ECON 1102 Regulatory Institutions of the World Economy

Mr Mark Ho

Group 4:1. Tran Long0007524452. Duan Ming Xuan

0007777133. Shi Peng

Supervision and Crisis management in recent

financial crises

1. Review of Past & Present financial crises2. Criticisms of the effectiveness of IMF’s supervision3. IMF’s response to manage the crises4. Conclusion 5. Recommendations

Content

Group presentation 4: ‘The frequency and severity of recent financial crisis raise doubts about the

effectiveness of the IMF’s supervision and crisis management policies.’ Discuss with the reference to

the continuing market crises from 2008 onwards

Crises and Occurring New Structures are Continuous and Permanent

economic crisis

rapid and dramatic price rise

production reducing expansion

significant unemployment rise

substantial income decrease

sharp securities devaluation

Review of financial crises | Criticisms| IMF’s responses | Conclusion |Recommendations

The Great Depression

19291997

2012-

2013

Asian financial crisis

Icelandic

financial crisis

2008

Greek Governme

nt-debt crisis

2010

Cypriot financial crisis

Review of financial crises | Criticisms| IMF’s responses | Conclusion |Recommendations

Trigger: Unsecured loans to US

home owners

Regulation Failures

Inflated Expectations of Returns

Imprudent in incentive

systems/risk managementMacro-economic

imbalances

Aggravating factors

Weakness in coordination: IMF, World bank, G7Underestimation of

systemic risks

Review of financial crises | Criticisms| IMF’s responses | Conclusion |Recommendations

IMF at a glance

July 1944

responsibilities

promote monetary cooperationpromote exchange

stability assist a multilateral

system of payments

make resources available

188

country members

functionssurveillance

review country policies provide advice to members

conditionalityfinancial support

Criticisms about the effectiveness of the IMF’s supervision & crisis

management policies

Analytical Weaknesse

s

failed to provide early warnings

issues in processes and decision-making

groupthink and other cognitive biases

analytical approaches & knowledge gaps

available data were ignored

or misinterpreted

too focused on bilateral

and ignored multilateral issues

Organizational Weaknesses & Internal Problemsstaff didn’t share information

or seek advice outside of their units

the financial sector

experts were not sufficiently appreciateincentives didn’t foster

the open exchange of ideas

weak accountability

difficult to integrate multilateral with bilateral

surveillance

The governance of the IMF & Political Constraints

IMF’s governance was

dominated by the major members

country authorities could

influence the IMF’s policy initiatives

IMF’s advice on member’s economic

policy was

ignored

Review of financial crises | Criticisms| IMF’s responses | Conclusion |Recommendations

IMF has not implemented its mandate consistently IMF focused exclusively on

inflation targeting, capital flows liberalization

IMF ignored its mandate to sustain growth and employment

IMF opposed capital controls not easy to get IMF’s

emergency loansIMF credit outstanding

was $100 billion in 2005,

but declined to $10 billion in 2008

no longer had a major role as a lender

Review of financial crises | Criticisms| IMF’s responses | Conclusion |Recommendations

Issues in implementation of crisis management policies

Review of financial crises | Criticisms| IMF’s responses | Conclusion |Recommendations

What has the IMF done to enhance its supervision & crisis management

policies?

Boost the lending capacity

increase

quota subscriptions of members

securing large temporary borrowing agreements

from members

total quotas

US$360 billion committed

resources:

US$1 trillion

loans committed

US$226 billion

Review of financial crises | Criticisms| IMF’s responses | Conclusion |Recommendations

Step up crisis lending

IMF lending over SDR 1 billion (in millions of SDRs), October 2008-April 2009.

Source: www.imf.orgReview of financial crises | Criticisms| IMF’s responses | Conclusion |

Recommendations

Iceland Greece Cyprus

$2.1 billion

dramatic tightening of

monetary policy

bank restructuring

stop the fall of the Icelandic krona

240billion euros of bailout loans

radical spending

cuts

tax rises

labour market and pension

reforms

10billion euros bailout

Save the

banking sector

Review of financial crises | Criticisms| IMF’s responses | Conclusion |Recommendations

Changes to the IMF’s conditionality regimes

greater degree of flexibility in the IMF’s approach to crisis management

Rapid Credit Facility (RCF)

Standby Credit Facility (SCF)

Flexible Credit Line (FCL)Colombia, Mexico, and Poland

Precautionary Credit Line (PCL)

Precautionary and Liquidity LineMacedonia and Morocco

granted more policy autonomy to countries with IMF facilities

approved temporary capital controls for member states Review of financial crises | Criticisms| IMF’s responses | Conclusion |

Recommendations

Extended Credit Facility (ECF)

Helping the world’s poorest

sharp increase in concessional lending to low- and middle-

income countries

$3.8 billion in 2009

debt relief amounted to

$268 million in 2010

Review of financial crises | Criticisms| IMF’s responses | Conclusion |Recommendations

sharpening

analyses on linkages between the real economy and the financial

sectormapping the

implications of rising interconnectedness for surveillance and lending working closely with

governments and other international

institutions

Review of financial crises | Criticisms| IMF’s responses | Conclusion |Recommendations

Governance Reforms at the IMF

increase the

importance of emerging markets

a 6% point shift in quota share to emerging and

developing countries

a doubling of quotas

protecting the voting shares of the poorest member a more

representative, fully-elected Executive

Board

Review of financial crises | Criticisms| IMF’s responses | Conclusion |Recommendations

Conclusion

Lessons of Crises for IMF’s supervision and crisis management

the buildup of systemic risk was not adequately

captured by IMF’s surveillance framework

IMF’s legitimacy and relevance has been

underminedIMF’s crisis management responsibilities

expanded with a series of crises

Review of financial crises | Criticisms| IMF’s responses | Conclusion |Recommendations

call for

radical reform of the

Fund

Supervisory Role in the

World Economysetting up global

surveillance systems

an intellectual leader during the crises

policy advice and technical assistance

effortspolicy responses development

better coordination with the international

financial institutions

flexible financial partner

immediate crisis control through lending

global central bank in the future

Review of financial crises | Criticisms| IMF’s responses | Conclusion |Recommendations

strengthen the IMF’s working environment and analytical capacity

improve the follow-up of the IMF’s advice

continuously enhance a

more flexible

approach to crisis management in borrowing members

reinforce IMF’s governance to

fully reflect changes in the world

economyReview of financial crises | Criticisms| IMF’s responses | Conclusion |Recommendations

• Aiginger, K. 2009. ‘The Current Economic Crisis: Causes, Cures and Consequences’, WIFO Working Papers No. 431, August, Osterreichisches Institut für Wirtshaftschung.

• Azar, K. G. and Mansoori, M. (2011) 2008 Economic Crisis Analysis (The Macroeconomic Approach). Urmia: Urmia University.

• BBC (2003) Q&A: Cyprus deal 28 March 2013. Available at: http://www.bbc.co.uk/news/business-21922110 [Accessed 26 March 2013]

• Broome, Andre, 2010, “The International Monetary Fund, Crisis Management and the Credit Crunch,” Australian Journal of International Affairs, Vol. 64, No. 1 (February), pp. 37–54.

• Carey, D. (2009), “Iceland: The Financial and Economic Crisis”, OECD Economics Department Working Papers, No. 725, OECD Publishing. Available at: http://dx.doi.org/10.1787/221071065826 [Accessed 26 March 2013]

• Chojna-Duch, E. (2012) Challenges for the IMF during the financial crisis 2008-2012: The ability to take measures to restore stability of the financial environment. National Bank of Poland, University of Warsaw.

• David, B. (2009) IMF Says It Battled Crisis Well. The Wall Street Journal. September 28; page A14. Available at: http://online.wsj.com/article/SB125409459507644953.html [Accessed 26 March 2013]

• IEO (2011) IMF Performance in the Run-Up to the Financial and Economic Crisis IMF Surveillance in 2004–07. Washington: Independent Evaluation Office of the International Monetary Fund.

• IMF (2013a) Factsheet: The IMF at a glance. March 29, 2013. Available at: http://www.imf.org/external/np/exr/facts/glance.htm[Accessed 25 March 2013].

• IMF (2013b) Factsheet: IMF’s Response to the Global Economic Crisis. March 29, 2013. Available at: http://www.imf.org/external/np/exr/facts/glance.htm[Accessed 26 March 2013].

• IMF (2013b) Factsheet: IMF Lending. April 2, 2013. Available at: http://www.imf.org/external/np/exr/facts/howlend.htm [Accessed 26 March 2013].

References

Thank you for listening