The Global Financial Crisis: What Are We Learning About Policy-Makers’ Data Needs?

The Global Financial Crisis: What Are We Learning About Policy-Makers’ Data Needs? Tessa van der Willigen and Pedro Rodriguez Strategy, Policy, and Review Department IMF

Outline • What happened • Short-term actions • Better early warning in future • Data needs Disclaimer: I may stray outside SNA proper, but balance sheets are key...

What Happened?Background • Macroeconomic conditions: • Low global interest rates, reflecting large external surpluses in key emerging markets and easy monetary policy • Very large increases in asset prices • Financial sector regulation: • Rapid growth in “subprime” mortgages in US • Repackaging into traded structured products

What Happened?The Crisis • Correction in the US housing market • Fall in, and increased uncertainty in, the price of structured products • Financial institutions: • made losses and sold assets • began to hoard liquidity because of increased uncertainty (about values and counterparties) • reacted sharply to the collapse of Lehman Brothers

What Happened?International Linkages • Origins of the crisis in the US • Spillovers to Europe because of direct exposures and declines in wholesale funding • Emerging markets hit after the collapse of Lehman: • The “decoupling” hypothesis was probably always optimistic • Accelerated deleveraging

Getting the Crisis Under Control--I • Restoring confidence in mature financial systems: • Providing short-term liquidity • Removing damaged assets from banks’ balance sheets • Recapitalizing banks

Getting the Crisis Under Control--II • Dealing with capital flow reversals in emerging markets: • Use reserve buffers • Liquidity support (swap lines with major central banks, the IMF’s new Short-Term Liquidity Facility) • Adjust as necessary • Review contingency plans in case of banking sector problems

Getting the Crisis Under Control--III • Addressing the fiscal consequences of intervention in the financial system • Ensure debt sustainability • Develop an exit strategy

Better Early Warning in Future--I • Better financial stability analysis: • Risks were moved to off-balance sheet vehicles • Risks moved to a burgeoning superstructure of complex marketable products and derivatives and became untraceable

Better Early Warning in Future--II • Better macroeconomic analysis: • Need better identification of asset price bubbles • Need a better understanding of how concerned we should be about external imbalances (e.g., the discrepancies between the development of US foreign assets and its current account)

Better Early Warning in Future--III • International financial linkages: • We had far too little idea of countries’ exposures to other countries, different kinds of institutions, and different kinds of instruments

Data Needs—Fiscal • Accurate and transparent recording of • the fiscal costs of intervention in the banking sector and implications for public debt • contingent liabilities

Data Needs—Financial Sector • A big agenda for regulators • Related, we also need better aggregate financial stability analysis • Considerable efforts in recent years: • Balance sheet analysis (the IMF’s Standardized Report Forms for Monetary and Financial Statistics cover banks, non-bank depository corporations, insurance companies, pension funds, investment funds, special purpose entities, etc.) • Financial Soundness Indicators (Coordinated Compilation Exercise; though these are lagging indicators)

Data Needs—Financial Sector, Ctd. • Importance of information on: • Off balance sheet entities • Contingent exposures (derivatives) • Maturity of liabilities and assets • Intrasectoral exposures/market structures • Valuation

Data Needs—External Sector • We need: • better analysis of the buildup of external vulnerabilities; and • better analysis of the potential for international spillovers through the financial sector. • Again, considerable efforts in recent years: • initiatives on debt and reserves data after the Asian crisis • Balance of Payments Manual 6th edition, with more emphasis on the International Investment Position (IIP) and its composition (e.g., maturity, currency) • Coordinated Portfolio Investment Survey • Coordinated Direct Investment Survey (forthcoming)

Data Needs—External Sector, Ctd • IIP: • Sectoral composition • Geographical composition • Currency composition (incl. of reserves) • Expand CPIS (key countries not covered, annual frequency, long lags) • Valuation issues, esp. of FDI

Conclusion Some themes that may be relevant for SNA: • Balance sheets are indeed crucial • We need not just their amounts but their sensitivities to various developments (for stress testing) • Off balance sheet and contingent exposures are crucial • Aggregation can mask important features • Valuation issues are very difficult

The Global Financial Crisis: What Are We Learning About Policy-Makers’ Data Needs?