Front Matter

Front Matter

International Monetary Fund. Independent Evaluation Office
Published Date:
August 2011
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    Established in July 2001, the Independent Evaluation Office (IEO) provides objective and independent evaluation on issues related to the IMF. The IEO operates independently of IMF management and at arm’s length from the IMF’s Executive Board. Its goals are to enhance the learning culture within the IMF, strengthen the IMF’s external credibility, promote greater understanding of the work of the IMF throughout the membership, and support the Executive Board’s institutional governance and oversight responsibilities. For further information on the IEO and its work program, please see its website ( or contact the IEO at +1-202 623-7312 or at


    Independent Evaluation Office

    of the International Monetary Fund


    IMF Performance in the Run-Up to the Financial and Economic Crisis

    IMF Surveillance in 2004–07


    © 2011 International Monetary Fund

    Production: IMF Multimedia Services Division

    Cover: Randy Lyhus

    Cataloging-in-Publication Data

    IMF performance in the run-up to the financial and economic crisis: IMF surveillance in 2004–07 / prepared by an IEO team led by Ruben Lamdany and Nancy

    • Wagner. – Washington, D.C.: International Monetary Fund, c2011.

    • p.; cm.

    • At head of title: IEO, Independent Evaluation Office of the International Monetary Fund. Includes bibliographical references.

    • ISBN 978-1-61635-078-9

    1. International Monetary Fund – Evaluation. 2. Global Financial Crisis, 2008–2009. 3. International finance. 4. Risk assessment. I. Lamdany, Ruben, 1954– II. Wagner, Nancy L. (Nancy Louise) III. International Monetary Fund. Independent Evaluation Office.

    HG3881.5.I58 I448 2011

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    The following conventions are used in this publication:

    • In tables, a blank cell or N/A indicates “not applicable,” ellipsis points (…) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.

    • An en dash (–) between years or months (for example, 2008–09 or January–June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2008/09) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2009).

    • “Billion” means a thousand million; “trillion” means a thousand billion.

    • “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

    As used in this publication, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.

    Some of the documents cited and referenced in this report were not available to the public at the time of publication of this report. Under the current policy on public access to the IMF’s archives, some of these documents will become available five years after their issuance. They may be referenced as EBS/YY/NN and SM/YY/NN, where EBS and SM indicate the series and YY indicates the year of issue. Certain other documents are to become available 10 to 20 years after their issuance, depending on the series.


    Warning member countries about risks to the global economy and the buildup of vulnerabilities in their own economies is arguably the most important purpose of IMF surveillance. This IEO evaluation found that the IMF fell short in delivering on this key objective in the run-up to the financial and economic crisis that began to manifest in mid-2007 and that reached systemic proportions in September 2008. During the period 2004–07, the banner message of IMF surveillance was characterized by overconfidence in the soundness and resiliency of large financial institutions, and endorsement of financial practices in the main financial centers. The risks associated with housing booms and financial innovations were downplayed, as was the need for stronger regulation to address these risks.

    The IEO found that the IMF’s ability to identify the mounting risks was hindered by a number of factors, including a high degree of groupthink; intellectual capture; and a general mindset that a major financial crisis in large advanced economies was unlikely. Governance impediments and an institutional culture that discourages contrarian views also played important roles. To address these factors, the report stresses the need to modify institutional structures and incentives to strengthen accountability and to foster better assessment of risks, candor and clarity in messages, and the ability to “speak truth to power.” More broadly, the IMF must cultivate a culture which is proactive in crisis prevention, continuously scanning for risks and emphasizing vulnerabilities—including in advanced economies. While the IEO report focuses on financial sector issues because of the nature of the recent crisis, most of its recommendations deal with institutional changes that would improve the IMF’s capacity to detect other types of risks and vulnerabilities that could be at the center of a future crisis.

    I am encouraged by the broad agreement with the conclusions and recommendations of this report expressed by the Managing Director and the Executive Board. The report has also led to a vigorous debate among IMF staff. This introspection is an important catalyst for change. The IMF has already taken a number of initiatives to address the weaknesses revealed by the crisis. However, the IEO believes that additional changes are needed to reform the IMF’s culture, governance, and practices, so that the IMF is better prepared to confront future challenges.

    The international community needs a strong, effective, and well-equipped IMF to face the many economic and financial challenges that lie ahead. Yet the problems uncovered by this evaluation are long-standing and difficult to solve; addressing them will require close collaboration between authorities in member countries and the IMF Management and its Board. I hope this evaluation will contribute to this endeavor.

    Moises J. Schwartz


    Independent Evaluation Office

    IMF Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance in 2004–07

    This report was prepared by an IEO team led by Ruben Lamdany and Nancy Wagner. The IEO team included Angana Banerji, Sanjay Dhar, Alisa Abrams, Andrew Martinez, Chris Monasterski, and Roxana Pedraglio. The team was assisted by contributions from Biagio Bossone and David Peretz. The evaluation benefited from discussions with participants at three workshops held in July 2009, November 2009, and April 2010, and from comments from Jack Boorman, John Hicklin, Joanne Salop, Marcelo Selowsky, and Shinji Takagi. However, the final judgments are the responsibility of the IEO alone. Sarah Balbin, Arun Bhatnagar, and Annette Canizares provided administrative assistance. Rachel Weaving, Chris Monasterski, Roxana Pedraglio, and Esha Ray provided editorial and production management assistance. The report was approved by Moises Schwartz.

    The evaluation also benefited from comments from an Advisory Group comprising Hamad Al-Sayari, Otmar Issing, Jin Liqun, Tito Mboweni, Rachel Lomax, Guillermo Ortiz, Yaga Venugopal Reddy, Eisuke Sakakibara, Edwin Truman, and William White. The Advisory Group met on October 5, 2010 and discussed a preliminary version of this report and prepared a summary of its views, which is being issued as a background paper to this evaluation (“Summary of Views of the Advisory Group,” BP/10/01; see



    Bank for International Settlements


    Commodity Futures Trading Commission


    Deputy Managing Director


    Dynamic Stochastic General Equilibrium


    European Central Bank


    Economist Intelligence Unit


    Emerging Markets Bond Index


    European Union


    Early Warning Exercise


    Fiscal Affairs Department


    Flexible Credit Line


    Federal Open Market Committee


    Financial Sector Assessment Program


    Financial Stability Board


    Financial Sector Stability Assessment


    Canada, France, Germany, Italy, Japan, United Kingdom, and United States


    A grouping composed of major industrial countries and systemically

    important developing and emerging market countries


    Global Financial Stability Report


    International Capital Markets Department


    International Monetary and Financial Committee


    Mutual Assessment Process


    Managing Director, First Deputy Managing Director, and two Deputy Managing Directors


    Mortgage-backed securities


    Monetary and Capital Markets Department (combined ICM and MFD)


    Managing Director


    Monetary and Financial Systems Department


    Organization for Economic Cooperation and Development




    Policy Development and Review Department (old name for

    reviewing department)


    Research Department


    Securities and Exchange Commission


    Selected issues paper


    Swiss National Bank


    Strategy, Policy, and Review Department (new name for reviewing department)


    Acronym formed from T-bill and Eurodollar futures


    Triennial Surveillance Review


    Vulnerability Exercise


    Vulnerability Exercise for Advanced Economies


    World Economic and Market Developments


    World Economic Outlook

    Executive Summary

    This evaluation assesses the performance of IMF surveillance in the run-up to the global financial and economic crisis and offers recommendations on how to strengthen the IMF’s ability to discern risks and vulnerabilities and to warn the membership in the future. It finds that the IMF provided few clear warnings about the risks and vulnerabilities associated with the impending crisis before its outbreak. The banner message was one of continued optimism after more than a decade of benign economic conditions and low macroeconomic volatility. The IMF, in its bilateral surveillance of the United States and the United Kingdom, largely endorsed policies and financial practices that were seen as fostering rapid innovation and growth. The belief that financial markets were fundamentally sound and that large financial institutions could weather any likely problem lessened the sense of urgency to address risks or to worry about possible severe adverse outcomes. Surveillance also paid insufficient attention to risks of contagion or spillovers from a crisis in advanced economies. Advanced economies were not included in the Vulnerability Exercise launched after the Asian crisis, despite internal discussions and calls to this effect from Board members and others.

    Some of the risks that subsequently materialized were identified at different times in the Global Financial Stability Report, but these were presented in general terms, without an assessment of the scale of the problems, and were undermined by the accompanying sanguine overall outlook. These risks were not reflected in the World Economic Outlook or in the IMF’s public declarations. The IMF did appropriately stress the urgency of addressing large global current account imbalances that, in the IMF’s view, risked triggering a rapid and sharp decline in the dollar that could set off a global recession. But the IMF did not link these imbalances to the systemic risks building up in financial systems.

    The IMF’s ability to detect important vulnerabilities and risks and alert the membership was undermined by a complex interaction of factors, many of which had been flagged before but had not been fully addressed. The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and inadequate analytical approaches. Weak internal governance, lack of incentives to work across units and raise contrarian views, and a review process that did not “connect the dots” or ensure follow-up also played an important role, while political constraints may have also had some impact.

    The IMF has already taken steps to address some of these factors, but to enhance the effectiveness of surveillance it is critical to clarify the roles and responsibilities of the Board, Management, and senior staff, and to establish a clear accountability framework. Looking forward, the IMF needs to (i) create an environment that encourages candor and considers dissenting views; (ii) modify incentives to “speak truth to power;” (iii) better integrate macroeconomic and financial sector issues; (iv) overcome the silo mentality and insular culture; and (v) deliver a clear, consistent message on the global outlook and risks.

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