Lessons from the Crisis for International Financial Surveillance Dimitri G Demekas Assistant Director Monetary & Capital Markets Department, IMF

Lessons from the crisis What have SE European countries learned? International financial surveillance What has the IMF learned?

Lessons from the crisis Financial regulation Macroeconomic policies Global financial architecture Initial Lessons from the Crisis (http://www.imf.org/external/pp/longres.aspx?id=4315) Lessons from the Crisis for Future Regulation (http://www.imf.org/external/np/pp/eng/2009/020409.pdf) Lessons of the Crisis for the Global Architecture (http://www.imf.org/external/np/pp/eng/2009/021809.pdf) Lessons of the Global Crisis for Macroeconomic Policy (http://www.imf.org/external/np/pp/eng/2009/021909.pdf)

Lessons from the crisis I Financial regulation Perimeter (regulation, information) Procyclicality (accounting, regulation) Prudential rules (capital requirements, liquidity, risk management, macro-prudential factors) Corporate governance practices (information disclosure, executive compensation)

Lessons from the crisis II Macroeconomic policy Bubbles Leverage Countercyclical policies: macro only or macro-and-prudential?

Lessons from the crisis III Global financial architecture Cooperation in regulation, bank resolution, systemic liquidity Improved surveillance, especially of systemically important countries IMF governance and mandate

What lessons matter for SE Europe? What have we learned from SE Europe? Procyclicality in policy and regulation Capital requirements, liquidity rules The importance of leverage Regional contagion, regional cooperation

International financial surveillance: What has the IMF learned? IMF surveillance instruments: Multilateral surveillance (WEO, GFSR) Bilateral surveillance (Article IV consultation) Financial Sector Assessment Program (FSAP)

Better tools, greater flexibility Greater focus on crisis preparedness crisis management frameworks Improved stress testing techniques Emphasize data gaps/caveats Focus on liquidity risks Capture cross-market, cross-country exposure More flexible FSAPs More focused “modular” stability assessments, higher frequency

New forms of IMF engagement European Bank Coordination Initiative Cooperation with FSB and financial sector standard-setters (EWE, revisions to standards) Input to FSB and G-20 “peer reviews” New forms of multilateralism?

Thank you

Standard capital inflow surge financing an investment and growth boom…

…while macro policies were insufficiently countercyclical…

… and prudential rules were procyclical. Higher profitability: lower provisioning Higher growth: lower provisioning

The importance of capital and liquidity buffers Croatia’s “unorthodox” measures 2003-07 Marginal reserve requirement on foreign borrowing by banks at 55% Reserve requirement at 17% Fx liquid asset requirement at 32% Credit controls …did not help slow credit growth, but provided buffers when the crisis hit eliminated reduced to 14% reduced to 20%

The importance of leverage

Regional aspects of the crisis CESE: Asset share of foreign-owned banks, in percent TSI TMO 12 12 12 T-Com

Regional aspects of the crisis RAIF = Raiffeisen; ERST = Erste; UNIC = Unicredit; ISP = Intesa Sanpaolo; SG = Societe Generale

European Bank Coordination Initiative