The Global Financial Crisis: What Are We Learning About Policy-Makers

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The Global Financial Crisis What Are We
Learning About Policy-Makers Data Needs?

• Tessa van der Willigen and Pedro Rodriguez
• Strategy, Policy, and Review Department
• IMF

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Outline

• What happened
• Short-term actions
• Better early warning in future
• Data needs
• Disclaimer I may stray outside SNA proper, but
  balance sheets are key...

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What Happened?Background

• Macroeconomic conditions
• Low global interest rates, reflecting large
  external surpluses in key emerging markets and
  easy monetary policy
• Very large increases in asset prices
• Financial sector regulation
• Rapid growth in subprime mortgages in US
• Repackaging into traded structured products

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What Happened?The Crisis

• Correction in the US housing market
• Fall in, and increased uncertainty in, the price
  of structured products
• Financial institutions
• made losses and sold assets
• began to hoard liquidity because of increased
  uncertainty (about values and counterparties)
• reacted sharply to the collapse of Lehman Brothers

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What Happened?International Linkages

• Origins of the crisis in the US
• Spillovers to Europe because of direct exposures
  and declines in wholesale funding
• Emerging markets hit after the collapse of
  Lehman
• The decoupling hypothesis was probably always
  optimistic
• Accelerated deleveraging

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Getting the Crisis Under Control--I

• Restoring confidence in mature financial systems
• Providing short-term liquidity
• Removing damaged assets from banks balance
  sheets
• Recapitalizing banks

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Getting the Crisis Under Control--II

• Dealing with capital flow reversals in emerging
  markets
• Use reserve buffers
• Liquidity support (swap lines with major central
  banks, the IMFs new Short-Term Liquidity
  Facility)
• Adjust as necessary
• Review contingency plans in case of banking
  sector problems

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Getting the Crisis Under Control--III

• Addressing the fiscal consequences of
  intervention in the financial system
• Ensure debt sustainability
• Develop an exit strategy

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Better Early Warning in Future--I

• Better financial stability analysis
• Risks were moved to off-balance sheet vehicles
• Risks moved to a burgeoning superstructure of
  complex marketable products and derivatives and
  became untraceable

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Better Early Warning in Future--II

• Better macroeconomic analysis
• Need better identification of asset price bubbles
• Need a better understanding of how concerned we
  should be about external imbalances
• (e.g., the discrepancies between the development
  of US foreign assets and its current account)

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Better Early Warning in Future--III

• International financial linkages
• We had far too little idea of countries
  exposures to other countries, different kinds of
  institutions, and different kinds of instruments

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Data NeedsFiscal

• Accurate and transparent recording of
• the fiscal costs of intervention in the banking
  sector and implications for public debt
• contingent liabilities

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Data NeedsFinancial Sector

• A big agenda for regulators
• Related, we also need better aggregate financial
  stability analysis
• Considerable efforts in recent years
• Balance sheet analysis
• (the IMFs Standardized Report Forms for Monetary
  and Financial Statistics cover banks, non-bank
  depository corporations, insurance companies,
  pension funds, investment funds, special purpose
  entities, etc.)
• Financial Soundness Indicators
• (Coordinated Compilation Exercise though these
  are lagging indicators)

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Data NeedsFinancial Sector, Ctd.

• Importance of information on
• Off balance sheet entities
• Contingent exposures (derivatives)
• Maturity of liabilities and assets
• Intrasectoral exposures/market structures
• Valuation

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Data NeedsExternal Sector

• We need
• better analysis of the buildup of external
  vulnerabilities and
• better analysis of the potential for
  international spillovers through the financial
  sector.
• Again, considerable efforts in recent years
• initiatives on debt and reserves data after the
  Asian crisis
• Balance of Payments Manual 6th edition, with more
  emphasis on the International Investment Position
  (IIP) and its composition (e.g., maturity,
  currency)
• Coordinated Portfolio Investment Survey
• Coordinated Direct Investment Survey
  (forthcoming)

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Data NeedsExternal Sector, Ctd

• IIP
• Sectoral composition
• Geographical composition
• Currency composition (incl. of reserves)
• Expand CPIS (key countries not covered, annual
  frequency, long lags)
• Valuation issues, esp. of FDI

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Conclusion

• Some themes that may be relevant for SNA
• Balance sheets are indeed crucial
• We need not just their amounts but their
  sensitivities to various developments (for stress
  testing)
• Off balance sheet and contingent exposures are
  crucial
• Aggregation can mask important features
• Valuation issues are very difficult