
Global Financial Stability Report, October 2024
Steadying the Course: Uncertainty, Artificial Intelligence, and Financial Stability
International Monetary Fund. Monetary and Capital Markets Department

Abstract

Chapter 1 shows that although near-term financial stability risks have remained contained, mounting vulnerabilities could worsen future downside risks by amplifying shocks, which have become more probable because of the widening disconnect between elevated economic uncertainty and low financial volatility. Chapter 2 presents evidence that high macroeconomic uncertainty can threaten macrofinancial stability by exacerbating downside tail risks to markets, credit supply, and GDP growth. These relationships are stronger when debt vulnerabilities are elevated, or financial market volatility is low (during episodes of a macro-market disconnect). Chapter 3 assesses recent developments in AI and Generative AI and their implications for capital markets. It presents new analytical work and results from a global outreach to market participants and regulators, delineates potential benefits and risks that may arise from the widespread adoption of these new technologies, and makes suggestions for policy responses.

Keywords:
financial stability; vulnerabilities; uncertainty; risk; artificial intelligence; capital markets; tail risk; uncertainty index; monetary policy; mortgage rate; market liquidity risk; fiscal policy uncertainty; Emerging and frontier financial markets; Financial sector stability; Sovereign bonds; Credit; Global; Middle East; Europe; Central and Eastern Europe; South America
Cover Policy Papers
Annual Update on SDR Trading Operations
International Monetary Fund. Finance Dept.
This paper provides an update on the status of the SDR trading market and operations. For more than three decades, SDRs have exclusively been exchanged for freely usable currencies in transactions by agreement, primarily through the Voluntary Trading Arrangements (VTAs). A small fraction of transactions by agreement—sales or acquisitions of SDRs—has been arranged directly between parties. VTAs are bilateral arrangements between the Fund and SDR department participants or prescribed holders, in which the VTA participants agree to buy and sell SDRs within certain limits. The paper covers SDR trading operations during the period September 2023 to August 2024.
Keywords:
SDR trading capacity; SDR sale; SDR department participant; SDR amount; IMF SDR webpage; SDR interest rate; Currencies; Liquidity; Trading arrangements; Freely usable currencies; Middle East and Central Asia
Cover Technical Assistance Reports
Sri Lanka: Technical Assistance Report-Liquidity Monitoring and Monetary Operations
International Monetary Fund. Asia and Pacific Dept
The IMF South Asia Regional Training and Technical Assistance Center (SARTTAC) provided technical assistance (TA) to the Central Bank of Sri Lanka (CBSL) focusing on modernizing monetary operations framework and improving liquidity monitoring. Macroeconomic crisis, compounded by the pandemic, has created significant challenges for conducting monetary policy in Sri Lanka. Considering this, the mission proposed a phased approach for modernizing monetary policy instruments and operations, contingent on progress in ongoing debt restructuring, reducing financial stability risks, achieving macroeconomic stabilization, and improving CBSL’s balance sheet. A transitory model for monetary operations was recommended, centered on one week liquidity operations, while still envisaging a certain level of market segmentation. Key recommendations included introducing a single policy rate to strengthen monetary policy signaling, modifying Statutory Reserve Ratio, and operationalizing Standing Facilities to form an Interest Rate Corridor (IRC). In the later stages, when the CBSL can target aggregate liquidity, liquidity management should return to a mid-corridor system with Open Market Operations (OMO)s calibrated based on liquidity forecasts. These recommendations are designed to enhance monetary policy transmission, support the achievement of CBSL’s primary mandate of price stability, a prerequisite for macroeconomic stability and sustainable economic growth.
Keywords:
Sri Lanka; Monetary policy; international organization.; IMF South Asia Regional Training and Technical Assistance Center; liquidity monitoring; IMF's Monetary; liquidity Assistance facility; weakening monetary policy transmission; Liquidity; Special resolution regime; Open market operations; Liquidity forecasting; Central bank policy rate; Global
Cover Technical Assistance Reports
Zimbabwe: Technical Assistance Report-Financial Sector Stability Report Follow Up Technical Assistance on the Implementation of the Basel III Liquidity Framework
International Monetary Fund. African Dept.
and
International Monetary Fund. Monetary and Capital Markets Department
As a follow-up to the 2019 FSSR, a hybrid remote TA mission supported the RBZ on finalizing the implementation of Basel III liquidity framework, with a particular focus on the NSFR. The mission reviewed the drafts of the NSFR regulation and the template for prudential reporting, supported the RBZ to elaborate a questionnaire for a Quantitative Impact Study (QIS), discussed identified gaps with the BSD management and relevant supervisors, delivered training on LCR and NSFR, and provided recommendations on enhancing the drafts. The mission also discussed the outputs of LCR first assessments, highlighting the importance checking the quality of LCR data reported by banks.
Keywords:
Banking regulation; Basel III; Liquidity requirements; Net Stable Funding Ratio; Central Bank; Zimbabwe.; RBZ Banking Supervision Division; Basel III liquidity framework; IMF's Monetary; TA mission; request of the Reserve Bank of Zimbabwe; Liquidity risk; Commercial banks; Liquidity; Global