Financial Sector Surveillance And The Mandate Of The Fund

This paper reviews the Fund’s liquidity position. The review covers the Fund’s financial activities for the period September 11, 2009 through March 31, 2010, and also discusses recent developments likely to influence the Fund’s liquidity position. Against this backdrop, it examines the outlook for liquidity using the one-year Forward Commitment Capacity (FCC), the primary measure of the Fund’s liquidity, which is calculated taking into account supplementary resources made available under borrowing arrangements, including note purchase agreements.

The global financial crisis has magnified the role of Financial Sector Surveillance (FSS) in the Fund's activities. This paper surveys the various steps and initiatives through which the Fund has increasingly deepened its involvement in FSS. Overall, this process can be characterized by a preliminary stage and two main phases. The preliminary stage dates back to the 1980s and early 1990s, and was mainly related to the Fund's research and technical assistance activities within the process of monetary and financial deregulation embraced by several member countries. The first "official" phase of the Fund's involvement in FSS started in the aftermath of the Mexican crisis, and relates to the international call to include financial sector issues among the core areas of Fund surveillance. The second phase focuses on the objectives of bringing the coverage of financial sector issues "up to par" with the coverage of other traditional core areas of surveillance, and of integrating financial analysis into the Fund's analytical macroeconomic framework. By urging the Fund to give greater attention to its member countries' financial systems, the international community's response to the global crisis may mark the beginning of a new phase of FSS.

The paper reviews the adequacy of the Fund’s precautionary balances and proposes a more transparent and rules-based framework for adjusting the precautionary balance target through time. The framework seeks to provide sufficient flexibility to capture the main elements considered relevant by the Board in the past when setting the target and draws on approaches followed by other IFIs, adapted to the particular circumstances of the Fund.

This paper reviews the status of financing for the Fund’s concessional lending and debt relief activities for low-income countries (LICs). It is based on the latest available data and projections, and it takes into account the commitments made so far in response to the Managing Director’s fund-raising request of August 2009. The paper is organized as follows. Section II summarizes: (i) the comprehensive reforms of the Fund’s concessional lending instruments and the associated financing framework that have become effective since the last review; and (ii) the measures that the Board recently endorsed to facilitate the needed mobilization of loan resources. Section III on the financing of PRGT operations begins by reviewing the projected financing needs established in July 2009 in light of recent commitments under the PRGT, and then considers the status of loan and subsidy resources, before discussing developments in the PRGT Reserve Account. Sections IV and V provide updates on the subsidization of emergency assistance and the financing of debt relief under the HIPC and MDRI.

This paper, and a companion piece on legal aspects “The Fund’s Mandate—The Legal Framework,” is the first in a series of reflections on the Fund’s mandate—on what it should be doing to promote global stability and how the membership might support that process. At this stage, the aim is not to put forward concrete proposals but to float ideas with a view to stimulating a broader debate. Follow up papers, based on feedback from the Executive Board and public outreach, are planned ahead of the final report to the IMFC in September.

This paper outlines strategic priorities for the IMF’s financial surveillance in the coming years. It complements recent discussions on the work agenda in this area. It takes stock of innovations and gaps in financial surveillance by the Fund during the past decade, including in the wake of the current global financial crisis. It proposes concrete and prioritized steps to further strengthen financial surveillance so that the Fund can fulfill its mandate to ensure the effective operation of the international monetary system and support global economic and financial stability.

This paper responds to the IMFC call to review, in light of the crisis, the Fund’s mandate over macroeconomic and financial sector policies bearing on global stability. The crisis exposed weaknesses in economic oversight—national, regional, and global—prior to the crisis, prompting major institutional innovations to uncover risks and meet large and diverse financing needs. Despite progress, it still needs to be asked if the mandate in the Fund’s Articles is up to the challenges ahead. The Board’s deliberations, which are far from complete, have prompted it to emphasize practical steps to deliver on the Fund’s broad stability mandate, with any need to amend the Articles reconsidered in light of experience. The effectiveness of these steps will also depend on quota and governance reform, as confidence in the Fund as an impartial overseer of global stability and lender of last resort rests on its legitimacy.

In September 2010, the Executive Board made financial stability assessments under the Financial Sector Assessment program (FSAP) a regular and mandatory part of bilateral surveillance under Article IV for jurisdictions with systemically important financial sectors. This decision recognized that although financial sector issues were at the core of the Fund’s surveillance mandate, the FSAP as designed in the late 1990s had severe limitations as a tool. Voluntary participation, the low frequency of assessments, and their very broad coverage (particularly in emerging market and developing countries, where assessments are typically conducted jointly with the World Bank) limited the usefulness of the FSAP for surveillance. Building on the revamp of the FSAP during the 2009 program review that delineated the institutional responsibilities of the Fund and the World Bank and defined the content of the stability assessment under the FSAP, the Executive Board took the next step in 2010 to make these stability assessments mandatory every five years for members with systemically important financial sectors