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

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

3 Lessons from the crisis Financial regulation Financial regulation Macroeconomic policies Macroeconomic policies Global financial architecture Global financial architecture Initial Lessons from the Crisis ( Lessons from the Crisis for Future Regulation ( Lessons of the Crisis for the Global Architecture ( Lessons of the Global Crisis for Macroeconomic Policy (

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

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

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

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

International financial surveillance: 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 (FSAP) Financial Sector Assessment Program (FSAP) 8

Better tools, greater flexibility Greater focus on crisis preparedness crisis management frameworks Greater focus on crisis preparedness crisis management frameworks Improved stress testing techniques Improved stress testing techniques Emphasize data gaps/caveats Emphasize data gaps/caveats Focus on liquidity risks Focus on liquidity risks Capture cross-market, cross-country exposure Capture cross-market, cross-country exposure More flexible FSAPs More flexible FSAPs More focused “modular” stability assessments, higher frequency More focused “modular” stability assessments, higher frequency 9

New forms of IMF engagement European Bank Coordination Initiative European Bank Coordination Initiative Cooperation with FSB and financial sector standard-setters (EWE, revisions to standards) Cooperation with FSB and financial sector standard-setters (EWE, revisions 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? 10

11 Thank you

12 Standard capital inflow surge financing an investment and growth boom…

13 …while macro policies were insufficiently countercyclical…

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

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

16 The importance of leverage

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

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

19 European Bank Coordination Initiative