Progress in Major International Fora on Reform of the International Financial Architecture
Much work is taking place in various international fora to rise to the challenge of the new global environment and contribute to the efforts to reform the international financial architecture. These efforts involve in particular the Financial Stability Forum. The G-20 and other groups, such as the Group of Ten and the various Basel-based committees, are also contributing to initiatives to reform the international financial architecture.
Financial Stability Forum (FSF)
Since its establishment in 1999, the FSF36 has worked in a number of key areas in collaboration with national authorities, the Fund and the World Bank, standards setters, and other fora on the initiatives that support financial stability and the reduction of systemic risk. FSF working groups have in particular focused on issues related to international capital flows, highly leveraged institutions (HLIs), offshore financial centers (OFCs), deposit insurance, standards and codes and, more recently, e-finance.37 Implementation of the FSF’s recommendations on financial sector issues is monitored regularly, through the work of follow-up groups and review at FSF meetings. This allows for periodic stocktaking on the progress and an assessment of priority tasks. In addition, the FSF secretariat regularly prepares notes on vulnerabilities and on ongoing work relevant to sound financial systems based on input from members of the group.
A report on progress in implementing the recommendations of the Working Group on Highly Leveraged Institutions (HLIs) was released at the fifth meeting of the FSF in March 2001. The report notes good progress in strengthening counterpart risk management and regulatory oversight. However, it suggested that credit providers need to make further progress in the measurement of risks inherent in credit exposures, including by conducting comprehensive stress tests. The report finds that supervisors remain concerned about the ability of regulated firms to resist market pressures. Although disclosure of information by HLIs to credit providers has improved in terms of both quality and quantity, progress remains inconsistent. The Good Practice Guidelines for Foreign Exchange Trading agreed among leading foreign exchange market participants were welcomed as an encouraging step toward more smoothly functioning foreign exchange markets.38 The FSF will review these issues in March 2002. 39
With regard to OFCs, the FSF, at its September 2001 meeting noted that while there are signs of progress, more is required. It reiterated the importance of OFCs disclosing the results of Fund assessments and encouraged further efforts by OFCs to improve their supervisory and cooperation practices, including participation in the Fund’s assessment program. It encouraged the Fund to complete its OFC assessment program as soon as possible. The FSF called on its members to strengthen the provision of assistance to OFCs and called on its members to strengthen the provision of assistance to OFCs and welcomed the proposal of the Basel Committee to set up a contact group with offshore supervisors. The FSF will review these issues in March 2002.
The FSF has also continued its work to develop international guidance on deposit insurance arrangements and considered the final report of the corresponding Working Group in September 2001. The report drew on extensive consultation with a draft posted on the Internet in mid-July 2001. FSF members considered that it would be particularly useful when moving from a situation where there may be an implicit or blanket guarantee to a system of explicit limited coverage.
The Follow-Up Group, created to raise awareness on standards, foster their implementation and explore in greater depth issues related to market and official incentives, met in July 2001, and considered further the feasibility of certain supervisory and regulatory-type incentives, as well as efforts to enhance the provision of technical assistance to help countries implement standards. The final report of the Follow-Up Group on Incentives to Foster Implementation of Standards was discussed at the September 2001 meeting of the FSF.
As part of its outreach activities, the FSF held its first regional meeting in Mexico City, in April 2001. These regional meetings bring together senior officials from FSF member and non-member countries in the region to exchange views on vulnerabilities in domestic and international financial systems, brief non-members on Forum discussions, and give them an opportunity to provide views and perspectives on the FSF’s work. The most recent in this series of regional roundtables was held in Tokyo in October 2001, for Asian/Pacific members and non-members.
The Group of 20 (G-20)
Members of the G-20, a gathering of finance ministers and central bank governors from systemically important countries established in 1999 to advance the reform of the architecture of the global financial system, have engaged in wide-ranging discussions of the opportunities and challenges that globalization creates for their economies. 40 They have promoted international initiatives such as standards and codes, and have committed themselves to implementing these initiatives.41 In the fall of 2001, the G-20 will organize roundtables on private sector involvement in crisis prevention and resolution, and on market awareness of standards and codes. The G-20 has also called for the establishment of a clearing house mechanism for technical assistance.
The Basel Committee on Banking Supervision has recently focused its work on the international coordination of the activities of supervisory authorities and on revising the 1988 Basel Capital Accord. A report on Essential Elements of a Statement of Cooperation between Banking Supervisors prepared by the Working Group on Cross-border Banking was released in May 2001. The report provides a framework for agreements between supervisors, to share information on a basis of mutual trust when the circumstances justify it. The Basel Committee on Banking Supervision has received more than 250 comments on its January 2001 proposals to revise fundamentally the 1988 Capital Accord. It is currently reviewing these comments and the Committee has indicated that the proposals are likely to be further adjusted to reflect these comments.
Groups such as the Group of 10, the International Association of Insurance Supervisors (IAIS), the International Accounting Standards Committee (IAS), the International Organization of Securities Commissions (IOSCO), the Committee on Payment and Settlement Systems (CPSS), the Organization of Economic Cooperation and Development (OECD), the United Nations Commission of International Trade Law (UNCITRAL), the International Federation of Accountants (IFAC), and the Basel-based committees have also contributed to the reform of the international financial system, including through joint initiatives which reflect strengthened cooperation among international institutions. For instance, a joint task force on the Winding Down of Large and Complex Financial Institutions (LCFI) was created in 2000 at the initiative of the FSF, G-10, and Basel Committee on Banking Supervision. Another example is the Multidisciplinary Working Group on Enhanced Disclosure, involving the Committee on the Global Financial System (CGFS) together with the Basel Committee, IAIS, and IOSCO.
Some Initial Evidence of Greater Differentiation in Markets42
In 1997, the spread between the interest rates paid on emerging market debt compared to that paid on U.S. Treasury bonds was similar for a wide range of countries. Fifty percent of emerging market countries had spreads within a range of 100 basis points despite differences in their policies and institutions. Now, the dispersion of spreads between countries is much higher with a 500 basis point range in spreads for the central 50 percent of emerging market countries.
Similarly, the average cross-correlation of returns in the emerging debt markets at times of pressure on Turkey and Argentina have been less than those observed at the height of the Asian and Russian crises in 1997, even after September 11.43 The Turkish devaluation in February 2001 led to a modest rise in the average cross-correlation between bond spreads on J. P. Morgan’s Emerging Market Bond Index plus (EMBI+) to 0.43 compared to peaks of 0.9 during the Asian crisis and 0.8 at the time of the Russian default (Figure 3.). During recent Argentina sell-offs in April (when Argentine sovereign spreads reached nearly 1,300 basis points) and July 2001 (when sovereign spreads reached 1,600 basis points), the average correlation across the index was 0.45 and 0.47 respectively. In August, Mexico was able to go to the market for a new bond issue at just 335 basis points above US Treasury Bonds despite heightened concerns over Argentina. The average cross-correlation of returns on emerging debt rose sharply in September, reaching levels not seen since the Brazilian devaluation. However, some of this rise may reflect the fact that emerging markets were all experiencing similar shocks during this period and the cross-correlation was still below the levels seen at the time of the Russian default and Asian crisis.
These developments are likely, at least in part, to reflect some of the following additional factors:
The composition of investors in emerging markets is rather different than at the time of the Asian crises, with a higher proportion of dedicated and local investors who are more likely to be discriminating.
The magnitude and type of shocks experienced in 2001 are different than those experienced in 1997.44
It is also possible that a larger shock, which led investors to re-evaluate the probability of default for emerging markets in general would lead to much higher correlations between markets.
Report of the Managing Director to the International Monetary and Financial Committee on the IMF in the Process of Change (IMFC/Doc/3/01/8, 4/25/01).
See Communiqué of the International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund, April 29, 2001.
Streamlining Conditionality and Enhancing Ownership The Managing Director’s Report to the International Monetary and Financial Committee (IMFC/Doc/4/01/4, 11/6/01).
These summaries were dated for those countries’ whose Article IV consultations took place at the beginning of the
These figures include the publication of combined Article IV and Use of Fund Resources reports.
Letters of Intent and Memoranda of Economic and Financial Policies.
The publication rate for staff reports on Fund-supported programs is about the same as for Article IV reports.
The SDDS was established in 1996 to guide countries that have, or might seek, access to international capital markets, in the dissemination of economic and financial data to the public. See IMF Executive Board Reviews Data Standard (PIN/01/101); and Concluding Remarks by the Acting Chairman of the IMF Executive Board, Macroprudential Indicators (6/25/01).
The Inter-Agency Task Force on Finance Statistics, formed under the aegis of the United Nations Statistical Commission and chaired by the Fund, is the coordinating body for this work.
From end-March to end-September 2001. See Report of the Managing Director to the International Monetary and Financial Committee on the IMF in the Process of Change (IMFC/Doc/3/01/10, 4/29/01)
ROSCs derived from FSSAs are considered complete following Board discussion of the FSSA. All other ROSCs are considered complete once they have received management approval.
In addition, there have been previous outreach seminars in Argentina, Belgium, Brazil, Chile, Czech Republic, Egypt, Japan, Singapore, South Africa, Thailand, and the United Kingdom.
The latter is a key aspect of the Fund’s multilateral surveillance activities and the work of the new ICM Department.
An FSAP is considered complete once the FSSA has been discussed by the Executive Board and the FSAP report has been sent to the authorities.
Of the 18 countries for which FSAPs are underway, 7 are advanced and emerging market economies and 11 are transition or developing economies (of which 6 access international private capital markets). This compares to 3 advanced and emerging and 9 transition and developing countries (6 of which access the international private capital market) covered under the pilot.
Macroprudential analysis includes stress testing of financial systems’ sensitivity to a variety of shocks.
See IMF Board Reviews Issues Surrounding Work on Offshore Financial Centers, IMF News Brief No. 00/62 (7/26/00); and Offshore Financial Centers: Note for the Executive Board (SM/01/205, 7/18/01).
Module 1 is an assisted self-assessment with technical assistance from experts, as needed, to help OFCs assess their compliance with particular standards. Module 2 is a stand-alone fund-led assessment of standards, and Module 3 is a comprehensive assessment of risks and vulnerabilities, institutional preconditions, and standards observance prepared by the Fund, within the framework of the FSAP.
Module 2 or module 3 assessments.
The CPIS database will complement the Bank for International Settlements (BIS) international statistical collections for banking statistics.
Summing Up by the Acting Chairman, Enhancing Contributions to Combating Money Laundering (PIN/01/41, 4/29/01).
During an extraordinary Plenary on October 29-30, 2001 the FATF agreed to a set of eight Special Recommendations on addressing terrorist financing.
In April 2001, the Bank and Fund hosted an international reserves policy forum which drew the participation of senior policy makers from more than 36 central banks from a wide range of countries. In addition, the Fund and Bank are involved on extensive outreach activities and providing assistance on reserve adequacy, management, and investment issues at the request of the authorities.
Countries that participate in the IMF’s GDDS commit to use the GDDS as a framework for the development of their national systems for the production and dissemination of economic, financial, and socio-demographic data.
Experience with the Insurance Core Principles Assessments Under the Financial Sector Assessment Program, IMF (8/31/01). In the case of the Insurance Core Principles, 15 percent of countries for which assessments were carried out received technical assistance from the Fund to help complete some or all of this work.
See Investor Relations Programs: Report of the Capital Markets Consultative Group Working Group on Creditor-Debtor Relations, IMF (7/20/01)
See Quarterly Report on the Assessments of Standards and Codes, IMF (7/12/01)
Bond prospectuses where this information has been given include Argentina, Germany, Indonesia, Malaysia, Mexico, and the Philippines.
See Quarterly Report on the Assessments of Standards and Codes, IMF (7/12/01)
The Financial Accounting Standards Board has a project on Financial Performance Reporting by Business Enterprises, www.fasb.org.
See the Final Report of the Follow-Up Group on Incentives to Foster Implementation of Standards, Financial Stability Forum, September 2001. Two different groups were surveyed: the first who had not been surveyed previously were asked whether they used ROSCs in their credit assessments while the second group that had been surveyed in 2000 were asked whether their use of ROSCs had increased over the year.
See for example Report of the Working Group on Highly Leveraged Institutions, Financial Stability Forum, April 2000.
Banks’ Interactions with Highly Leveraged Institutions, Basel Committee Publication No. 45, January 1999 and the accompanying Sound Practices for Banks’ Interactions with Highly Leveraged Institutions, Basel Committee Publication No. 46, January 1999. See also the follow-up report on the Banks’ Interactions with Highly Leveraged Institutions: Implementation of the Basel Committee’s Sound Practices Paper, Basel Committee Publications No. 68, January 2000.
Sound Practices for Hedge Fund Managers, Caxton Corporation, Kingdon Capital Management LLC, Moore Capital Management LLC, Tudor Investment Corporation, Sullivan and Cromwell, and Rutter Associates, February 2000.
The Forum was conceived in April 1999 to promote international financial stability through information exchange and cooperation in financial supervision and surveillance. It brings together, on a regular basis, national authorities from 11 economies (Australia, Canada, France, Germany, Hong Kong SAR of China, Italy, Japan, Netherlands, Singapore, the United Kingdom, and the United States), international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts.
Information on the FSF’s published reports and related information may be found at http://www.fsforum.org.
The guidelines have been endorsed by the bodies responsible for foreign exchange market standards in the main financial centers and will be incorporated into existing codes of market conduct.
“Financial Stability Forum holds its sixth meeting” Press Release, September 7, 2001, London.
The members of the G-20 are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Korea, Mexico, the Russian Federation, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States, the European Union, the Fund, and the World Bank. The mandate of the G-20 is to promote discussion, and to study and review policy issues among industrialized countries and emerging markets with a view to promoting international stability. Information about and publications of the G-20 are available at http://www.g20.org/indexe.html.
At end-September 2001, of the 19 countries that are members of the G20, 16 are subscribers to the SDDS, 18 have published PINs, 10 have published at least one Article IV or combined Article IV and Use of Fund Resources staff report, 10 have completed or committed to undertake FSAPs, and 13 have completed ROSCs.
This appendix draws on work by the Fund staff and the Bank of England. Effects of current turmoil in emerging markets may be less widespread than in previous crises, Subir Lall, IMF Survey Volume 30, Number 16, August 13, 2001. The International Financial System: A New Partnership, speech by Mervyn King, Deputy Governor of the Bank of England, at the 20th Anniversary of the Indian Council for Research on International Economic Relations, New Delhi, August 2001.
Movements in Asian stock market indices have become more, not less, correlated since the Asian crisis. This may reflect the shared dependence of these economies on exports, especially in the electronics sector and to certain regions.
Higher correlations of spreads are usually seen when there are large shocks. If the shock from increased spreads in Argentina and Turkey was not as large as the shocks experienced in the Asian and Russian crises in 1997 this would lead to lower correlations even if investors were not any more discriminating now than in 1997. However, 2001 has seen a downturn in expectations of global growth which could have reinforced the upward move in spreads across emerging market economies. This is in comparison to the experience in 1997 when world demand grew more strongly. This would bias down the correlations and support the view that investors are being more discriminating.