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Global financial stability report. Responding to the financial crisis and measuring systemic risk.

Global financial systems show early signs of stabilisation but more action needed says IMF



Authors: ; International Monetary Fund
Publisher: World Economic and Financial Surveys Series , 2009

Full text of document

The global financial system remains under severe stress. This Global Financial Stability report from the IMF comes at a time when the crisis is spreading to households and so individuals all over the world are feeling real effects. Private sector adjustment and public support packages are being implemented contributing to early signs of stabalisation. The report suggests that further policy actions and international coordination is needed to sustain improvements, restore public confidence and normalise conditions in markets.

Immediate policy recommendations include:

  • assessing bank viability and bank recapitalisation quickly and efficiently. The long-term viability of institutions needs to be evaluated accounting for losses to date and expected future losses
  • ‘bad assets’ need to be systematically addressed. Approaches must be implemented in a clear manner and carried out by countries applying the same underlying principles
  • adequate liquidity must be provided to accompany bank restructuring. The funding gap remains large and the structure of national schemes could be made more consistent with each other to improve clarity and reduce frictions
Measures to address the spread of the crisis to emerging market countries and to deal with the risk of protectionism are suggested. Emerging market economies must assure adequate protection against the deleveraging (reduced dependence on borrowed money) and risk aversion of advanced economy investors. Policy coordination across countries is needed to avoid beggar-thy-neighbour treatment as pressure to support domestic lending may lead to financial protectionism.

The global financial system needs to be stabalised. The report notes that policies aimed at the financial sector will be more effective if they are reinforced by appropriate fiscal and monetary policies. One recommendation is to promote fiscal and financial policies that reinforce each other. Another is to use conventional central bank policies to reopen credit and funding markets.

Lessons for creating a more robust global financial system include:
  • defining systemically important institutions and the perimeter of prudential regulation
  • preventing excessive leverage and curbing procyclicality
  • addressing market discipline and information gaps
  • strengthening cross-border and cross-functional regulation
  • improving systemic liquidity management