Lessons from the Crisis Lessons from the Crisis for International Financial Surveillancefor International Financial Surveillance

Dimitri G DemekasDimitri G DemekasAssistant DirectorAssistant Director

Monetary & Capital Markets Department, IMFMonetary & Capital Markets Department, IMF

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Lessons from the crisisLessons from the crisis What have SE European countries learned?What have SE European countries learned?

International financial surveillanceInternational financial surveillance What has the IMF learned? What has the IMF learned?

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Lessons from the crisisLessons from the crisis Financial regulationFinancial regulation Macroeconomic policiesMacroeconomic policies Global financial architectureGlobal financial architecture

Initial Lessons from the CrisisInitial Lessons from the Crisis((http://

www.imf.org/external/pp/longres.aspx?id=4315))Lessons from the Crisis for Future RegulationLessons from the Crisis for Future Regulation

((http://www.imf.org/external/np/pp/eng/2009/020409.pdf))Lessons of the Crisis for the Global Lessons of the Crisis for the Global ArchitectureArchitecture

((http://www.imf.org/external/np/pp/eng/2009/021809.pdf))Lessons of the Global Crisis for Macroeconomic Lessons of the Global Crisis for Macroeconomic PolicyPolicy

((http://www.imf.org/external/np/pp/eng/2009/021909.pdf))

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Lessons from the crisis ILessons from the crisis I

Financial regulationFinancial regulation Perimeter (regulation, information)Perimeter (regulation, information) Procyclicality (accounting, regulation)Procyclicality (accounting, regulation) Prudential rules (capital requirements, liquidity, Prudential rules (capital requirements, liquidity,

risk management, macro-prudential factors)risk management, macro-prudential factors) Corporate governance practices (information Corporate governance practices (information

disclosure, executive compensation)disclosure, executive compensation)

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Lessons from the crisis IILessons from the crisis II

Macroeconomic policyMacroeconomic policy BubblesBubbles LeverageLeverage Countercyclical policies: macro only or Countercyclical policies: macro only or

macro-and-prudential?macro-and-prudential?

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Lessons from the crisis IIILessons from the crisis III

Global financial architectureGlobal financial architecture Cooperation in regulation, bank resolution, Cooperation in regulation, bank resolution,

systemic liquiditysystemic liquidity Improved surveillance, especially of Improved surveillance, especially of

systemically important countriessystemically important countries IMF governance and mandateIMF governance and mandate

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What lessons matter for SE Europe?What lessons matter for SE Europe?What have we learned from SE Europe?What have we learned from SE Europe?

Procyclicality in policy and regulationProcyclicality in policy and regulation Capital requirements, liquidity rulesCapital requirements, liquidity rules The importance of leverageThe importance of leverage Regional contagion, regional Regional contagion, regional

cooperationcooperation

International financial surveillance:International financial surveillance:What has the IMF learned?What has the IMF learned?

IMF surveillance instruments:IMF surveillance instruments: Multilateral surveillance (WEO, GFSR)Multilateral surveillance (WEO, GFSR) Bilateral surveillance (Article IV consultation)Bilateral surveillance (Article IV consultation) Financial Sector Assessment Program Financial Sector Assessment Program (FSAP)(FSAP)

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Better tools, greater flexibilityBetter tools, greater flexibility Greater focus on crisis preparedness Greater focus on crisis preparedness

crisis management frameworkscrisis management frameworks Improved stress testing techniquesImproved stress testing techniques

Emphasize data gaps/caveatsEmphasize data gaps/caveats Focus on liquidity risksFocus on liquidity risks Capture cross-market, cross-country exposureCapture cross-market, cross-country exposure

More flexible FSAPsMore flexible FSAPs More focused “modular” stability assessments, More focused “modular” stability assessments,

higher frequencyhigher frequency

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New forms of IMF engagementNew forms of IMF engagement

European Bank Coordination InitiativeEuropean Bank Coordination Initiative Cooperation with FSB and financial Cooperation with FSB and financial

sector standard-setters (EWE, revisions sector standard-setters (EWE, revisions to standards)to standards)

Input to FSB and G-20 “peer reviews”Input to FSB and G-20 “peer reviews” New forms of multilateralism?New forms of multilateralism?

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Thank youThank you

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Standard capital inflow surgeStandard capital inflow surgefinancing an investment and growth boom…financing an investment and growth boom…

Capital inflows ($ million), emerging Europe, 2003-2007

0

50000

100000

150000

200000

250000

300000

2003 2004 2005 2006 2007

Bank loans

Portfolio investment: bonds

Portfolio investment: equity

Direct investment

Source: IMF, International Financial Statistics

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……while macro policies were insufficiently while macro policies were insufficiently countercyclical…countercyclical…

Government Balance/GDP for Emerging Europe Countries

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

2000 2001 2002 2003 2004 2005 2006 2007 2008

(in percent)

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… … and prudential rules were procyclical.and prudential rules were procyclical.

Higher profitability: lower provisioning

Higher growth: lower provisioning

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The importance of capital and liquidity buffersThe importance of capital and liquidity buffers

Croatia’s “unorthodox” measures 2003-07Croatia’s “unorthodox” measures 2003-07 Marginal reserve requirement on foreign borrowing Marginal reserve requirement on foreign borrowing

by banks at 55% by banks at 55% Reserve requirement at 17%Reserve requirement at 17% Fx liquid asset requirement at 32%Fx liquid asset requirement at 32% Credit controlsCredit controls

……did not help slow credit growth, but did not help slow credit growth, but provided buffers when the crisis hitprovided buffers when the crisis hit

eliminated

reduced to 14%

reduced to 20%

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The importance of leverageThe importance of leverage

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Regional aspects of the crisisRegional aspects of the crisis

TSI

T-Com

TMO 121212

0

10

20

30

40

50

60

70

80

90

100

ES

T

SV

K

B&

H

MN

E

LT

H

HR

V

AL

B

RO

M

CZ

E

HU

N

BG

R

SR

B

PO

L

LT

A

MK

D

UK

R

SV

N

RU

S

2000 2006

Source: European Bank for Reconstruction and Development; and IMF staff calculations.

CESE: Asset share of foreign-owned banks, in percent

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Share of Emerging Europe in total group assets and operating income

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

OTP RAIF ERST UNIC KBC ISP SG

AssetsOperating income

Source: Annual reports of banking groups. Societe Generale: Net banking income.

RAIF = Raiffeisen; ERST = Erste; UNIC = Unicredit; ISP = Intesa Sanpaolo; SG = Societe Generale

Regional aspects of the crisisRegional aspects of the crisis

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-25

-20

-15

-10

-5

0

5

10

15

20

25L

atv

ia

Se

rbia

Ro

ma

nia

Hu

ng

ary

Bo

sn

ia

Ru

ssia

Ukra

ine

Tu

rke

y

Po

lan

d

Be

laru

s

Esto

nia

Ma

ce

do

nia

Cro

atia

Mo

ldo

va

Bu

lga

ria

Lith

ua

nia

Mo

nte

ne

gro

Alb

an

ia -25

-20

-15

-10

-5

0

5

10

15

20

25

Source: BIS, Locational Banking Statistcs, Table 6a.

EBCI Countries

Changes in External Positions of Western Banks in Eastern European Countries (from September 2008 to March 2009; in percent) 1/

European Bank Coordination InitiativeEuropean Bank Coordination Initiative