IMF Global Financial Stability Report calls for collective action

08 October 2008

Declared losses on U.S. loans and securitized assets are likely to increase further to about $1.4 trillion, the report states and calls for a collective commitment by authorities to address the challenges effectively.

Declared losses on U.S. loans and securitized assets are likely to increase further to about $1.4 trillion, the latest IMF Global Financial Stability Report states and calls for a collective commitment by authorities to address the challenges effectively.

 

"The time for piecemeal solutions is over”, IMF Managing Director Dominique Strauss-Kahn stated. “I therefore call on policymakers to urgently address the crisis at a national level with comprehensive measures to restore confidence in the financial sector. At the same time, national governments must closely co-ordinate these efforts to bring about a return to stability in the international financial system."

 

The GFSR recommends five principles that can help authorities restore confidence in these exceptional circumstances:

• employ measures that are comprehensive, timely, and clearly communicated;
• aim for a consistent and coherent set of policies to stabilize the global financial system across countries;
• ensure rapid response on the basis of early detection of strains in order to contain systemic repercussions;
• assure that emergency government interventions are temporary and taxpayer interests are protected; and
• avoid losing sight of the objective of a more sound, competitive, and efficient financial system going forward.

 

Chapter 2 of the GFSR explores the inability of bank funding markets to perform their role in distributing liquidity across institutions and concludes that the interest rate channel of monetary policy has become much less reliable. It recommends improving the infrastructure in funding markets, increasing the authorities' attention to both credit and liquidity risks, and encouraging central bank co-operation and communication.

 

Chapter 3 analyses the potential procyclical role that the application of Fair Value Accounting (FVA) methods may have played in the development and outcome of the current credit cycle. It concludes that the application of FVA is still the way forward, but further enhancements of FVA methodologies will be needed to mitigate the exaggerated effects of some valuation techniques.

 

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