The Global Financial Crisis What Are We Learning

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

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...

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

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

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

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

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 IMF’s new Short-Term Liquidity Facility)‏

Adjust as necessary

Review contingency plans in case of banking sector problems

Getting the Crisis Under Control--III

Addressing the fiscal consequences of intervention in the financial system

Ensure debt sustainability

Develop an exit strategy

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

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)‏

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

Data Needs—Fiscal

Accurate and transparent recording of

the fiscal costs of intervention in the banking sector and implications for public debt

contingent liabilities

Data Needs—Financial Sector

A big agenda for regulators

Related, we also need better aggregate financial stability analysis

Considerable efforts in recent years:

Balance sheet analysis

(the IMF’s 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)‏

Data Needs—Financial Sector, Ctd.

Importance of information on:

Off balance sheet entities

Contingent exposures (derivatives)‏

Maturity of liabilities and assets

Intrasectoral exposures/market structures

Valuation

Data Needs—External 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 6 th edition, with more emphasis on the International Investment Position (IIP) and its composition (e.g., maturity, currency)‏