December 2, 2008 Deputy Assistant Secretary Sobel Remarks on the Global Financial Crisis and the IMF’s Response Thank you for this opportunity to speak about the global financial crisis and the IMF's response. The IMF is also facing a critical juncture in implementing its agenda for institutional reform, and I would like to touch today on this subject as necessary changes underway in the IMF will require Congressional support. The Evolving Role of the IMF
The IMF is a vital and necessary institution for international monetary cooperation. The need for such cooperation and the rationale for the Fund's existence is every bit as strong today as it was in 1944, when the IMF was created in the aftermath of the Depression, protectionism and beggar-thy-neighbor currency policies, and World War II.
Throughout its sixty-year plus existence, the Fund has well served the global financial community. It helped Europe and
This is a record of success and all along the way, through bipartisan backing in the
The Global Financial Crisis
We are in the midst of a deep global financial crisis, one that historians will analyze for decades to come. Against this background, I will only focus on two points about the crisis in order to tee up my discussion about the Fund's role in it.
First, at the outset of the crisis, economic performance in many of the leading emerging market economies remained robust. This remarkable performance was testimony to years of hard effort in many countries to put in place sound macroeconomic frameworks and institutions. However, as global de-leveraging has accelerated in recent months with a significant retrenchment in risk appetite, on top of sharp declines in commodity prices, emerging markets have increasingly been impacted and in some cases significant weaknesses exposed. Their outlooks for growth and trade have been substantially pared back and external financing has become increasingly difficult and stressed.
Second, the recent Declaration of the Leaders of the Group of Twenty includes a blunt section on the root causes of the crisis. It notes that amid a period of remarkable stability and large-scale capital flow earlier this decade, market participants reached for yield without exercising proper due diligence or comprehending the risks they were taking. Financial firms also engaged in unsound risk management practices, products became more opaque and complex, and policy-makers, regulators, and supervisors failed to keep pace with these changes and the excessive leverage and risks building up in the system. Global imbalances were an important backdrop with their correspondingly large build-up in foreign exchange reserves.
The Role of the IMF in Response to the Current Crisis
These two points underscore that the IMF, given its unique role as a balance of payments lender and its global mandate for macroeconomic and financial surveillance has critical responsibilities in responding to the crisis. Let me turn to each.
Crisis Lending
With the crisis increasingly affecting emerging market economies, the IMF is reprising its role as crisis lender and has moved quickly to use its existing tools creatively and flexibly, and to adopt new tools, when necessary. This is to be welcomed. It is important that the IMF help members facing legitimate needs, and the Fund should respond flexibly in doing so.
In
The Fund has worked in close consultation with a number of additional countries that are also susceptible to balance of payments pressures due to some combination of large current account deficits, inflexible exchange rate regimes, and large foreign exchange-denominated credit exposures. The Fund has publicly indicated it has held discussions with
Other countries have performed very well in recent years and are fundamentally sound, but they are now facing weaknesses due to tight liquidity conditions. Such countries would not necessarily require the combination of financing and policy adjustment comprised by a traditional Standby Arrangement. But they could need liquidity to tide them over for a several month period. In anticipation of potential member needs along these lines, the IMF recently created a Short-Term Liquidity Facility, to provide such members with large-scale, three-month loans on the basis of preceding strong policy performance indicating the financing difficulties are not home grown. With the IMF now back in the lending business amid this deep crisis and after a lull in recent years, there has been some public speculation about whether the IMF might need a massive increase in its capital.
A few months ago, the IMF had about $200 billion in loanable resources from its normal "quota-based" resources, plus an additional $50 billion as a backstop in times of need, for a total of $250 billion. In addition,
Prior commitments and those in recent weeks to
Our view is that the IMF is well positioned to meet prospective demands from its quota resources. This is not to imply that we should be complacent. History tells us that the unexpected happens and one must prepare contingency scenarios, especially for downward deviations from the baseline scenario. In their Declaration, G-20 Leaders recognized that resource adequacy of the IFIs needs to remain under close review and that resources should be increased if necessary. We completely agree. If a need for additional resources is asserted, though, it will be important for the IMF's leadership to make a credible case to shareholders as to why more money is needed and for what purposes. Further, should such a demonstrated need arise, we think there is a strong chance the need would be temporary, stemming from a once-in-a-generation financial crisis, and thus we think there would be a good case for relying on temporary funding rather than a permanent quota increase. Strengthening the Global Financial System
Another aspect of the IMF's crisis role revolves around global efforts to repair regulation and financial systems and the Fund's proper role.
For many years, the IMF has played an active role on this front. The IMF's Financial Sector Assessment Program (FSAP) has provided invaluable insights to countries around the world with respect to their implementation of standards and codes, stresses faced by their financial systems, and other aspects of regulatory regimes. Indeed, the
Regulation is a national activity, and sound regulation begins at home. But today's markets are global in scope. Also, regulation is generally micro-prudential in nature, yet the sum of the parts of micro-prudential actions clearly can and does have macro-economic and systemic ramifications. So, how does one square these circles? One answer might be to have a new international treaty establishing a global regulator and supervisory body. Yet, in a world in which the nation-state remains the dominant geopolitical actor, it is unlikely that countries would cede regulatory authority to a supra-national authority.
Hence, there is a far greater need for international cooperation among national regulators and for strengthening our understanding of the interface between micro-prudential and macro-prudential issues. Such cooperation is needed to ensure more effective and consistent regulation to protect against adverse cross-border developments affecting global stability and negative spillover effects from one country to another.
The good news is that there are many standard setting bodies (SSBs) where national regulators meet to advance international cooperation – the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, the International Association of Insurance Supervisors, to name just a few. These groups work on micro-prudential regulation and they have intensified their work since the onset of the crisis. The Financial Stability Forum (FSF), created in the wake of the Asian crisis, also acts as an informal hub, pulling together much of the work of standard setting bodies. It has played a very strong role in advancing the international regulatory agenda, particularly since September of 2007, when the G7 countries set forth many tasks for the FSF to coordinate.
The IMF, while lacking a mandate in regulating financial sectors, clearly has a leadership role in macroeconomics and financial sector surveillance and must contribute to making the global financial system stronger and more secure. To that end, it is critical for the future of international financial stability that these micro- and macro-prudential perspectives are successfully woven together. Against this background, the
In short, strong IMF-FSF-SSB collaboration, teamwork and respect for individual mandates, is a pragmatic and sound answer for squaring the circle. The IMF's role in this regard is absolutely vital. Also, to enhance the global legitimacy of the FSF, its membership needs to be broadened on an immediate basis.
The recent Declaration of the Leaders of the Group of Twenty focused heavily on tackling regulatory weaknesses to minimize the chances of a repeat of another crisis. There is much good work underway and much more to do.
IMF Reform Agenda It is essential to the health and resilience of the global economy that the IMF adeptly carry out these crisis-related roles, but it is equally important that the IMF continue root-and-branch reforms to modernize itself and retain its relevance and legitimacy to the international system. This point, as well, was underscored by the Leaders of the G20.
The
Evolving its
First, for the IMF to remain vital, its mission needs to evolve and not just on the global financial crisis.
We well appreciate that exchange rate determination is an inherently complex subject and that exchange rates reflect a host of macroeconomic and microeconomic forces in an economy and the global system. Over the years, the Fund has done an outstanding job in its surveillance work on fiscal and monetary policy issues. Exchange rate analysis had not been conducted with the same vigor, yet it is one of the Fund's most basic tasks to exercise firm surveillance over a member's exchange rate policy. Last year, the Fund recognized the need to intensify its efforts and updated its 30-year old exchange rate surveillance decision. Since that time, the analytical quality, focus and depth of the Fund's exchange rate work has improved significantly. But as stated in a Treasury report to Congress in August, the vital task of making tough judgments and increasing candor and clarity on external stability and exchange rate issues has not yet met with the same success.[1] The IMF itself echoed this finding in its recent Triennial Surveillance Review. We look forward to further progress.
Another area where the IMF has sharpened the focus of its mission is on promoting global financial stability and openness to international investment through its work on sovereign wealth funds. The recent agreement by the International Working Group of Sovereign Wealth Funds on a set of Generally Accepted Principles and Practices (GAAP) was an important and welcome step forward and a credit to the IMF's role as a facilitator.
In addition, macroeconomic stability is a necessary but not sufficient condition for growth in low-income countries, and the Fund has a vital role to play in this regard through its policy advice, technical assistance, and lending as appropriate. The IMF has adapted its tools to better meet the needs of its low-income members. It has strengthened its advice on policy responses to scaled up aid, and food and fuel price volatility. And it has helped break the cycle of over-dependence on Fund lending by providing deep debt relief to highly-indebted poor countries, implementing a new Debt Sustainability Framework, and introduced a non-borrowing "Policy Support Instrument" to untie intensive policy engagement from IMF borrowing. Governance Structure
The second major area for reform is the IMF's governance structure. The
The quota reform deal secured last April, in which the
The
Yet, this leadership position would have been jeopardized by the increase in the nominal size of the Fund, if our nominal quota had not risen commensurately. Accordingly, the Our advocacy for governance reform is not limited to changes in voting weights. In addition, we have sought changes to the Executive Board to make it more effective. A recent analysis by the Fund's Independent Evaluation Office confirmed that the size of the Board is unwieldy. The
Financing Model The IMF relies predominantly on lending income to finance not just lending-related activities but also its global, regional, and bilateral surveillance and technical assistance. While the recent uptick in Fund programs will boost lending income in the short term, IMF lending is subject to wide fluctuations and is projected to be on a downward trend, making IMF finances no longer sustainable. Crises and periods of high Fund lending will periodically occur, but generally stronger emerging market policies and institutions appear likely to put IMF lending (and lending income) on a permanently lower path over the long term.
In response to the steep decline in Fund lending in 2006 and 2007, the Fund initiated a review of its long-term finances by a distinguished external committee led by Andrew Crockett. The Committee had a mandate to propose alternate, sustainable sources of income to meet IMF administrative expenses. At the same time, the
On balance, estimates suggest that the Fund could face budget gaps on the order of $400 million per annum over the longer term. To address the vulnerabilities in the IMF's financing model:
The Need for Congressional Action
These important governance and finance reforms have been set in motion, but cannot be completed without support from the U.S. Congress. Changes in the
Conclusion
This is an important moment for the IMF and its future. The IMF has a critical role to play in the global resolution of the financial crisis. The proposed modernizing reforms will begin the process of making the IMF more representative of the global economy. It is strongly in the
Thank you.
[1] U.S. Treasury; "Report to Congress on Implementation of the International Monetary Fund's 2007 Decision on Bilateral Surveillance over Members' Policies"; August 2008. |
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