In wake of financial crises, IMF seeks a new role with broader authority
Thursday, May 20, 2010
After failing to foresee the biggest financial crisis of its existence, the International Monetary Fund wants more power to probe individual companies to see if they pose the type of broad risks that crippled the world economy in 2008.
The new authority being advocated by IMF staff would represent an important shift from the agency's traditional role of analyzing and aiding national economies to serving as a sort of global overseer, particularly when it comes to companies considered so connected around the world that their failure could undermine the economy. The events of the last two years -- in which problems in the U.S. housing market triggered the deepest economic contraction since the Great Depression -- have convinced IMF staff that their ability to monitor such institutions has fallen behind.
"We need to learn more about that, and to learn about it, we need more data, including from a rather small number of the large financially systemic institutions," IMF Managing Director Dominique Strauss-Kahn said in an interview this week. "The mandate of the fund is to have surveillance of countries, but today you have institutions as big, maybe bigger, than many countries. How can we have global surveillance without having data on what happens with those large financial institutions?"
The idea is part of an evolving discussion over the IMF's post-crisis role, a debate that has already led to a historic expansion of the agency's available funds, a discussion of ways to provide troubled countries quicker access to help, and renewed attention to the agency's role in early warning.
Agency staff now monitor fever charts assembled for countries around the world, for example, to try to flag those tipping toward a "red" zone, as Greece did recently.
But the proposed expansion of the fund's surveillance role may prove controversial, with financial industry representatives saying they worry about data breaches and over-regulation, even as economists and others say that closer attention to "systemic risk" is among the most important steps needed in the wake of the crisis. Recent IMF staff papers on the issue have not listed the sorts of companies the fund wants to monitor more closely. But major banks like Citibank, mortgage institutions like Fannie Mae, and large insurance companies like AIG have been cited as organizations that are "too big to fail" -- a concept IMF staffers like to render as "too interconnected to fail."
"We would have some real serious problems with it," said Wayne Abernathy, executive vice president for financial institutions policy at the American Bankers Association. "From time to time the IMF has sought to get itself beyond its responsibility of dealing with specific country to country economic issues, and generally they have not gotten far because it is not in their charter or their competence."
In this case, the suggestion stems from some soul searching on the part of an agency that failed to warn of the most severe economic meltdown since its World War II-era founding. Agency staff flagged many of the dynamics that contributed to the crisis, including the rise in default rates among holders of subprime home mortgages, and the complications that could follow. But the risks were put in mute terms.
"Weakness has been contained to certain portions of the subprime market . . . and is not likely to pose a serious systemic threat," the agency concluded in its April 2007, Global Financial Stability Report.
"We were not vocal enough," in announcing the risks, Strauss-Kahn said, arguing that an expansion of the fund's authority to give it more company information would let officials understand better how firms are connected and where broader risks are developing.
"If you are serious about surveillance we need to have the tools to adapt to the fact that the globalized world of today is not the world of Bretton Woods in 1944," Strauss-Kahn said, referring to the agreement that founded the IMF.
The IMF receives economic data and information on governmental finances from different nations, and is given other information as part of its Financial Sector Assessment Program, a voluntary effort to help countries monitor the health of their financial institutions. But under current IMF rules, "members are under no obligation to provide information 'in such detail that the affairs of individuals or corporations are disclosed,' " said a recent IMF staff paper outlining the idea of more intensive disclosure.
Such a change would have to be approved by the IMF's executive board, made up of countries that fund the organization and participate in its programs. A Treasury spokesperson said the United States had no comment on the idea.
The thrust of the proposal, however, is in line with one of the chief lesson of the crisis -- namely that a company's connections and its web of investments can be as important as what can be seen on its balance sheet or presented to a regulator. It may take a global agency like the IMF to grapple with the implications, said Liliana Rojas-Suarez, a senior fellow at the Center for Global Development and former deputy chief of the IMF's capital markets division.
"If we are accepting the fact that interconnections between the large companies is worldwide, then who is there to actually have an understanding of the global impact?" she said. At this point, "no one is the answer."