Is the IMF report on avoiding financial crises closing the barn door after the horses have bolted?

Sep 18 • Between the lines • 2362 Views • Comments Off on Is the IMF report on avoiding financial crises closing the barn door after the horses have bolted?

horsesThe IMF have published a fascinating paper this week, the title is “New Policies To Fend Off Financial Crises”. It’s notable that the IMF have chosen to use the plural word of “crisis”, acknowledging that the 2007/2008 crisis was not secular and that subsequently, the banking sector in the Western Hemisphere in particular, has experienced a series of mini crises between then and the current (supposed) recovery.

The IMF paper covers many subjects, but there is one overall glaring omission and it’s manifested in the form of denial; the IMF are failing to acknowledge the systemic problems already built into the current architecture of our financial framework, their implicit suggestion is that all wounds have been healed. The IMF advice may have come far too late to affect the outcome of what many are predicting will cause further issues; the tsunami of debt already built into the current system, some in the emerging BRICS economies, some in what are described as “developed economies”.

Respected institutions, such as the BIS and OECD, are now acknowledging the rise in debt over recent years, since the banking and financial sector in the west experienced its crises linked to the 2007/2008 crash. However, organizations such as the IMF are proposing avoidance tactics without taking into consideration that many of the problems may be too far down the line to avoid, as highlighted recently by a former official of the BIS (Bank Of International Settlements), who’s now resident at the OECD…

William White stated recently, in his position of chairman of an OECD department, that the global financial system has become addicted to ‘cheap’ easy money; as rates fall lower with each individual cycle and crisis, there is little wriggle room left in his opinion, should the system break again.

This looks like to me like 2007 all over again, but even worse. All the previous imbalances are still there. Total public and private debt levels are 30pc higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle.

The ultimate driver for the whole world is the US interest rate and as this goes up there will be fall-out for everybody. The trigger could be Fed tapering, but there are a lot of things that can go wrong. I very am worried that Abenomics could go awry in Japan, and Europe remains exceedingly vulnerable to outside shocks.


IMF plans

To help countries design and implement policies, known as macroprudential policy, the International Monetary Fund has developed a new framework to guide countries as they choose approaches best suited to their needs.


José Viñals, Financial Counsellor to the IMFs Managing Director;

“This framework is the culmination of a multi-year policy development effort. It is a milestone for the IMF and its member countries because it will help them develop essential crisis-prevention tools.


The Framework

Detect and contain risks before they turn into a crisis

The crisis exposed the costs of financial instability at national and global levels. Detecting and containing the build-up of such risks requires dedicated macroprudential policies in advanced and emerging economies. The new analysis from the IMF brings together and distills valuable lessons for policymakers.


Dont leave home without a roadmap

Countries should define the goals and scope of macroprudential policy at the national level. Macroprudential policy aims to contain vulnerabilities in a country’s financial system. For example, by limiting the excessive use of borrowed funds, or leverage, macroprudential policy increases the system’s resilience to sharp asset price declines and other economic shocks. Such use of policy may have a welcome side effect in cooling aggregate demand, these side-effects should not become the main objective.


Monetary and fiscal policies have a role to play

To achieve a stable financial system, monetary and fiscal polices must complement macroprudential policies, policymakers should support them with strong supervision and enforcement.

Effective macroprudential policy can help other policies achieve their goals. If countries apply macroprudential policy tools, such as capital buffers, and limits on loan-to-value ratios, then the macroprudential authority will be better able to contain side-effects of monetary policy on financial stability. This can help alleviate conflicts in the pursuit of monetary policy by reducing the need for monetary policy to “lean against” adverse financial developments.


The right tools for the job

Policy makers should improve the collection of data and information. Lack of data hinders an assessment of the severity of an identified risk, creating uncertainty over the need for a macroprudential response. Policy makers may not have access to macroprudential tools. A range of tools, including broad-based capital buffers, targeted loan-to-value limits, and liquidity-based tools may be necessary for the effective conduct of macroprudential policy.

Strong institutional and governance frameworks are essential for the effective conduct of macroprudential policy. The macroprudential authority should have the power to recommend action by other policymakers. Complying with the recommendation, or to publicly explain why no action was taken. Central bank needs to play an important role.


The global dimension and role of the IMF

The IMF can play a key role, in collaboration with standard setters and country officials, to help ensure the effective use of macroprudential policy. Over the next few years, the IMF will use the new framework to step up its dialogue with national officials on macroprudential policies, including through its bilateral surveillance, financial sector assessment programs and technical assistance.

The goals are to encourage strong institutional underpinnings for macroprudential policy, help analyze evolving risks, and advise on policy responses that appropriately reflect country-specific circumstances. By pursuing these goals, the IMF and its member countries can help ensure lasting domestic and global financial stability.

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