Financial Sector Surveillance and the IMF

Abstract

The global financial crisis has magnified the role of Financial Sector Surveillance (FSS) in the Fund's activities. This paper surveys the various steps and initiatives through which the Fund has increasingly deepened its involvement in FSS. Overall, this process can be characterized by a preliminary stage and two main phases. The preliminary stage dates back to the 1980s and early 1990s, and was mainly related to the Fund's research and technical assistance activities within the process of monetary and financial deregulation embraced by several member countries. The first "official" phase of the Fund's involvement in FSS started in the aftermath of the Mexican crisis, and relates to the international call to include financial sector issues among the core areas of Fund surveillance. The second phase focuses on the objectives of bringing the coverage of financial sector issues "up to par" with the coverage of other traditional core areas of surveillance, and of integrating financial analysis into the Fund's analytical macroeconomic framework. By urging the Fund to give greater attention to its member countries' financial systems, the international community's response to the global crisis may mark the beginning of a new phase of FSS. This Working Paper should not be reported as representing the views of the IMF.

Lagged Learning and the Response to Equilibrium Shock: The Global Financial Crisis and IMF Surveillance

“…Although the Fund carries out the surveillance task since the time of its creation, its systematic involvement in financial sector surveillance is relatively new because it can be traced back to the 1994 Mexican and 1997–98 Asian financial crises (Gola and Spadafora 2009: 3). Both crises offered a conspicuous example of the implications of weak financial systems and of the speed with which financial vulnerabilities spread across the globe 9.…”

“…This has been done in two steps. First, IMF research showed that the potential connection between financial sector policies and financial crises identifying the major sources of risks (Gola and Spadafora 2009: 10–2). Second, internal studies started connecting financial sector surveillance with a systemic focus.…”

“…In particular, a number of reforms contributed to converting IMF staff expertise towards financial surveillance. For instance, in April 2002 the Board approved a measure according to which Article IV mission teams, whose members usually come from area departments,14 would have been reinforced by deploying staff coming from financial sector departments such as the Monetary and Exchange Affairs Department (MFD) or the International Capital Market Department (ICMD) (Gola and Spadafora 2009: 50–1). The ICMD, in turn, was itself created in 2001 to strengthen ‘the Fund's conceptual work related to the international financial system and to capital market’ 15…”

International organizations and organizational fields: explaining policy change in the IMF

“…The changes to the Fund's surveillance that led the organization to focus on domestic financial sector policies can be traced back to the period that followed the 1994 Mexican crisis. Although the Fund had already been involved with financial sector surveillance since the 1980s, through the publication of regular reports and analyses, the Mexican crisis provided the catalyst for expanding the scope of that surveillance (Gola and Spadafora, 2009: 3). In particular, the crisis offered a conspicuous example of the implications of weak financial systems and of the speed with which financial vulnerabilities spread across the globe.…”

“…In particular, the recognition of the importance of financial sector issues to macroeconomic stability did not find an outright application in IMF surveillance practices because the Fund's long-standing experience and routines for macroeconomic surveillance slowed down the development of financial sector surveillance. For instance, in order to guide IMF staff members’ approaches to financial sector issues, the organization adopted the so-called ‘macroeconomic relevance test’ (Gola and Spadafora, 2009: 45). That is to say, staff members were expected to cover non-core issues such as financial sector issues in their analyses only to ‘the extent to which they actively and directly impinge upon the effective conduct of macroeconomic policy’ (IMF, 1999: 63).…”