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Saturday, March 07, 2009

“Initial Lessons of the Crisis” and “State of Public Finances” by IMF

IN CLEAR WORDS ,IMF SAYS THAT THE POLITICAL SYSTEM ,WAS NOT SUCCESSFUL IN REGULATING THE GLOBAL MARKETS,BUT WHY?
WHEN ITS MAIN PURPOSE AND EXISTENCE ,ESPECIALLY IN THE IDEOLOGY OF ALMOST TOTAL FREE MARKETS ENVIRONMENT,SHOULD BE THAT ONE (REGULATOR) WITH ITS CONSEQUENCES (CONTROL,JUSTICE,QUICK REACTIONS TO FRAUD,ETC).

A).......Government debt is expected to rise even faster, by about 15 percentage points of GDP for advanced G20 countries in 2008/2009, and this is the largest increase in any two years since the end of the second world war. Further increases are projected in our paper in the following years. Moreover, the outlook will, of course, be worse if growth falls short of what is projected in the January WEO update, and if additional support were needed for the financial sector. Our paper presents some scenarios illustrating these downside risks.

The possible concerns about the reliability of the fiscal accounts that may arise from this figure should, in our view, be addressed. This is critical because if investors lose confidence in the solvency of governments, interest rates will rise and financial markets will be further destabilized, and the fiscal stimulus itself will not be very effective.

So how do we deal with this risk? Our paper proposes a strategy based on four pillars. The first pillar is that fiscal stimulus packages should not involve permanent..............


B)......QUESTION: Yes. Specifically what's the role of governments on this?

MR. CARUANA: I could answer at least part of it by saying that the approach that we have taken here is that we should capture systemic risk and that the way to do it is by a functional approach, and by functional means those that perform -- financial institutions that have a function that is systemically important should be regulated, and then I explained that there is a two-tiered approach. First is expanding the oversight, the disclosure. I think hedge funds that have some size will be under this, so there should be kind of disclosure for hedge funds. And then there should be an analysis on the part of supervisors of which institutions whether they are hedge funds or not hedge funds are systemically important, and we have to recognize that systemic today has more meanings than before the crisis. Systemic today is not just size, it's interconnectedness, it is the business model that they have, the funding model. It is much more complex. But these judgments should be passed and then decide which institutions should be under prudential regulation, which would mean which institutions, for example, are you going to have some kind of capital requirements, liquidity requirements, or special resolution frameworks. That is not automatic. It should be decided. But for example, let me give you one example. Any financial institution that would be engaged in selling credit default swaps, insuring writing credit protection in a very heavy way that provides with a lot of interaction and interconnection should be in our view subject to some capital requirement and if it would happen whether it is an insurance company, such as AIG, or if it is a hedge fund, or if it is a bank, it is not important what is the legal structure, the important thing is that they are engaged in a systemic activity that creates size and interaction and therefore it requires some capital requirements or some prudential controls. And we don't enter into the details of how these requirements should be. We are not the regulator. It should be for the regulators to do that. But that's what we have presented. We do not even say that all .....


C)MR. CARUANA: Let me start with the second. We just think it is important to have some supervisor that has an overall view of systemic risks, so I think this is pointing us in the right direction and we are calling for that in the papers that you have there. In terms of the code of conduct, I would say that the important thing there is that what we are saying is that there is a need for fundamental improvements in the institutional and legal setting in some areas that refer to the cross-border management of financial institutions such as early remedial action, the resolution of cross-border institutions and the burden sharing. These are very difficult questions and sometimes the cooperation among supervisors is limited by these questions not being resolved, and for resolving these questions it is important to get more additional political support and that is what we are saying. As it was mentioned before, these papers have been shared and have been -- we have benefited from the multiple discussions where we've participated. We participated in the Financial Stability Forum, we participated in the working groups around the G-20. We are benefiting from these discussions and we are.....

MORE http://www.imf.org/external/np/tr/2009/tr030609.htm

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