IMF Survey: You’ve had a lot of experience as a financial crisis “insider”—first as a Swedish government official during the Nordic banking crisis in the early 1990s, then at the IMF as part of the international fight against banking crises. Where does the IMF stand now on the learning curve in terms of resolving financial crises?
Ingves: The IMF’s capacity to deal with financial crises is a lot better today than when I first joined. With a full division of experts who know how to deal with crises, we’re truly in a position to produce a public good—which is international knowledge and experience, something that’s often lacking in countries. The IMF is kind of a financial sector Red Cross. We build financial systems, and we put them back together when they’re falling apart. We also have a much more refined knowledge of the types of financial crises that can occur. For example, there can be major differences between a financial crisis in a dollarized economy and one in an economy where people basically use only their own currency. And there can be major differences between a crisis where the government has gone bust and one where banks’ loan portfolios are the problem.
IMF Survey: How about the IMF’s ability to avert crises?
Ingves: There’s a greater focus now on vulnerabilities— including financial sector ones—and we know a lot more about which numbers to watch. But that doesn’t mean that it’s easy to predict when a financial crisis will strike. I continue to be surprised by the fact that in some cases, a country’s numbers can look bad, and we expect a serious problem, and yet the country holds together for years and years. In another country, where the numbers look reasonably good, a crisis can rapidly unfold. So the best approach for the IMF is to track those cases where the numbers don’t look good, and mentally prepare for what will be needed if things start to fall apart. Of course, it helps if countries are more willing to act when it’s still possible to correct problems and avoid huge ones down the road. But maybe it’s the nature of the business that it’s difficult to act until things go terribly wrong.
IMF Survey: Are we living in a riskier world given massive capital flows, instantaneous information flows, and sophisticated hedging instruments?
Ingves: The truth is that financial crises come and go, and it’s been like that for a long time. Is the world riskier now? I would say that it’s not necessarily riskier but that the types of risks have changed—and will continue to change, particularly given that derivatives and new financial instruments alter the distribution of risk in the system. But if we understand how these instruments work, we can also better pinpoint the risks, because the instruments themselves don’t create the risks.
IMF Survey: Since mid-1999, the IMF and World Bank have put increased effort into surveillance over financial sectors through the FSAP. At this point, about two-thirds of our members have completed or requested these assessments. How has the FSAP changed over time? Do you consider the program a success?
Ingves: When we began the pilot project, we started out with a blank piece of paper, just wanting to prove that it was doable—and we have to thank the Canadians for being willing to be our guinea pig. Over the years, this project has gone way beyond what I ever imagined, and I take great pride in the fact that we’re now talking about 120 country assessments. The current FSAP assessments are much more streamlined, as we’ve gotten better at tailoring the contents to each country’s needs and stage of development. As for issues, in the early days, there was quite a debate over stress tests on financial systems. Today, it’s a generally accepted tool. Similarly, we’re no longer debating whether to make FSAP results public; it’s generally accepted that this should be done, and there’s a fairly good record of countries doing so.
IMF Survey: What are the most important lessons that the IMF and participating countries have reaped from the FSAP?
Ingves: One lesson is that it’s hard for a country to conduct its own FSAP assessment. It’s not because countries don’t have the capacity—many countries do—but because they don’t have a mechanism to coordinate the work. If the ministries of finance and justice and the central bank are all roughly on the same level, who pulls the information together and makes sense of it? That is a service the IMF can provide. Another lesson is that things can always be improved, even in countries that are doing well and are well organized. I think in every FSAP assessment we have uncovered something new, often even surprising the country officials.
IMF Survey: Going forward, how often should countries undertake FSAP assessments?
Ingves: Given that we’ve already done so many countries, and in many cases are just trying to do updates, the process needs to change. Fortunately, doing updates will be much simpler than starting from scratch; this particularly holds when it comes to doing the standards assessments. The MFD will also be participating in the regular IMF Article IV country assessments—possibly 40 or so in the current financial year. This is a welcome development, since the IMF’s overall financial sector work needs to be both deepened and spread more widely. We started with a blank sheet of paper in 1999, but now it’s time to truly integrate the FSAP with the work of other departments, making it a standard tool that the IMF uses to carry out surveillance.
IMF Survey: Are you satisfied with how financial sector surveillance is handled as part of the IMF’s country and global surveillance?
Ingves: It’s taken the IMF a long time to develop the capacity to do financial sector surveillance. In my view, it’s truly a late starter. Going forward, the IMF needs to find a proper balance between macroeconomic and more technical work. It also needs to spend more time figuring out how best to carry out the financial sector work. There’s no fixed template. The IMF will have to create one and let it evolve over time.
It’s taken the IMF a long time to develop the capacity to do 3inancial sector surveillance. In my view, it’s truly a late starter. Going forward, the IMF needs to 3ind a proper balance between macroeconomic and more technical work.
IMF Survey:How about the United States? It’s a big FSAP supporter, yet it’s the only Group of Seven [G7] country that hasn’t had one. Is it just too costly for the IMF, as the United States has argued? What might you tell U.S. officials they would learn from it?
Ingves: We’re ready to do the work, and I expect the United States to participate at some point. We’ve done all the other G7 countries, and we’ve had quite a lot of experience in making the process work in fairly large and complex countries. What might the U.S. learn? An FSAP would provide U.S. officials with a second opinion from a group of external, independent experts on its financial sector. Those views could then be fed into the domestic debate—both at the technical level, sometimes with new rules and regulations, and at the political level, which would deal more with the overall performance of the financial sector, especially against the backdrop of globalization.
IMF Survey:Any examples of this happening in some of the major industrial countries?
Ingves: In the case of Japan, we argued strongly that it had to do something about the Japan Post, which turned into a major election issue—and the privatization of this huge postal savings system is now moving forward. In the case of Germany, there is a lively domestic debate about our views on the structure of the whole German financial sector, not the least the savings banks. In the case of the United Kingdom, we argued that a few things could be improved in the insurance sector.
IMF Survey:Turning to the conduct of monetary policy, an increasing number of countries have adopted inflation targeting. Is this just a passing fad, or is it an appropriate and attainable monetary policy regime that more countries ought to consider seriously?
Ingves: Countries vary in economic size, degree of economic integration with their neighbors and the world, and exchange rate regime. Each has to choose the monetary policy framework that is best for it—there is no textbook where you can look at page 375 and get the answer. That said, in a world with increasing capital flows between countries, it has probably become harder for countries to defend a fixed exchange rate.That means that for some, inflation targeting is a serious candidate. It certainly has been the case in Sweden.
IMF Survey:What should the IMF be advising on central bank independence?
Ingves: Independence is a good thing. But it goes hand-in-hand with transparency. If you have the right to decide independently, then you have to explain to others what you do and why you do it. In addition, a central bank is part of a society, and that means that it needs to understand how that society works and what its role should be in that society. In that sense, independence is never absolute. Independence is given to you provided that you supply what is expected of you—which is monetary stability.
IMF Survey:You’ve long talked about the importance of greater transparency in the financial community, including on the part of central banks. Is this still a topic of debate, and has the move toward greater transparency shielded central bankers from political influence?
Ingves: When I first joined the Fund, MFD was in the middle of trying to finalize and negotiate what came to be known as the central bank code on transparency. That was quite a contentious process, and it wasn’t a given in those days that transparency was a good thing. Today, the IMF has done a large number of country and central bank assessments using this code, and my impression is that the need for transparency is rarely contentious. Transparency also makes political interference harder. In a quiet way, this work has changed the thinking of many.
IMF Survey:Many industrial countries are weighing how best to adopt the complex new capital adequacy framework, known as Basel II. Should emerging markets also adopt Basel II? What should the IMF’s role be? Who will assess whether countries are doing a good job of implementing these standards?
Ingves: There are many versions of Basel II, including a simplified approach. The key is to choose the right version so that Basel II is tailored to the needs and the capacity of the country. For some emerging market countries, that will mean opting for the simplified approach, until their markets and data are more sophisticated. On the issue of assessment, it wouldn’t surprise me if the IMF ends up doing it. But I also think it would be important for other parties to be involved as assessors as well. One model might be shared assessments along the lines of our cooperation with the Financial Action Task Force when we do the anti-money laundering assessments.
IMF Survey:Do you have any thoughts on where the IMF is headed in terms of its financial sector involvement?
Ingves: There has always been an internal debate on how much financial sector work the IMF should be doing. In the end, we always do more, and that’s because there’s a natural demand for this type of work in countries, and it’s likely to continue. The reality is that it takes a solid understanding of the financial sector machinery to properly execute various types of macroeconomic policies—especially monetary policy and crisis management.
IMF Survey:Any thoughts on what you would like to accomplish as Sweden’s central bank governor?
Ingves: First, Sweden is a country with an inflation target, so it’s important to meet the target. It’s also important to communicate in such a way that there is sound support for the target and that it’s commonly accepted and understood. Second, there’s a need to continue to develop the financial stability work and stay on top of financial innovation. Third, it’s vital to maintain expertise in the central bank so that it remains respected, both nationally and internationally. Finally, it’s important to ensure that the Riksbank stays small and efficient.
IMF Survey:I understand that you’ve always wanted to be a long-distance runner. Where are you now on the course?
Ingves: After seven years, I know all the trails around McLean, Virginia, by heart. I did four seven-minute miles this morning in the gym, and I probably could do five in a row. That’s good enough for now.