“Macro…, what?!” The New Buzz on Financial Stability

Posted on March 23, 2012 by iMFdirect

José Viñals (l) and Nicolás Eyzaguirre

By José Viñals and Nicolás Eyzaguirre

(Version in Español)

Just a few years ago, “Macro…, what?!” would have been a typical reaction to hearing the technical term that today is the talk of the town among financial regulators.

But in the aftermath of the global financial crisis, macroprudential policy—which seeks to contain systemic risks in the financial system—has indeed come to be an important part of the overall policy toolkit to preserve economic stability and sustain growth.

For example, a number of countries, especially emerging markets, have been relying on macroprudential policies (such as loan-to-value or debt-to-income ratios, or countercyclical loan loss provisions) to rein in rapid credit growth, which—if unchecked—could destabilize the financial system and, ultimately, bring about a recession and drive up unemployment.

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Filed under: Advanced Economies, Africa, Asia, Debt Relief, Economic Crisis, Economic research, Emerging Markets, Europe, Finance, Financial Crisis, Financial regulation, Financial sector supervision, Fiscal policy, growth, IMF, International Monetary Fund, Latin America, Middle East, Multilateral Cooperation | Tagged: , , , , , , | 6 Comments »

IMF Revises Up Its Global Economic Forecast

Posted on January 26, 2010 by iMFdirect

The IMF has revised upwards its forecast for growth in the global economy saying it is recovering faster than previously expected. It  sees world growth bouncing back from negative territory in 2009 to a forecast 3.9 percent this year and 4.3 percent in 2011.

But the recovery is proceeding at different speeds around the world, with emerging markets, led by Asia relatively vigorous, but advanced economies remaining sluggish and still dependent on government stimulus measures, the IMF said in an update to its World Economic Outlook, published on January 26.

IMF Chief Economist Olivier Blanchard says the recovery right now is still very much based on stimulative policies by government, while  IMF Managing Director Dominique Strauss-Kahn has warned that countries risk a return to recession if anti-crisis measures are withdrawn too soon.

The IMF said it had revised upwards its earlier forecast for global growth by ¾ percentage point from the October 2009 forecast.  Along with the update to its forecast, the IMF also released a new assessment of global financial conditions in its Global Financial Stability Report (GFSR). It said that financial markets have rebounded since the lows of last March, the result of improving economic conditions and wide-ranging policy actions by governments.

“Notwithstanding the recent sell-off, risk appetite has returned, equity markets have improved, and capital markets have reopened,” Jose Viñals, Director of the IMF’s Monetary and Capital Markets Department, said.

Filed under: Advanced Economies, Economic Crisis, Economic research, Emerging Markets, Europe, Financial Crisis, Financial regulation, Fiscal Stimulus, IMF, Latin America, recession | Tagged: , , , , , , | 1 Comment »

Too Important to Fail?

Posted on December 8, 2009 by iMFdirect

By José Viñals

Over the past two years, disruptive failures, shotgun marriages, and government bailouts of some household names in the financial industry have placed the age-old issue of “too big to fail” at the center of financial sector policy discussions. As well, the Lehman bankruptcy and government support for AIG extended the “too-big-to-fail” notion from banks to include nonbank financial institutions. And in some cases, the financial institutions in distress were not even particularly big; rather, they were too interconnected, and too important for the functioning of the global financial system, to be allowed to fail.

We need to think about how to deal with such “too-important-to-fail” institutions for at least three reasons. 

  • When institutions are provided with implicit (and explicit) public support, they are apt to take on riskier activities than they otherwise would, with the knowledge that the government will step in if those risks turn out badly. This is called moral hazard. 
  • Well-run institutions are forced to compete with institutions that are implicitly guaranteed—or even directly financially supported—by the government. This makes for an unlevel playing field in the financial sector. 
  • Government support absorbs valuable public resources, arguably at the expense of more equitable and productive public spending; it could also endanger the fiscal stability of a country.

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Filed under: Economic Crisis, Financial Crisis, Financial regulation, recession | Tagged: , , , , , , | 1 Comment »

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