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G20-IMF-FSB Update - March 26, 2010

By Adam S. Hersh

March 26, 2010

Show Us the Money

In 2009, the G-20 committed US$750b in new resources for the IMF (pdf). After pledging $500b through the IMF's New Agreements to Borrow at the G-20 meeting in September 2009, the G-20 countries plus some others met in November to hammer out the details of delivering these funds to the IMF. (An additional $250b was raised by a new issuance of SDRs in August 2009).

G-20 Funds Delivered from New Agreements to Borrow and Other Funds Supplied

2010

2009

So, G-20 countries and others have largely delivered on their commitments to bolster IMF resources to fight the global economic crisis. New resources from the G-20 were directed specifically toward alleviating problems arising from the global economic crisis--to provide financing no longer readily available from international capital markets and to support countries adversely affected by external demand shocks owing to the global recession. In addition, the G-20 directed and the IMF pledged specifically to expand quantity limits and terms for concessional lending to low income countries. But how much of the new resources is reaching countries in need?

Overall, it is difficult (if not impossible) to discern which IMF lending activities are attributable to the new resources committed by G-20 countries and which are continuations of lending from existing resources and programs. Clearly, any lending originating before the November 2008 G-20 summit is unrelated to the G-20's directives or commitment of resources. I attempt to identify the lending decisions specifically highlighting additional needs or exceptional circumstances directly related to the global economic crisis. In these cases, the IMF cites modification of performance criteria, revisions to the quantity of credit provided, or changes to the disbursement schedule or loan terms. The IMF reports new lending of US$5b to sub-Saharan Africa in 2009.

The IMF's Flexible Credit Line (FCL) provides a source of credit ex ante to qualifying countries to be drawn upon as necessary or on a precautionary basis. The IMF's Extended Credit Facility (ECF) is intended to provide concessional financial assistance supporting balance of payments problems in low-income countries. The ECF replaces the Poverty Reduction and Growth Facility (PRGF) and is financed under the Poverty Reduction and Growth Trust (PGRT). Eligibility for concessional lending under the ECF is determined per capita income levels commensurate to World Bank IDA thresholds as well as potential near-term risks. Countries qualifying for the ECF/PRGF may also qualify for access to the IMF's Exogenous Shocks Facility (ESF), intended to help low income countries experiencing temporary economic shocks from events originating outside their national economies (e.g. world commodity price shocks, natural disasters, lost demand due to economic crises in other countries, etc.). The ESF carries an initial no-interest period, followed by 0.25 percent with a ten year term.

Under the Flexible Credit Line

2009

Under the Extended Credit Facility

2010

2009

2008

 

Under Stand-By Agreements

2010

2009

2008

Of the US$750b of new resources committed by the G-20, I identify total lending supplied under these facilities: US$156.27b. (Note: The total amount expressed in dollar terms will vary due to US$/SDR and Euro/SDR exchange rates).

IMF Updates Data Dissemination Standards to Cover Financial Soundness Indicators

Work to improve the quality, timeliness, standardization, and availability of economic data is a mundane and thankless--though important--job. While valuable in its own right, arduous efforts at international cooperation to improve information reporting and disclosure have not succeeded in mitigating pervasive international financial crises. Nor will they. After all, information on the aberrant appreciation of housing prices int 2000s against a decades-long level price trend, or information about the vast inflation of stock valuations in the late 1990s were readily available for anyone who cared to look.

Since the Asian financial crisis of 1997-98, the IMF and other international bodies have been working to improve and expand the availability of information through a set of Special Data Dissemination Standards. In 2001, the IMF compiled a set of financial soundness indicators (FSIs) (pdf) to provide objective measures for monitoring financial system soundness. The identifiedcore FSIs cover a range of measures pertaining to the health of banking systems--regulatory capital, nonperforming loans, return on assets, liquidity, and sectoral, maturity, and foreign currency exposures of assets--and a broader set of encouraged indicators. Now, in 2010, the IMF will incorporate these core FSIs into its data standards.

While incorporation of FSIs into international data reporting systems has been a decade-long project, the G-20 also encouraged the IMF to work on data improvement and standardization. In 2009, the IMF, BIS, and European Central Bank released through joint effort a Handbook on Securities Statistics, 2009 (pdf). The G-20 countries themselves recently began sharing their statistics online to enable monitoring of economic and financial developments in these economies.

How much will the new FSIs improve monitoring and management of financial stability? Not as much as we would hope. The evidence is that these indicators of the financial system are procyclical, showing improvement in financial booms, but masking the accumulation of underlying risk and financial fragility revealed in the deterioration of these indicators only when the economy turns to bust. For example, the ratio of nonperforming loans will decline in a credit boom-fueled economic expansion. But improvement in this indicator can mask the fact that banks are over-extending loans that will become nonperforming in the future when boom conditions ease. Similarly, return on assets should increase during an expansion when there are many (apparent) profitable lending opportunities, but can plunge when the expectations of those opportunities go unrealized in a contraction. Monitoring nonperforming loans or return on assets indicators does not provide a reliable real time or forward-looking assessment of financial system soundness. Nor do these indicators help policymakers discriminate between healthy, sustainable real economic expansions and unhealthy, speculative-led expansions.

Counterstrike Against Countercyclical Financial Regulation

Proposals for "dynamic provisioning" are on the way out, according to Tony Jackson of the Financial Times. Dynamic provisioning is a variant of the countercyclical capital reserve requirements under discussion at the FSB and Basel Committee (see Section 3.2 - pdf) that would dampen the exuberance of credit booms and leave banks better positioned to withstand credit busts. The Basel Committee's December 2009 consultative document, "Strengthening the resilience of the banking sector" explored countercyclical capital buffers at length, hailed them as a foundation for a more stable banking system, and slated proposals for further development and assessment to be reported at their July 2010 meeting.

At the same time that the BIS (convening a number of central bankers) was recommending regulatory policies to curb procyclicality in financial markets, Jackson observes of countercyclical dynamic provisioning:

Last week the UK's chief financial regulator Lord Turner - not normally a man shy of his views - went cool on the idea. So did the head of the International Accounting Standards Board. Meanwhile, both the Basel Committee and the European Commission, I am told, are quietly backing away.

Though the Basel Committee highlights countercyclical capital buffers are "common sense best practices" for financial institutions to pursue, the reality is that the practice will often be inconsistent with the profit-maximizing behavior of financial institutions as well as strategic decisions about corporate governance and control. Building countercyclical capital buffers would require financial institutions to lend less and to hold more resources in low-yielding reserves at precisely the time when lending appears most profitable. Failure to maximize short term profits (relative to competitors) would likely adversely affect share prices, exposing the financial institution to take-over and curbing benefits of share ownership and stock options enjoyed by executives and managers. Thus, in addition to pursuing strategies that minimize holdings of low-yielding reserves, executives face incentives to prop up share prices by distributing dividends and by using the financial institution's resources for share buy-backs. Indeed, such practices have been prevalent in the present crisis even in financial institutions receiving government bail-outs. Hoping that financial institutions will voluntarily adhere to these common sense best practices when the incentives of the current regulatory regime are lined up against such behavior is not a prudent approach to ensuring systemic financial stability.

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