Public Information Notice No. 10/150

Public Information Notice: IMF Executive Board Discusses Financial Interconnectedness

November 22, 2010

On October 25, 2010, the Executive Board of the International Monetary Fund (IMF) discussed a staff paper on understanding financial interconnectedness.

Executive Board Assessment

Executive Directors welcomed the discussion of financial interconnectedness as part of the ongoing efforts to enhance Fund surveillance. They noted that financial interconnections and cross-border flows have brought benefits as well as vulnerabilities. Directors viewed the mapping of the cross-border financial architecture as a valuable first step towards constructing systemic risk maps and identifying fault lines along which financial shocks could propagate. Such maps would further strengthen the Fund's capacity to assess vulnerabilities, monitor the buildup of systemic risks, and provide early warnings. Directors stressed the preliminary nature of the mapping exercise undertaken in the present paper, calling for caution in interpreting its outcomes.

Directors called for further work that would, over time, permit to operationalize the analysis of financial interconnectedness in the Fund's surveillance. The analysis could be used to enhance Financial Sector Assessment Programs, while situating countries in the context of the global financial network would add multilateral perspectives to bilateral surveillance, thereby strengthening the latter. Directors noted that, in keeping with the Fund's mandate and comparative advantage, the objective of such analysis should be to enhance macrofinancial assessments of risks.

Directors saw scope for synergies across the analysis of financial interconnectedness, spillover and early warning exercises, as well as multilateral analyses done in the context of the Global Financial Stability Report (GFSR). They encouraged further research to track the evolving financial architecture and associated changes in risks and vulnerabilities. Enhancements should aim at making the analytical frameworks more risk-based and more dynamic to keep abreast of future changes, including in the regulatory environment.

Directors recognized the large data gaps and challenges for both comprehensively mapping the global financial architecture and analyzing the buildup of systemic risk concentrations. They called for close collaboration and efficient division of labor among all relevant parties, and viewed the joint IMF-FSB working group on data gaps and systemic linkages as a critically important effort in bridging gaps. Directors highlighted the confidentiality concerns and legal constraints that prevent the sharing of information of individual institutions with nonsupervisory entities such as the Fund. Some Directors encouraged exploring possibilities for aggregated data or other methods that could facilitate use of the data for the macro-financial analysis of risks. A number of Directors saw merit in developing a clear framework and set of rules to secure a better understanding of the Fund's role in this area, and a few of them favored amending the Articles of Agreement to make the promotion of financial stability an explicit part of the Fund's mandate.

The discussion has produced many useful suggestions on how to take the work on financial interconnectedness forward while being mindful of competing demands. Directors called for further collaboration and data sharing with relevant multilateral institutions and fora, including joint research with agencies that have access to information not available to the Fund. They encouraged staff to explore publicly available data as well as data available for purchase that could advance the study of financial interconnectedness, and to report back to the Executive Board.