Annex I. Implementation of the ISD: 2013 Article IVs
This annex discusses early experiences from the first year of implementing the Integrated Surveillance Decision (ISD), based on an assessment of 11 Article IV consultation reports. 21 All of these reports examined outward spillovers, although they varied in terms of the depth of analysis and coverage of transmission channels. Most of the reports spelled out alternative policies, although they did not necessarily document spillovers from the country’s existing policies. It is unclear whether staff gained much traction with authorities in discussions of outward spillovers.
Annex II. Lessons from a Seminar on Modeling Risks and Spillovers at the IMF
The IMF relies on a variety of economic models to assess risks and spillovers. To clarify how different models should be used in surveillance, a seminar was held in April 2014 to obtain the perspectives from seven academics and practitioners, as well as model users. They assessed the IMF’s three main structural macroeconomic models for spillover analysis and a variety of specialized models, focusing on specific applications illustrating how the models were used. This annex summarizes the conclusions from the seminar.
Prepared by a staff team comprising Ding Ding (APD), Qianying Chen (EUR), Hiroko Oura and Francis Vitek (both MCM), Eugenio Cerutti, Ayhan Kose and Esteban Vesperoni (all RES), Evrim Bese Goksu, Noriaki Kinoshita and Manik Shrestha (all STA), Sean Craig, Gavin Gray (lead), Jean Frederic Noah Ndela Ntsama, Rania Papageorgiou, Michael Perks and Veronique Salins (all SPR). David Marston (RMU) provided general guidance.
At the same time, calls for work on spillovers date back to at least the 1990s, when the Asian financial crisis demonstrated the significance of cross-border linkages. See IEO (1999).
The third pillar of the FSS was to engage more effectively with stakeholders in order to improve the traction of financial sector surveillance.
TSR background papers on “Stakeholders’ Perspectives on IMF Surveillance” and a “Review of IMF Surveillance Products” provide more detail on country authorities’ views and on gaps identified in a review of surveillance products.
Section C discusses the individual models in greater detail.
Examples of usage in Fund research include Financial Soundness Indicators and the Characteristics of Financial Cycles, Lane R. P. and Gian Maria Milesi-Ferretti Cross-Border Investment in Small International Financial Centers, IMF WP No. 10/38, and Brushko, Iuliia and Yuko Hashimoto (2014) The Role of Country Concentration in the International Portfolio Investment Positions for the European Union Members, IMF WP No. 14/74.
As David Li and Paul Tucker note: “Bilateral surveillance will often be closer to the vulnerabilities and pathologies that give rise to international spillover risks and problems.”
Examples of spillbacks are provided in the TSR External Study on “Risks and Spillovers” by David Li and Paul Tucker.
A parallel staff study on the scope of “Surveillance in Low Income Countries (LICs)” covers the relevance of risks and spillover work for this group of countries.
The VE comprises three separate exercises covering advanced economies (VEA), emerging markets (VEE) and low-income countries (VE-LIC).
See Managing Volatility: A Vulnerability Exercise for Low-Income Countries (March 9, 2011), and The IMF-FSB Early Warning Exercise: Design and Methodological Toolkit.
Stress tests assess the soundness of the system as a whole. Staff should be careful about how they are communicated to avoid making implicit judgments about the health of individual banks.
These relationships are typically approximations that may not fully reflect regulatory treatment of banks in a country. If estimation is difficult, one can consider some arbitrary shocks (for instance, that the NPL ratio increases by 5 percentage points). A top-down test, which can be carried out by a country-authority or IMF staff using supervisory data, will usually be more accurate. A bottom-up test is a test carried out by banks themselves. See recent IMF policy paper on stress testing for typology and basic structures of stress tests, as well as a survey of stress testing practice of country authorities.
See Mapping the Shadow Banking System Through a Global Flow of Funds Analysis, IMF WP/14/10.
For instance, Santos and Elliott, 2012, Estimating the Costs of Financial Regulation, SDN/12/11; and Viñals, Pazerbasioglu, Surti, Narain, Erbenova, and Chow, 2012, Creating a Safer Financial System: Will the Volcker, Vickers, and Liikanen Structural Measures Help? SDN/12/4.
The reports covered China, Euro Area, France, Germany, Greece, Italy, Japan, Spain, Switzerland, United Kingdom, and United States.