February 25, 2010Snip from today's meeting in South Korea ~
Reconstructing the World Economy
John Lipsky, First Deputy Managing Director, International Monetary Fund - Opening Remarks at the Korea Development Institute (KDI)/IMF Conference
Seoul, Korea, February 25, 2010
The Future Financial System
It comes as no surprise that the crisis—with its financial sector origins —has motivated a profound re-evaluation of the global financial system. How policy makers and market participants respond to the recent events will shape the future financial system and its role in the global economy for decades to come.
To limit future crises, we must be better equipped to cope with systemic risks in a globalized system. This will require multiple reforms, including a widening of the perimeter of regulation to include all systemically significant financial institutions. In addition, incentive-compatible regulation will be needed to limit excessive leverage and risk-taking. Of course, efforts to mitigate systemic risks are not costless. For example, excessive regulation could stifle innovation and unduly limit the potential benefits of a globally integrated financial system.
The dramatic recent demonstration of the impact of international linkages has underscored the importance of creating a new regulatory framework that is broadly consistent across countries. This will represent a complex challenge, especially for such issues as the resolution of failing cross-border institutions. The IMF can and will encourage our members to coordinate their reform efforts. And the Fund’s detailed knowledge of its members’ financial systems and its experience in monitoring global standards and codes should allow the Fund to contribute meaningfully to the efforts currently underway to design a new financial system that serves the global community. Reaching agreement, however, will require serious and sustained political support.
Reforming the International Monetary System
The final session today focuses on how a new international financial architecture -- and in particular a strengthened international monetary system -- can help to address some of the current challenges.
As is recognized generally, key exchange rates have been relatively stable through the crisis. A flight to the US dollar took place in September 2008—contrary to what many had predicted, given concerns about the US economy. However, the dollar’s continued dominance as an international reserve asset means that the global demand for reserve assets can only be satisfied if the reserve issuer runs external deficits. And there is no automatic mechanism that would mitigate an ongoing reserve build-up by surplus countries. This problem has been aggravated in recent years as the demand for reserves rose sharply—reflecting in part the desire of many large emerging markets to self-insure against costly capital account crises. Of course, in many cases the reserve build-up has far exceeded any conceivable insurance function.
How can these tensions best be addressed? On the demand side, alternative insurance arrangements could mitigate the precautionary demand for reserves. On the supply side, alternative reserve assets could strengthen systemic stability and efficiency.
The recent reform in the IMF’s lending instruments—in particular the introduction of the Flexible Credit Line (FCL), and the mainstreaming of high-access precautionary arrangements (HAPA)— represents a significant step forward in bolstering the Fund’s insurance facilities. However, these instruments cannot serve as full substitutes for reserves, given that countries must qualify for them.
Recent studies by Fund staff, including today’s background paper and a paper presented to our Executive Board last summer on “Exchange Rate Regimes and the Stability of the International Monetary System” present a number of proposals to improve the stability of the international monetary systems in light of recent challenges. These proposals eventually could gain traction and practical relevance, if more incremental efforts aimed at strengthening the current system prove insufficient.
As you can see, today’s agenda is both broad and deep. I thank you for joining us today, and look forward to useful discussions.
http://www.imf.org/external/np/speeches/2010/022510.htm
Recommend taking a look at this ~
Peterson Institute for International EconomicsNew Estimates of Fundamental Equilibrium Exchange Rates (FEERs): Question and Answer Session ~
