Mapping Cross Border Financial Linkages A Supporting Case For Global Financial Safety Nets

This paper maps cross-border financial linkages and identifies factors that drive them, contributing to the discussion on the appropriate design of a global financial safety net (GFSN). It builds on previous staff work and complements the findings of the companion paper on the Analytics of Systemic Crises and the Role of Global Financial Safety Nets. This paper notes the growing roles of financial linkages and complexity in injecting latent instability into the global financial system, underscoring the value of a GFSN design that is effective in forestalling the risk that a localized liquidity shock propagates through the global financial network turning into a large-scale systemic crisis.

In response to the global crisis, the Fund overhauled its lending toolkit and boosted its resources, strengthening its ability to pre-empt financial crises. This paper—with the companion paper on Mapping Cross-Border Financial Linkages—takes another look at the recent global crisis in the context of a broader review of past systemic crises to (i) assess whether rising linkages across countries is a source of latent systemic instability and (ii) ascertain whether the global financial safety net (GFSN) is adequate to contain crisis and contagion risks arising from such systemic instability. This paper develops a new methodology to identify systemic crises and reviews associated policy responses from a global, rather than country-level, perspective

The current report finds that, despite an improvement in economic prospects in some key advanced economies, new challenges to global financial stability have arisen. The global financial system is being buffeted by a series of changes, including lower oil prices and, in some cases, diverging growth patterns and monetary policies. Expectations for rising U.S. policy rates sparked a significant appreciation of the U.S. dollar, while long term bond yields in many advanced economies have decreased—and have turned negative for almost a third of euro area sovereign bonds—on disinflation concerns and the prospect of continued monetary accommodation. Emerging markets are caught in these global cross currents, with some oil exporters and other facing new stability challenges, while others have gained more policy space as a result of lower fuel prices and reduced inflationary pressures. The report also examines changes in international banking since the global financial crisis and finds that these changes are likely to promote more stable bank lending in host countries. Finally, the report finds that the asset management industry needs to strengthen its oversight framework to address financial stability risks from incentive problems between end-investors and portfolio managers and the risk of runs due to liquidity mismatches.

Aid has become a tangle of donors and recipients, so unwieldy that it is in danger of collapse. This ground-breaking book presents fresh thinking that transcends the 'more' verses 'less' arguments. Drawing on complexity theory it shows how aid could be transformed into a truly dynamic form of global cooperation fit for the twenty-first century.

The current report finds that, despite an improvement in economic prospects in some key advanced economies, new challenges to global financial stability have arisen. The global financial system is being buffeted by a series of changes, including lower oil prices and, in some cases, diverging growth patterns and monetary policies. Expectations for rising U.S. policy rates sparked a significant appreciation of the U.S. dollar, while long term bond yields in many advanced economies have decreased—and have turned negative for almost a third of euro area sovereign bonds—on disinflation concerns and the prospect of continued monetary accommodation. Emerging markets are caught in these global cross currents, with some oil exporters and other facing new stability challenges, while others have gained more policy space as a result of lower fuel prices and reduced inflationary pressures. The report also examines changes in international banking since the global financial crisis and finds that these changes are likely to promote more stable bank lending in host countries. Finally, the report finds that the asset management industry needs to strengthen its oversight framework to address financial stability risks from incentive problems between end-investors and portfolio managers and the risk of runs due to liquidity mismatches.

Staff Discussion Notes showcase the latest policy-related analysis and research being developed by individual IMF staff and are published to elicit comment and to further debate. These papers are generally brief and written in nontechnical language, and so are aimed at a broad audience interested in economic policy issues. This Web-only series replaced Staff Position Notes in January 2011.

We analyze the determinants of IMF lending since the early nineties, a period during which the roles of financial cycles and interconnectedness as amplifiers and transmitters of economic crises have gained prominence. First, we show that the global financial cycle is an important driver of IMF lending cycles. Second, using a panel of 91 advanced, emerging, and frontier economies over 1992-2014, we show that global factors and interconnectedness, as proxied by a countries’ potential exposure to economic spillovers from trade partners, together with more traditional idiosyncratic factors, have a significant impact on the probability that a member country obtains financial assistance from the IMF. Our results are robust to various robustness checks. The approach presented in this paper can be used to assess future demand for IMF financial assistance.

Financial sector linkages have increased continuously in the Caribbean with cross border capital flows and financial conglomerates dominating the financial system. While the greater interconnectedness can heighten systemic risks and likelihood of contagion, it can have positive impacts provided the regional authorities take steps to prevent the systemic risk. In this context, financial sector reform measures aimed at bolstering and harmonizing prudential regulations in line with international best practices, the strengthening and enhancement of financial sector supervision to include cross border linkages through consolidated supervision, increased cooperation across supervisors in the region, and the establishment of deposit insurance and crisis resolution frameworks will be critical to maintain financial sector stability and minimize the repercussions of any negative shocks.