A Guide to Progress in Strengthening the Architecture of the International Financial System Statement by the Managing Director on Progress in Strengthening the Architecture of the International Financial System Executive Board Meeting, April 16, 1999 Experimental Case Studies on Transparency Practices, April 1999 Involving the Private Sector In Forestalling and Resolving Financial Crises, March 1999 G7 Finance Ministers and Central Bank Governors Declaration and G7 Leaders Statement, October 30, 1998 Memorandum on the Work Program on Strengthening the Architecture of the International Monetary System, October 30, 1998 Reports on International Financial Architecture, October 1998
|
|
|
|
Report of the Managing Director to the Interim
Committee on Progress in Strengthening the Architecture of the International Financial System
April 26, 1999 Contents
Appendix 1. Developing International Standards in
Areas Boxes |
1. This report provides an overview of the agenda to strengthen the architecture of the international financial system (Section I); reviews the details of the agenda, by broad topic (Sections II to VI); and includes a matrix indicating the status and next steps for each specific proposal.
2. Developments in the world economy since the Annual Meetings in October 1998 have reconfirmed the importance and urgency of addressing both domestic policy weaknesses and strengthening the architecture of the international financial system. Broad agreement had been reached on a number of the key aspects of the strengthened architecture by October 19981, and important reforms have already been introduced. Nevertheless, it remained to refine the general principles and to implement many of the proposals that had been put forward. The Executive Board's work program before the Spring 1999 meetings has been ambitious, and other institutions and fora have also been actively considering various aspects of this complex challenge.
3. Many players—both domestic and international, and both private and official—need to be activated to pursue various aspects of the reforms that, at a general level, command broad support:
The extent of consensus achieved and progress made in these areas, as well as next steps, are described in the following sections of this report, and in the attached matrix.
4. All of these aspects of a strengthened architecture are interrelated. The development, dissemination, and monitoring of standards is crucial to the strengthening of financial systems; the choice of exchange rate regime and the strengthening of supervisory systems are an integral part of ensuring an orderly process of capital account liberalization; better data, greater transparency of countries' policies and the Fund's assessments of them, as well as strengthened financial systems are critical to reducing the volatility of private sector flows. Similarly, the private sector, national governments and international institutions and fora all need to work together in this endeavor. Private financial institutions and corporations need to adhere to new standards that are being set; national authorities need to ensure that standards are established and met, that supervisory and regulatory agencies are strengthened, and that vulnerabilities are minimized through better management of macroeconomic and financial policies; and the Fund and other international institutions and fora need to ensure that their efforts are mutually reinforcing and effective.
5. A vital complement to the reform of the financial system will be the strengthening of social policies. Countries need to be better prepared to absorb the impact of the inevitable changes that occur in a dynamic market economy and to allay some of the hardships and maximize the benefits of a global and integrated international financial system. The Fund has been deeply involved with other institutions in establishing social safety nets in recent programs in Asia. However, more needs to be done by the international community, including developing codes of good practices in social policies, where the World Bank is taking the lead,2 and in developing social safety nets, before crisis strikes.
6. A strengthened architecture will take time to be put into place and longer to become fully effective. However, this only adds to the urgency with which the international community needs to focus its efforts on translating consensus on principles into operational actions.
7. A key pillar in strengthening the architecture of the international financial system relates to enhancing the transparency of the policy process. An element of this involves greater openness on the part of the Fund. The efforts in this area also encompass the private sector as many of the standards (e.g., accounting, auditing, bankruptcy, corporate governance, securities market regulation, etc.) ultimately are implemented at the level of individual firms. While questions remain—such as on the appropriate level of disclosure/regulation of highly leveraged institutions—progress has been achieved on a number of fronts.
Efforts to Improve Transparency and Accountability
8. Better transparency can help foster better economic performance, in part by encouraging more widespread discussion and analysis of a country's policies by the broader community, but also by engendering trust in policy making, which can enable timely and decisive decision making when needed. Similarly, greater transparency on the part of the Fund—greater openness and clarity in its own policies and the advice it provides to countries—can also improve understanding of the Fund's role and operations. Efforts to promote greater transparency on the part of the private sector have focused mainly on the development and implementation of internationally recognized standards.
9. In the past two years, the Executive Board has adopted a series of significant measures to improve transparency of the Fund and its members' policies. Key actions include:
10. Most recently, the Executive Board has reached important decisions to:
11. In terms of next steps, the Board will:
12. Important progress has been made in developing and refining voluntary standards in the areas of direct operational concern to the Fund:
13. Next steps in developing and refining standards include:
|
and Improving Access to External Debt Statistics |
The Executive Board has strengthened the SDDS. Key decisions
include:
The Inter-Agency Task Force on Finance Statistics, chaired by the Fund, has implemented a joint presentation of external debt statistics from the Bank for International Settlements (BIS), the Organization for Economic Cooperation and Development (OECD), the World Bank, and the Fund to meet the general need for more comprehensive, timely, and accessible data, particularly for shorter maturities. This presentation is now available on the external web sites of these organizations. |
14. In the context of its surveillance activities, the Fund needs to understand country practices regarding international standards across a range of areas in order to assess vulnerabilities and the implications of particular developments for the effective operation of domestic and international financial systems.
15. Following the discussion in July 1998, the Executive Board recently considered further the role of the Fund in relation to standards. To help illuminate practical considerations involved in monitoring observance of standards, a first round of experimental case studies was prepared.4
16. Key areas of emerging consensus within the Executive Board include:
17. The issues and practical modalities in the preparation of "transparency reports"—summarizing the degree to which an economy meets internationally recognized disclosure standards—as recommended by the G-22 and G-7 are complex. The Executive Board agreed that a second round of experimental case studies—covering a wider range of countries, including those where implementation of standards is less advanced—should be undertaken over the next few months to help in developing the Fund's role in this area with a view to having concrete proposals by the 1999 Annual Meetings.
18. A few key issues that need to be considered further are:
19. The strengthening of financial systems is an essential element of the new architecture. To this end, the Fund, the World Bank, the Basle Committee on Banking Supervision, other key international groupings, and financial supervisors across various regions have stepped up their efforts in developing and disseminating international principles and good practices of sound financial systems. Recent key actions include:
20. Looking ahead, the Fund is strengthening its surveillance of countries' financial systems in the context of Article IV consultations, with a view to improving evaluations of soundness and vulnerabilities, and supporting structural reforms aimed at developing financial sectors. This work will be coordinated with related efforts being carried out in the World Bank, so as to make maximum use of scarce resources while also providing both institutions with a common platform for policy advice, as well as for financial and technical assistance. The intention is to progress in this area by carrying out a number of pilot studies of individual countries in the coming months, and then report to the Executive Board on the experiences gained and to seek Board guidance on next steps. On a related issue, the possible role of peer review in evaluating financial systems needs to be explored further.
21. Efforts to strengthen financial systems will need to continue in various international fora and through implementation by national authorities. One aspect is greater transparency of the private sector, including highly leveraged institutions, which needs to be pursued in the appropriate fora.
22. In addition to the efforts on developing standards and good practices, the legal environment within which financial systems operate needs to be efficient and effective. To this end, several countries have taken welcome actions to improve their bankruptcy laws and procedures, but there is still a need to press ahead more broadly on this front. In this context, the Fund has prepared a report on orderly and effective insolvency procedures, which identifies and discusses key issues that arise for all countries regarding the design and applicability of orderly and effective insolvency procedures. The World Bank also intends to use this report in its efforts to develop guidelines for effective insolvency regimes for developing countries. In addition, the United Nations Commission on International Trade Law (UNCITRAL)—which has proposed a model law on cross-border insolvency and contributed to the Fund report—has expressed strong interest in collaborating with the Fund and Bank in this area.
|
|
| More effective collaboration between the Fund and the World
Bank is important in strengthening financial systems. To this end, the Financial Sector
Liaison Committee (FSLC) was established in September 1998 to enhance the
collaboration process between the two institutions. The aim of this cooperation is to ensure that
the Fund and Bank deliver high quality, sound, and timely advice to countries, and that expert
staff from both institutions are engaged in the most effective way.
The Committee has:
Next steps on the Committee's agenda include developing further the proposal for collaboration in the form of jointly conducted financial sector assessments that would draw on the resources and feed into the work programs of both institutions. |
23. Financial integration, including capital account liberalization, brings substantial benefits. Nevertheless, capital account liberalization carries risks and needs to be carefully managed.
24. Experience from the crises of the last two years has highlighted the following:
25. While supportive of the aim of further liberalization of capital flows, the Executive Board has discussed the use and effectiveness of controls and found it helpful to distinguish between controls over capital outflows and those over inflows.
26. In terms of next steps,
27. The effort to better involve the private sector in crisis resolution seeks to bring about a more orderly adjustment process; limit moral hazard and strengthen market discipline; and help emerging market borrowers protect themselves against volatility and contagion. Looking at the experience of the past two years, the case-by-case approach has achieved a degree of success.
28. However, it is generally agreed that more needs to be done to create market-based incentives and instruments for the private sector to remain involved. While a diversity of views has been expressed, some progress has been made and a consensus appears to be emerging in a number of areas.
Intensify Efforts at Preventing Crises
29. Prevention remains the key and is the primary responsibility of individual members working in collaboration with the Fund and the international community more generally. Countries' efforts should be aimed at improving both their macroeconomic and structural policies, and the environment for private sector risk assessment and decision making by improving the flow of information and the regulatory environment, and limiting implicit and explicit guarantees to the private sector. Key elements are:
30. Prevention needs to be buttressed by measures designed and adapted ex ante to better ensure the involvement of the private sector in crisis avoidance or orderly resolution. Such measures, designed and put in place before the event, could help facilitate the orderly resolution of balance of payments pressures. These include mechanisms that effectively pre-commit private sector participants to maintain or provide additional net exposure, or reduce debt-service burdens, in times of crisis, while limiting moral hazard and the distortion to markets in normal times. Mechanisms are also needed for dealing with extreme situations when ex ante measures do not deliver the needed support and it is not possible to reach agreement on an orderly refinancing or debt restructuring. In considering options, two key principles are:
31. In addition to proposals that would seek to reduce any bias that might exist in the short-term interbank credit markets, and to modify the terms of bond contracts, several measures have been proposed (see Box 3).While there is clearly a need to make progress in some areas, all of the proposals involve potential drawbacks or trade-offs that need to be borne in mind.
32. There are three areas where agreement seems to be emerging:
Consideration should also be given to a coordinated regulatory requirement for new sovereign issues admitted to domestic markets to meet specified minimum conditions regarding contractual provisions. A concerted regulatory approach, intended to reflect systemic concerns, may go beyond the traditional role of security market regulators to protect investors. For its part, the Fund would encourage members to include terms that would facilitate restructuring in bond issues. These steps could be complemented by efforts to build a consensus in support of these changes among the financial institutions involved in issuing and underwriting sovereign bonds.
|
|
| Private Contingent Credit Lines that could be drawn on
in times of difficulty, if fairly priced, could provide efficient insurance against adverse market
developments, including liquidity risk, and could contribute to effective burden sharing during
periods of stress. At the same time, in complex financial markets, hedging strategies of private
financial institutions could lead to offsetting transactions with the country concerned and/or shift
pressures to other markets. Members should be encouraged to explore contingent credit lines with
private financial institutions.
Call Options in Interbank Credit Lines could provide a contractual basis for an extension of maturities under specified conditions. However, interbank credit lines often are a key source of short-term liquidity for countries, and the triggering of such options could lead to a loss of maturing short-term credit lines in advance of a call, thereby exacerbating liquidity difficulties. Debt Service Insurance, including structured notes, that generates a debt service burden that varies counter-cyclically against overall economic developments of the country could help reduce risk of crisis. Such instruments are more likely to be feasible for members that have highly concentrated exports (such as many oil or primary commodities exporters), where contracts can be linked mainly to exogenous developments. Official guarantees of new debt through full or partial guarantees of new sovereign or private debt instruments may hold promise at times when market access is very limited, for example during the emergence from a crisis. However, questions can be raised about the effectiveness of guarantees. The World Bank has recently reviewed its experience with guarantees and has proposed a limited policy-based guarantee program. An assessment of the experience with this program will be conducted at an appropriate point. |
33. In extreme situations, if ex ante mechanisms put in place fail to deliver the needed support in sufficient amounts and/or efforts to reach agreement on voluntary debt restructuring fail and pressures in the external accounts do not abate, members may be faced with a need to consider some combination of a default on sovereign bonds and the imposition of exchange controls. Such measures could lead to an interruption in the ability of nonsovereigns to service their external debts. There is little modern experience with restructuring sovereign bonds or with renegotiating private debt caught up in exchange controls, and so it is difficult to predict how the process would unfold. To permit the Fund to support a member's adjustment policies during the possibly protracted period of debt negotiations that could follow such action, the Fund's financing assurances and arrears policies have been modified so as to permit, on a case-by-case basis, the Fund to lend into arrears. Certain issues remain to be resolved regarding the conditions under which the Fund would proceed, and the Board will return to this at an early date. Other measures to involve the private sector in extreme circumstances are discussed in Box 4.
34. There also is a need to explore ways to ensure that in extreme situations, the process of debt negotiation following default, even if protracted, remains orderly. Some consider that there is little danger of creditors resorting to disruptive litigation on a scale that could effectively disrupt a country's adjustment efforts or the capacity of the Fund to support those efforts. Others, however, consider that there is a possibility that creditor litigation could block progress toward an orderly debt restructuring and challenge the Fund's ability to provide effective support for a member's adjustment efforts. Against this background, further consideration could be given to the possibility of adopting some mechanism to allow the official community to endorse a temporary stay on creditor litigation, possibly through an amendment of Article VIII, Section 2(b) of the Fund's Articles of Agreement.
|
|
Concerted Rollovers of External Debt, in the case of Korea, against the background of a hemorrhaging of official reserves and the prospect of an imminent default, were successful in stabilizing a critical situation and facilitating a restructuring of interbank claims into sovereign guaranteed bonds. However, Korea's success reflected some special circumstances, and could be difficult to replicate in other cases. In deciding on such operations, the international community must pay special care to the danger that concerted operations in one case could lead creditors to withdraw credit lines in advance of a crisis elsewhere for fear of a concerted rollover. Restructuring International Sovereign Bonds raises difficult issues, which would need to be considered on a case-by-case basis. In practice, there is a trade-off between the immediate cash flow relief associated with bond restructuring and the resulting reduction over the medium term in the country's ability to mobilize resources from private creditors. |
35. In strengthening the architecture of the international financial system, the Executive Board has directed efforts on a number of systemic aspects.
Implications of Capital Mobility and Exchange-Rate Volatility
36. The profound changes that the international monetary and financial system has undergone in postwar period, in particular over the last two decades, raise broad systemic issues. In the preliminary discussion on Fund-supported programs in East Asia, a lesson drawn was that the stable exchange rates of the countries affected may have led borrowers and creditors alike largely to disregard currency risks, perceiving that they were implicitly guaranteed against related losses. However, adoption of a more flexible exchange rate regime is no panacea and, regardless of the regime, vulnerabilities would continue to exist and standards for strengthened financial systems and improvements in transparency would still be required.
37. Before the 1999 Annual Meetings, the Board will hold a seminar to address these issues. In the area of exchange-rate regimes, the focus will be on the volatility of the exchange value of major currencies, the scope for measures to moderate such volatility, and the consequences for the exchange-rate policy of emerging market economies. As for asset markets, the focus will be on the systemic aspects of major swings in capital flows to developing countries and on possible general, systemic, measures to moderate the boom phase of the cycle on the side of lenders as well as of borrowers, including some of those addressed above for strengthening financial systems, and improving transparency and accountability.
Developing the Fund's Facilities
38. Progress is being made in adapting the Fund's facilities to the new international architecture. A review of the Supplemental Reserve Facility (SRF) was conducted in January 1999 with an eye to ensuring that the Fund is ready to respond promptly and effectively to member's need for balance of payments financing.
39. At the same time, ways have been explored in which the Fund could support members whose economies are fundamentally sound and well managed, but which are concerned with the potential effects of contagion on their access to capital markets. In this regard, the Board has created a contingent credit line (CCL) in the Fund. This new facility is intended to play an important role in preventing crises, including by creating further incentives for the adoption of strong policies and adherence to internationally recognized standards, encouraging the constructive involvement of the private sector, and thereby reducing the risks of financial market contagion.
Strengthening the Fund's Resources
40. In order to effectively play its role in safeguarding the stability of the international monetary system, the Fund needs sufficient financial resources. To that end, important actions have been taken.
41. Beyond these actions, a special SDR allocation has been proposed, through an amendment in the Articles of Agreement, and is in the process of ratification by the Fund's membership. However, securing full financing for the ESAF and the Fund's participation in the HIPC Initiative remains a major challenge, and further efforts are urgently needed to ensure that the Fund has sufficient resources to support the structural adjustment programs of the poorest countries and to provide agreed debt relief.
|
| ||||
| Proposal | Action Required | Executive Board's View | Progress to Date | Next Steps |
| I. Transparency, Standards, and Surveillance | ||||
| A. Transparency and accountability | ||||
| (i) Official sector | ||||
| Press Information Notices (PINs). Agreement to continue to actively encourage the release of PINs following Article IV consultations and extension of their use to policy papers. | (i) Decision by members to release PINs following Article IV
Consultations.
(ii) Executive Board decision on procedures for the release of PINs following discussions of policy papers. |
Board endorsed both staff proposals. | PINs were released for 70 percent of Article IV Consultations from
August-December 1998. Lags shortened, and number of modifications reduced.
First policy PIN was released 3/29/99 for discussion of SDDS reserves data. |
National authorities are actively encouraged to allow release of
PINs following Article IV consultations.
Fund staff to develop internal guidelines for release of PINs on policy papers shortly. Fund Board's next review of PIN policy planned for April 2000 (PINs in UFR cases discussed below). |
| Article IV staff reports. Allow voluntary release of reports. | Executive Board decision. | Majority in favor but views differed widely. | On 4/5/99, authorization of an eighteen-month pilot program for the voluntary release of Article IV reports. | National authorities to volunteer for pilot program.
Fund staff to proceed expeditiously to put in place the modalities for the evaluation of the pilot, drawing on outside consultants supplemented by external review. Fund Board to make new policy known to constituencies. |
| UFR. (i) Publication of Chairman's remarks on programs, and voluntary release of summings up following Board discussion; (ii) strongly encourage publication of LOIs/MEFPs and PFPs, particularly in cases that require continued access to private markets; and (iii) voluntary release of staff reports for UFR. | Executive Board decision. | Agreed on:
(i) establishment of a presumption that LOIs/MEFPs and PFPs would be released, subject to a review after one year; and (ii) proceeding with the release of the Chairman's remarks in UFR cases, on understanding that the question of UFR PINs and release of UFR staff reports would be revisited in six months. |
Implemented. | Fund staff to advise members on new policy.
Fund Board to make new policy known to constituencies. Board to review further policies after one year. In addition, issues may be reviewed in light of the experience gained in transparency in other areas. National authorities are presumed to release LOIs/MEFPs and PFPs. |
| Access to Fund's archives. Allow accelerated public access to the Fund's archives. |
Executive Board decision to shorten time limits from 30 years to 5 years for access to Board documents; and to 20 years for other archival documents. | Board approved proposals, with a transition period of six months before new policy goes into effect. | Implemented. | Fund Board to review policy in two years, with view to possible further liberalization. |
| Data provision to the Fund. Reach agreement on minimum standard for reporting of reserves and related items. | Agreement on minimum standard. | Most Directors were supportive of principle, but had differing views on content, reporting frequency, and lags. | Proposals will be based on Board decisions regarding reserves in the SDDS (see SDDS). | Fund staff to bring proposals to IMF Board after Interim Committee, based on SDDS decisions reached at 3/23/99 Board meeting. |
| Enhanced evaluation of the Fund's activities. | Systematic evaluation of Fund activities. | Diverse views. Directors have agreed to take stock, following completion of current program of external reviews. | Internal and External evaluations of ESAF (published)
Fund's preliminary assessment of Fund-supported programs in Asia (published) External evaluation of Fund surveillance and the Fund's economic research activities under way (results expected to be presented by the summer of 1999) |
Fund Board to take stock of evaluation process, following completion of current program of external review, toward the end of 1999. |
| (ii) Private sector | ||||
| Private Sector Disclosure. | Assess how operations of key financial market participants could be improved through greater disclosure requirements. | There are important gaps in this area. | Widening coverage of BIS data to other emerging markets and, especially, off-shore financial centers. Continuing progress linked to actions on standards. | National authorities and standard-setting bodies (BCBS, CGFS,
IAIS, IASC, and IOSCO) to pursue ongoing work.
Financial Stability Forum to prepare a report on offshore centers in next six months. |
| Highly Leveraged Institutions. | Assess appropriate supervisory/regulatory structure and disclosure to markets. | Most Directors saw this as a particularly important area for improved supervision/regulation, but recognized difficulties with design and measurement. | Reports by BCBS and IOSCO (Feb 1999), on standards for bank's financial relations with highly leveraged institutions. | National authorities and standard-setting bodies to further develop
and implement standards for banks' relations with highly leveraged institutions. Consideration of
public data disclosure requirements for highly leveraged institutions.
Financial Stability Forum to prepare a report on HLIs in next six months. |
|
B. Standards |
||||
| SDDS. Strengthening data dissemination on reserves and external debt. | Strengthen the SDDS prescriptions for: (i) international reserves and related items; (ii) external debt and debt service. Consider inclusion of macro-prudential indicators of vulnerability in the SDDS. | Supportive; concerns from some Directors about degree of detail, costs of compliance, and lack of symmetry in publication of data by private sector. | The Board has agreed to strengthen the SDDS prescriptions in the areas of debt (12/98) and international reserves (3/99). Also established procedures for monitoring observance of the standard. | National authorities that have subscribed to the SDDS to comply
with existing standards; by March 31, 2000 to observe revised standards for reserves.
Others to consider subscribing to the SDDS and take necessary steps.
Fund staff to establish monitoring procedures; to consult with compilers on debt transition period (will report to Board by end of 1999); and to collaborate with BCBS to come up on agreed set of macro-prudential indicators. Draft operational guidelines on international reserves data to be prepared by June 1999. International organizations to participate in consultation processes and provide feedback. CGFS to collaborate in preparation of operational guidelines. |
| Code of Good Practices on Fiscal Transparency. Implement code endorsed by Interim Committee in April 1998. | Endorsement of manual by IMF Executive Board. | Supportive. | Revised draft manual on fiscal transparency issued to Board on lapse of time basis. Code, manual and questionnaire were posted on the external web site in November 1998. | National authorities to aim at adhering to Code.
Fund staff working on pilot assessments of fiscal transparency. |
| Code of Good Practices on Transparency in Monetary and Financial Policies. | Approval of code. | Broad agreement on principles. | Board seminar on March 19, and meeting with financial supervisory and regulatory experts on March 22. Revised draft discussed at April 9 Fund Board meeting. | Revised draft of code to be circulated to Interim Committee. Fund Board to consider soon after IC meeting. |
| Banking supervision. Address gaps in existing standards; identify areas where further work could help countries achieve compliance with the Basle Core Principles; and review 1988 Capital Accord. | Review gaps in existing standards; develop a handbook on the methodology for assessing implementation of the Basle Core Principles, and consider updating Capital Accord. | Supportive. | Basle Committee reviewing gaps.
Draft handbook prepared by the Liaison Group (includes G-10 and non G-10 countries), in consultation with the Fund and World Bank, to be considered by Basle Committee in April 1999. BCBS Task Force established to review Capital Accord. |
Basle Committee to finalize handbook.
Fund and World Bank staff are likely to be the main agencies responsible for assessing compliance with Core Principles. Task force will aim to have concrete proposals on fast-track to improve capital accord by December 1999. |
| Other standards. Relevant standard-setting bodies to complete work on developing other standards relevant for the functioning of financial systems. | Continue developing standards in following areas: accounting and auditing, bankruptcy, corporate governance, insurance regulation, payment and settlement systems, and securities market regulation. | Supportive. | Ongoing. (See appendix I for an update of the current status of progress in individual areas). | Relevant standard-setting bodies to continue work. |
| c. Surveillance | ||||
| Fund Surveillance and International Standards. Fund to better integrate use of standards in surveillance. G-22/G-7 go further and recommend that the Fund publish transparency reports. | IMF Board to consider Fund's role, including in preparation and publication of transparency reports. | Supportive of staff's initial experimental studies; encouraged staff to proceed with assessment of what is feasible and to develop specific proposals for extending work. | Experimental case studies have been prepared for Argentina, Australia, and the United Kingdom, and one has been commenced for Hong Kong SAR. | Fund staff to prepare a second round of case studies and to initiate outreach program to solicit reactions to initial studies. Studies will be made available on Fund's web site. Concrete proposals to Fund Board before 1999 Annual Meeting. |
| Comprehensive reporting on the capital account. Develop
mechanisms for better assessing capital flows and external vulnerability.
Improve member's systems for monitoring of short-term external debt, in order to improve surveillance and help forestall financial crisis. |
Strengthened surveillance over debt and capital flows; improved databases of
creditor information on debt; improving data systems and reporting by members on debt/capital
flows.
Implement or strengthen high-frequency monitoring system for short-term capital flows, particularly interbank lines from foreign banks. |
Board endorsed these efforts. | Within the Fund: Staff has expanded reporting to Board through
WEMD, reports on financial market developments, and through published reports on international
capital market developments; interdepartmental task force led efforts to improve creditor data
(BIS, OECD) and facilitate access. Enhanced creditor-side data on external debt and internal
system for disseminating detailed BIS data came on line on Internet in March.
Technical assistance: continued efforts within Fund to provide assistance, disseminate best practice. TA to members in improving data and monitoring systems. |
Fund staff to continue work to implement detailed
recommendations of task force.
National authorities. Efforts to strengthen data systems on external debt and reserves and further public dissemination (see SDDS). International organizations. BIS, IMF, OECD, and World Bank to collaborate on IATF to widen coverage of creditor data systems, shorten publication lags. Financial Stability Forum to prepare a report on short-term capital flows in next six months. |
| Early Warning Systems. Develop and test empirical models to help predict balance of payments crises. | Develop, for use within the Fund, prototype operational models to predict crises. | Saw merit in continued research in this area; cautious about reliance as predictor of crisis; concern about any publicity. | Staff has analyzed existing models; produced prototype enhanced models. | Fund staff to implement and test system for regular assessment of risks; decide how best to disseminate results confidentially within Fund. |
|
II. Strengthening Financial Systems |
||||
| Financial market supervision and development. | Strengthen focus of Fund surveillance on health and vulnerabilities of financial sector, including linkages between macroeconomic policies and banking system soundness. Enhanced technical assistance on a wide range of financial sector areas | Supportive | Work has begun on strengthening surveillance of countries' financial systems
in the context of Article IV.
The Financial Sector Liaison Committee (FSLC) established in September 1998 to enhance the collaboration process between the World Bank and the IMF. Committee has initiated actions to enhance coordination and effectiveness of work programs, and develop guidelines. Agreement in principle to coordinate joint financial sector monitoring and assessment program. |
Fund staff to carry out a number of pilot studies and report to
Board thereafter seeking guidance on next steps.
FSLC will continue to coordinate the work of the Fund and World Bank in this area. |
| III. Capital Account Issues | ||||
| Capital controls. Achieving orderly liberalization; possible use of certain types of capital controls. | Identify circumstances when there may be a role for capital controls, and approaches to achieving orderly liberalization. | Controls may make sense in certain circumstances to provide a (temporary) breathing space, but cannot substitute for more fundamental policy action. A consistent macro-policy framework and supporting financial sector reforms are crucial in achieving orderly liberalization. | Board meeting of 3/24/99 reached agreement on broad principles but differences remain on operational questions about the use and effectiveness of capital controls. | Fund staff to study further detailed country cases, focusing on the use and effectiveness of specific controls and on experiences with the liberalization of different aspects of the capital account, and aimed at drawing conclusions for best practices. |
|
IV. Involving the Private Sector |
||||
| Raise cost of short-term cross-border capital flows. | Make capital requirements a function of type of funding; have monetary authority charge banks directly for existence of sovereign guarantee; and on the lending side, assign higher risk weight to interbank lines under Basle Accord. | Most Directors saw merit. Urged consideration on fast track with goal of early implementation of proposals that can gather international support. | None. | Basle Committee on Banking Supervision (BCBS) to address issue. |
| Contingent credit lines (as in Argentina and Mexico). | Contract market-based contingent credit lines with commercial banks to trigger liquidity support in times of crisis. | Generally supportive, but noted that experience was not yet sufficient to form judgment, and that care was needed in design. | Some experience being gained. | Official Community—assess whether there is a role for official
sector to support.
Debtor countries—discuss with creditors. |
| Call options. Embed call options in interbank loan agreements. | Introduce ability of debtor to extend maturity of loans under pre-specified conditions. | Some Directors cautioned about interfering with key short-term liquidity market; others thought further consideration warranted as way of addressing volatility of short-term capital flows. | None. | Official community: Further examination required.
Debtors should discuss with creditors. |
| Creditor-debtor councils. Organize creditor-debtor councils to improve the flow of information. | Decision on desirability of such councils, and their composition. | Mixed. Directors considered it desirable to improve information flows, but noted representational issues and risks including those relating to insider information. | None. | International community (Fund, G-10, IIF, etc.) to assess and, if appropriate, advance specific proposals. |
| Fund dialogue with the private sector. | Decision on desirability of various approaches to closer links with the private sector. | Mixed. Agreement on need to improve flow of information; noted risks relating to inside information. | Ongoing discussion. | Fund and others- Further examination required. |
| Bond covenants. Modify the terms of foreign sovereign bond contracts. G-10 proposal. | Introduce sharing clauses and majority decision rules to speed negotiation process. Introduced to market in concerted initiative by major industrial governments. | Directors supported moving forward expeditiously with provisions for bond
clauses, including sharing clauses, qualified majority conditions, and collective representation
provisions.
A few Directors noted British-style Trust Deed Bonds could be useful model. |
G-22 has consulted with private sector on model clauses. Fund staff paper identifies relevant features of bond contracts. | National authorities: Concerted action by industrial country
governments as well as by emerging market countries. Could perhaps build on endorsement by
trade association of clauses (not yet underway).
Fund and national authorities: Encourage industrial countries to introduce such terms in their own bond contracts. |
| Sovereign arrears. Allow Fund to lend into sovereign arrears to private bondholders to support adjustment measures during negotiations. | Extend 1989 policy to allow Fund to lend into arrears to private bondholders. | Building on an earlier discussion, Directors agreed to extend the 1989 policy on lending into arrears on a case-by-case basis. | Done, in principle. | Fund Board. Further discussion required to make operational. |
| Nonsovereign arrears. Allow Fund to lend into nonsovereign arrears arising from the imposition of exchange controls, again to support adjustment measures during negotiations. | Extend further the 1989 policy to lend into nonsovereign arrears. | Directors considered that the Fund should be willing to lend into arrears under these circumstances, again on a case-by-case basis. | Done, in principle. | Fund Board. Further discussion required on conditions under which Fund would proceed. |
| Litigation stays. Impose stay on creditor litigation to facilitate orderly nonsovereign debt renegotiation. | Mechanisms to provide a means to impose a stay on enforcement of creditor claims. | A number of Directors thought that amending Article VIII, Section 2(b) warranted further consideration; others did not see the need for such action. | None. | Fund Board. Further consideration required. |
| V. Strengthening the International Monetary System-Systemic Aspects | ||||
| Interim Committee. Strengthen and/or transform Interim Committee. | Decision on various proposals identified by staff, including transformation of Interim Committee to Council. | Unanimous on strengthening Interim Committee. Diverse views on transforming Interim Committee. | Report of the IMF Executive Board prepared. | Interim Committee to discuss this issue. |
| Exchange rates. Study measures that could improve functioning of international monetary system. | Fund staff study of exchange rate regimes, asset markets, and international capital flows. Focus on systemic issues. | Diverse views on merits of fixed, floating regimes in liberalized financial markets. | Board paper under preparation for consideration after Interim Committee meeting. | Fund Board to hold seminar after Interim Committee meetings. |
| VI. The Fund's Financial Facilities and Resources | ||||
| CCL. A possible role for the IMF in providing contingent credit lines (CCLs). | Decision by the Fund Board whether to proceed with concept and establish the CCL. | Board has reached a decision to create a Fund-financed CCL. | ||
| Increase in Fund's quotas and entry into force of IMF's New Arrangements to Borrow (NAB) | Approval of members. | Endorsed. | Implemented. | Fund Board to review quota formulae in the context of the 12th General Review. |
| ESAF/HIPC. Secure full financing for interim ESAF and the Fund's participation in HIPC Initiative | Bilateral contributions and direct contributions from Fund's own resources. | Status of financing was discussed by Fund Executive Board on April 16. | Ongoing. | Continue efforts to secure full financing of these initiatives. |
1As described in the Managing Director's Report to the
Interim Committee, October 1, 1998.
2World Bank, Principles of Good Practice in Social
Policy: A Draft Outline for Discussion and Guidance, April 14, 1999, DC/99-4.
3The Fund's archives policy will be reviewed in two
years.
4These case studies, for Argentina, Australia, and the United
Kingdom, are accessible through the Fund's web site along with a solicitation for feedback.
5Appendix I provides the current status
of developing standards in areas outside the Fund's direct operational concern.
6The World Bank is in the process of developing systems for
assisting countries to assess structural sources of vulnerability and providing support for
institutional strengthening and capacity building (Strengthening the Underpinnings of the
Market Economy: International Standards, Principles and Best Practices, and the Role of the
World Bank, April 22, 1999, DC/99-10).