Guy Quaden: Modernising IMF surveillance
Intervention by Mr Guy Quaden, Governor of the National Bank of Belgium, at the
International Monetary Fund-Monetary Authority of Singapore (IMF-MAS) Conference
"The IMF and the international financial system: the post crisis agenda", Singapore,
24 September 2010.
* * *
First of all, I would like to thank the Monetary Authority of Singapore and the IMF for inviting
me to contribute to this high-level conference.
The world economy has changed in important ways. Capital flows now dwarf trade flows.
Many economies are now integrated into world capital markets. Financial sectors have
become more interconnected and a channel for rapid transmission of crises across regions
and at a global level. This requires Fund surveillance (in other words its crisis prevention
role) to adapt both in substance (what surveillance should do) and modalities (how to do it).
I would like to focus on three major topics:
1. the analysis of financial sector stability must be strengthened both at global and
country level;
2. bilateral surveillance must be complemented with multilateral surveillance;
3. the so-called traction of Fund surveillance - the ability and willingness of countries
to heed Fund advise - must be improved.
Let me elaborate.
Financial sector stability issues
The international community has drawn many important lessons from the recent financial
crisis. Implementing the needed changes has only just begun.
The Basel III Agreement, reached only recently, is a major step to make the banking sector
more stable and better equipped to absorb losses. It is only a first step. Improving capital
adequacy primarily focuses on the stability of individual banks. It is foremost an instrument of
micro-prudential regulation. Compliance of individual banks with prudential regulations does
not assure the stability of the system as a whole. Macro-financial stability concerns must be
kept under constant review and addressed by national institutions - the central banks - with
a clear mandate. In the European Union, the European Systemic Risk Board will be
established next year and assume an important role at EU-wide-level. However, the
implementation of its recommendations will remain largely the responsibility of national
authorities. I see an evident parallelism and potential for synergy between the surveillance
mandate of the ESRB and IMF surveillance, the latter remaining broader in scope.
After a series of national and regional crises (Mexico, Asia, Russia, ...) the IMF Board
adopted in 2000 a Financial Sector Assessment Program. The Fund would at regular
intervals (of 3 to 5 years) conduct an in depth evaluation of the vulnerabilities of a country's
financial sector and the adequacy of prudential regulation and surveillance. However, the
membership could not agree, in a straightforward manner, that financial sector stability was
an integral part of Fund surveillance, and therefore mandatory. The technical assistance
nature of FSAPs was used by some countries to argue that the Fund should prioritise its
resources to countries less equipped to conduct sound financial sector policies. As a
consequence, some major systemically important financial sectors that proved very
vulnerable did not undergo a timely and sufficiently in-depth scrutiny.
Last Tuesday, the IMF Board decided that the 25 countries with a systemically important
financial sector will undergo at least every 5 years an in-depth assessment of their financial
sector. Moreover, the Board has stressed that financial sector policies are important in all
cases of bilateral surveillance. This is a significant progress.
Multilateral surveillance
Bilateral surveillance, understandably, focuses on how national policies must be conducted
in the country's best interest. The premise is simple: if each country achieves internal stability
and a sustainable external position without manipulating exchange rates, the system as a
whole will function satisfactorily. While this remains largely valid, trade and financial
integration and economic interdependence are now so far advanced that national economic
interests must be pursued in a shared framework of collective stability. National policies
pursued in the country's own best (short term) interest might not be collectively consistent.
The problem of the persistent global imbalances is an important example. To complement
bilateral surveillance, the Fund must formulate policy-oriented advice on how to improve the
coherence of national policies toward improved collective stability and sustainable global
growth.
A promising proposal that has been floated recently is the production of spillover reports. It is
to be welcomed that the Fund plans to prepare, on a trial basis over the next year, at least
three spillover reports for the US, the euro area and China. These reports will focus on
outward spillovers of domestic policies of these economies and would involve not only the
authorities of these economies (akin to the contact for the regular Article IV consultations) but
also the authorities of the economies affected by the policies.
The launch of the first Mutual Assessment Process (MAP) by the G20, in collaboration with
the IMF, is a new attempt at multilateral cooperation and coordination. Given the potential
benefits, this objective should be pursued with determination. However, the effectiveness of
the G20 process still needs to be demonstrated going forward. Moreover, many special
topics affecting groups of countries that may include non-G20 members or only a few of the
G20 members will remain uncovered in that G20 process. The IMFC could provide a forum
for addressing these issues.
Prioritization and collaboration
The improvement of surveillance will require adequate resources and Fund members should
not withhold them. But it is obvious that choices will have to be made among a very wide
range of ideas; and priorities will have to be set. This should happen taking into account in
particular the effectiveness and cost of each proposal and the work done by other
international institutions.
When considering the creation of IMF surveillance products, sufficient attention should be
devoted to the integration of these products in the overall IMF surveillance framework in
order to maximise the effectiveness of and the synergy among all these products. The Fund
has indeed already a large array of surveillance instruments (at bilateral, regional and
multilateral level: Article IV, FSAPs, WEO, GFSR, REO, EWE, Vulnerability Exercises in
EMs, Multilateral Consultations ...) which are the result of its efforts to keep its relevance in a
changing world.
At the same time, close cooperation with other international institutions and fora is essential,
taking due account of comparative advantages and expertise, and avoiding duplication of
efforts. Regarding, for instance, financial stability surveillance, the IMF and the FSB work
together on the Early Warning Exercise and on systemically important financial institutions.
Nevertheless, there remains probably room to improve further the coordination of their
activities. In retrospect, we have to admit that the record of both the FSF and the IMF was
less than perfect. The Fund has also to collaborate efficiently with the Basel institutions: with
the BIS, that produces high-quality macrofinancial research, and with the Basel Committee
on Banking Supervision, given that it has much responsibility for micro-financial issues.
Another proposal which is gaining attention is to tailor further the content and frequency of
the surveillance process according to the specific circumstances of each member country,
and thus also according to the systemic importance of the country concerned. While I can
certainly see merit in this proposal, it should be kept in mind that surveillance is important for
all countries and that all members have the right to receive adequate policy advice during
regular Article IV consultations. Tailoring consultations to specific circumstances should not
lead to diverging surveillance quality for different categories of members.
Traction of Fund surveillance
I come to my last topic: the so-called traction of Fund surveillance.
With highly competent economic analysts in central banks and governments in most
countries, some have questioned the usefulness of Fund surveillance. Such is not my view.
The added value of Fund surveillance rests on the political independence of the Fund
opinion. Like independent central banks, Fund experts put longer term considerations above
short term political calculus. In doing so, the Fund steers policy makers toward more honesty
and boosts the government's ability to implement often politically difficult reforms.
There is a debate about how transparency can help improve traction of Fund surveillance.
Prior to the Mexican crisis in 1994, IMF surveillance reports were highly confidential. Today,
all Article IV reports, with a few exceptions, are available on the Fund's website. For the
Fund, the challenge in this context, is to be perceived as an impartial advisor and monitor,
not too tied by its structure to the official view in which problems are downplayed1.
Let's be frank. The IMF must indeed avoid public clashes about short term emergencies. On
this, candid analysis is only acceptable if treated with the needed degree of confidentiality.
Full and unfettered transparency could on the contrary induce complacency and a loss of
credibility for the Fund. However, at the same time, the IMF must become more pro-active in
persuading public opinion, social partners, and NGOs of the long-term costs of unadjusted
policies and of the long-term gains that will outweigh short-term pain. Explanation by a
credible international institution that promotes a global common good, might find more
support from the public for long-term objectives than politicians believe there is.2
Much has been said and written on improving the governance of the IMF and enhance
ministerial involvement. Many observers conclude that nothing really happens at the
international meetings of the IMF and the World Bank. This perception is not entirely
unfounded. As I see it, the central task of ministers and governors meeting in the IMF is to
seriously discuss policy-oriented multilateral surveillance reports. This is a task that the IMF
Executive Board can only prepare. In the end, it is up to the policymakers at the highest level
to agree on how consistency among their policies can be promoted, and policy coordination
improved. Pursuing these objectives will elevate the level of ambition of Fund surveillance
and the cooperation of its members to a higher level than that exists now. Today's
conference should advance our ambition.