The Global Financial Crisis: Causes, Policy Response, and Outlook

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The Global Financial Crisis Causes, Policy
Response, and Outlook

• Max Alier
• Resident Representative in Ukraine

The views expressed herein are those of the
author and should not be attributed to the IMF,
its Executive Board, or its management.
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Main Message

• Despite recent economic indicators showing signs
  of an incipient recovery, it is too early to say
  that the economy is out of the woods. A number
  of issues still need attention and an adequate
  solution to these issues will be key in
  determining how fast and how strong we emerge
  from the crisis. In particular, restoring
  solvency of the financial system is key.

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Outline

• A Crisis in the Making
• Macroeconomic Policy Response
• Bringing the Financial System to a Sound Footing
  Dealing with Bank Insolvency
• Outlook

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A Crisis in the Making

• The root cause of the global financial crisis
  can be traced back to the optimism bred by a long
  period of high growth, low interest rates, low
  volatility, and policy failures in
• Financial regulation
• Macroeconomic policies
• Global Architecture

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A Crisis in the Making

• The global financial crisis brought to an end
  the longest period of strong global economic
  growth on record.
• Broadly speaking it was healthy growth
• High productivity growth
• Low inflation
• Low long-term and short-term interes rates

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A Crisis in the Making
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A Crisis in the Making

• However, these benign conditions fed the build
  up of systemic risk. Low interest rates, together
  with increasing and excessive optimism about the
  future, pushed up asset prices, from stocks to
  housing prices.
• Low interest rates and limited volatility
  prompted a search for yield and underestimation
  of risks leading to the creation and purchase of
  ever riskier assets.

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Macroeconomic Policy Response

• The magnitude of the crisis and the clear threat
  of a global financial meltdown prompted a strong
  policy response characterized by an unprecedented
  level of policy coordination across the globe
  involving industrialized countries as well as
  emerging market economies.

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A Crisis in the Making
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Macroeconomic Policy Response

• Fiscal policy was loosened to offset the decline
  in private demand prompted by the balance sheet
  effect resulting from the asset price correction,
  as well as, the deterioration in labor market
  conditions.
• Monetary policy was rapidly loosened, including
  by using non-traditional instruments, to ensure
  an adequate level of liquidity in the financial
  sector and to prevent a collapse of the payment
  system.

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Bringing the Financial System to a Sound Footing

• Beyond the near-term liquidity support needed to
  preserve the financial system, major challenges
  lie ahead
• Dealing with solvency problems and restoring
  credit flows.
• Improving regulatory and oversight frameworks to
  prevent a repetition of current crisis.
• I would like to focus on the first issue. In
  particular, on the frameworks to deal with bank
  insolvency and debt restructuring.

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Bringing the Financial System to a Sound Footing
Bank Insolvency

• The primary objective of the bank insolvency
  framework is to safeguard the stability of the
  financial system.
• Why a special bank insolvency regime?
• A special bank insolvency regime, separate from
  the corporate insolvency, may facilitate timely
  action and provide for consistency between the
  supervisory and insolvency-related functions of
  the banking authorities. It is particularly
  useful where the corporate insolvency regime is
  weak and ineffective.

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Bringing the Financial System to a Sound Footing
Bank Insolvency

• Insolvency proceedings refers to all types of
  official action involving
• the removal of management and/or the imposition
  of limits on/suspension of, the rights of
  shareholders
• assumption of direct control by the banking
  authority or other officially appointed person
• over a bank that has crossed a threshold for
  the commencement of insolvency proceedings.

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Bringing the Financial System to a Sound Footing
Bank Insolvency

• Types of bank insolvency proceedings
• Official administration the purpose is to
  protect the banks assets, assessing its true
  financial condition, and conduction all the
  necessary restructuring operations, or placing
  the bank in liquidation.
• Liquidation proceedings the purpose is to
  maximize the value realization of assets, and an
  orderly and equitable distribution of proceeds to
  creditors. Liquidation results in dissolution of
  the bank as a separate legal entity.

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Bringing the Financial System to a Sound Footing
Bank Insolvency

• Bank restructuring operations should
• minimize the disruption of the financial system
• limit the costs to depositors, other creditors,
  and taxpayers
• aim at addressing the causes and not just the
  symptoms of bank insolvency.

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Bringing the Financial System to a Sound Footing
Bank Insolvency

• Types of bank restructuring operations
• Mergers and Acquisitions
• Purchase-and-Assumption Transactions
• Good-bank/Bad-bank Separation and Bridge Banks
• Publicly Assisted Bank Restructuring

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Bringing the Financial System to a Sound Footing
Bank Insolvency

• Systemic Banking Crises are characterized by
  financial sector distress of such a magnitude
  that it has an adverse in effect on the real
  economy, and usually include
• Severe financial problems in a large part of the
  banking system.
• A system-wide loss in bank asset quality.
• Widespread loss of credit discipline.
• Danger of collapse of the payment and settlement
  systems.

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Bringing the Financial System to a Sound Footing
Bank Insolvency

• Response to systemic banking crises should aim
  at
• Protecting the payment system.
• Limiting the loss of depositor and creditor
  confidence.
• Restoring solvency, liquidity, and stability of
  the banking system.

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Outlook

• There are nascent signs that the world economy
  has bottomed out. Credit and trade flows are
  resuming.
• Particularly encouraging are developments in
  EMs, in particular in Asia and Latin America.
• The IMF has started to revise
• its output growth projections.
• However, the recovery is still
• fragile and large reform agenda
• lies ahead to put the world
• economy on a strong footing.

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Thank you
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