G20-IMF-FSB Update – March 26, 2010
By Adam S. Hersh
March 26, 2010
Show Us the Money
In 2009, the G-20 committed US$750b in new resources for the IMF (pdf). After pledging $500b through the IMF’s New Agreements to Borrow at the G-20 meeting in September 2009, the G-20 countries plus some others met in November to hammer out the details of delivering these funds to the IMF. (An additional $250b was raised by a new issuance of SDRs in August 2009).
G-20 Funds Delivered from New Agreements to Borrow and Other Funds Supplied
2010
- Canada – US$769m to the Poverty Reduction and Growth Trust
- Denmark – SDR200m for lending to low income countries
- Spain – SDR405m for lending to low income countries
- Slovak Republic – Euro 440m (US$600m)
- Belgium – Euro 4.74b
- Malta – Euro 120m
- Brazil – US$10b via a Note Purchase Agreement
- India – US$10b Note Purchase Agreement
2009
- Portugal – Euro 1.06b
- Denmark – Euro 1.95b
- Japan – US$100b
- Netherlands – Euro 5.31b
- Spain – Euro 4b
- Germany – Euro 15b
- France – Euro 11b
- UK – US$15b
- Norway – US$4.5b
- Canada – US$10b
- Switzerland – US$10b
- US – $100b
- Korea – $10b
- Australia – US$5.7b
- Russia – US$10b
- China – US$50b Note Purchase Agreement
- Singapore – US$1.5b
- Chile – US$1.6b
So, G-20 countries and others have largely delivered on their commitments to bolster IMF resources to fight the global economic crisis. New resources from the G-20 were directed specifically toward alleviating problems arising from the global economic crisis–to provide financing no longer readily available from international capital markets and to support countries adversely affected by external demand shocks owing to the global recession. In addition, the G-20 directed and the IMF pledged specifically to expand quantity limits and terms for concessional lending to low income countries. But how much of the new resources is reaching countries in need?
Overall, it is difficult (if not impossible) to discern which IMF lending activities are attributable to the new resources committed by G-20 countries and which are continuations of lending from existing resources and programs. Clearly, any lending originating before the November 2008 G-20 summit is unrelated to the G-20’s directives or commitment of resources. I attempt to identify the lending decisions specifically highlighting additional needs or exceptional circumstances directly related to the global economic crisis. In these cases, the IMF cites modification of performance criteria, revisions to the quantity of credit provided, or changes to the disbursement schedule or loan terms. The IMF reports new lending of US$5b to sub-Saharan Africa in 2009
The IMF’s Flexible Credit Line (FCL) provides a source of credit ex ante to qualifying countries to be drawn upon as necessary or on a precautionary basis. The IMF’s Extended Credit Facility (ECF) is intended to provide concessional financial assistance supporting balance of payments problems in low-income countries. The ECF replaces the Poverty Reduction and Growth Facility (PRGF) and is financed under the Poverty Reduction and Growth Trust (PGRT).Eligibility for concessional lending under the ECF is determined per capita income levels commensurate to World Bank IDA thresholds as well as potential near-term risks. Countries qualifying for the ECF/PRGF may also qualify for access to the IMF’s Exogenous Shocks Facility (ESF), intended to help low income countries experiencing temporary economic shocks from events originating outside their national economies (e.g. world commodity price shocks, natural disasters, lost demand due to economic crises in other countries, etc.). The ESF carries an initial no-interest period, followed by 0.25 percent with a ten year term.
Under the Flexible Credit Line
2009
Under the Extended Credit Facility
2010
- US$118.1m for Mauritania
- augmented the Gambia’s ECF by US$7.1m and released a furtherUS$3m under the 2007 agreement
- US$79.4m for Malawi
- US$574m for Moldova
2009
- US$21.5m for the Comoros under PRGF
- US$240.6m for Ethiopia under the Exogenous Shocks Facility
- US$1.13m for São Tomé and Príncipe
- US$10.7m for St. Lucia under the Exogenous Shocks Facility
- US$602.6m for Ghana under PRGF
- US$5.1m for Dominica under the Exogenous Shocks Facility
- US$1.57b for Bosnia and Herzegovina
- US$144.1m for Cameroon under the Exogenous Shocks Facility
- US$176m for Mozambique under the Exogenous Shocks Facility
- augmented by US$14.4m Benin’s ongoing August 2005 PRGF
- augmented by US$112m Senegal’s earlier 2008 US$75.6m Exogenous Shocks Facility agreement
- US$1.86m for the Republic of Congo under PRGF
- US$336m for Tanzania under the Exogenous Shocks Facility
- US$209m for Kenya under the Exogenous Shocks Facility
- US$5.7m for St. Vincent and the Grenadines under the Exogenous Shocks Facility
- increased by US$256.4m Zambia’s PRGF
- US$116m for Tajikistan under PRGF
- US$565.7m for Côte d’Ivoire under PRGF
- US$195.5m for Democratic Republic of Congo under the Exogenous Shocks Facility
2008
- US$100m for the Kyrgyz Republic under the Exogenous Shocks Facility
- US$12.53m for the Republic of Congo under PRGF
- US$13.6m for Armenia under PRGF
Under Stand-By Agreements
2010
2009
- US$240.9m for Mongolia
- US$3.63b for Belarus
- US$92.5m for the Maldives, inclusive of US$13.2m from the Exogenous Shock Facility
- US$1.4b for Angola
- US$1.7b for Dominican Republic
- US$17.45b/Euro 12.91b for Romania
- US$2.46b for Belarus
- US$540m for Armenia, later augmented by an additional US$282.7m
- Euro 394m for Serbia, later augmented by an Euro 2.5b
- US$935m for Guatemala
- US$735m for Costa Rica
2008
- US$16.4b for Ukraine
- Euro 1.71b/US$2.35b for Latvia
- US$2.2b for Iceland
- Euro 12.3b/US$15b for Hungary
Of the US$750b of new resources committed by the G-20, I identify total lending supplied under these facilities: US$156.27b. (Note: The total amount expressed in dollar terms will vary due to US$/SDR and Euro/SDR exchange rates).
IMF Updates Data Dissemination Standards to Cover Financial Soundness Indicators
Work to improve the quality, timeliness, standardization, and availability of economic data is a mundane and thankless–though important–job. While valuable in its own right, arduous efforts at international cooperation to improve information reporting and disclosure have not succeeded in mitigating pervasive international financial crises. Nor will they. After all, information on the aberrant appreciation of housing prices int 2000s against a decades-long level price trend, or information about the vast inflation of stock valuations in the late 1990s were readily available for anyone who cared to look.
Since the Asian financial crisis of 1997-98, the IMF and other international bodies have been working to improve and expand the availability of information through a set of Special Data Dissemination Standards. In 2001, the IMF compiled a set of financial soundness indicators (FSIs) (pdf) to provide objective measures for monitoring financial system soundness. The identifiedcore FSIs cover a range of measures pertaining to the health of banking systems–regulatory capital, nonperforming loans, return on assets, liquidity, and sectoral, maturity, and foreign currency exposures of assets–and a broader set of encouraged indicators. Now, in 2010, the IMF will incorporate these core FSIs into its data standards.
While incorporation of FSIs into international data reporting systems has been a decade-long project, the G-20 also encouraged the IMF to work on data improvement and standardization. In 2009, the IMF, BIS, and European Central Bank released through joint effort a Handbook on Securities Statistics, 2009 (pdf). The G-20 countries themselves recently began sharing their statistics online to enable monitoring of economic and financial developments in these economies.
How much will the new FSIs improve monitoring and management of financial stability? Not as much as we would hope. The evidence is that these indicators of the financial system are procyclical, showing improvement in financial booms, but masking the accumulation of underlying risk and financial fragility revealed in the deterioration of these indicators only when the economy turns to bust. For example, the ratio of nonperforming loans will decline in a credit boom-fueled economic expansion. But improvement in this indicator can mask the fact that banks are over-extending loans that will become nonperforming in the future when boom conditions ease. Similarly, return on assets should increase during an expansion when there are many (apparent) profitable lending opportunities, but can plunge when the expectations of those opportunities go unrealized in a contraction. Monitoring nonperforming loans or return on assets indicators does not provide a reliable real time or forward-looking assessment of financial system soundness. Nor do these indicators help policymakers discriminate between healthy, sustainable real economic expansions and unhealthy, speculative-led expansions.
Counterstrike Against Countercyclical Financial Regulation
Proposals for "dynamic provisioning" are on the way out,according to Tony Jackson of the Financial Times.Dynamic provisioning is a variant of the countercyclical capital reserve requirements under discussion at the FSB and Basel Committee (see Section 3.2 – pdf) that would dampen the exuberance of credit booms and leave banks better positioned to withstand credit busts. The Basel Committee’s December 2009 consultative document, "Strengthening the resilience of the banking sector"explored countercyclical capital buffers at length, hailed them as a foundation for a more stable banking system, and slated proposals for further development and assessment to be reported at their July 2010 meeting.
At the same time that the BIS (convening a number of central bankers) was recommending regulatory policies to curb procyclicality in financial markets, Jackson observes of countercyclical dynamic provisioning:
Last week the UK’s chief financial regulator Lord Turner – not normally a man shy of his views – went cool on the idea. So did the head of the International Accounting Standards Board. Meanwhile, both the Basel Committee and the European Commission, I am told, are quietly backing away.
Though the Basel Committee highlights countercyclical capital buffers are "common sense best practices" for financial institutions to pursue, the reality is that the practice will often be inconsistent with the profit-maximizing behavior of financial institutions as well as strategic decisions about corporate governance and control. Building countercyclical capital buffers would require financial institutions to lend less and to hold more resources in low-yielding reserves at precisely the time when lending appears most profitable. Failure to maximize short term profits (relative to competitors) would likely adversely affect share prices, exposing the financial institution to take-over and curbing benefits of share ownership and stock options enjoyed by executives and managers. Thus, in addition to pursuing strategies that minimize holdings of low-yielding reserves, executives face incentives to prop up share prices by distributing dividends and by using the financial institution’s resources for share buy-backs. Indeed, such practices have been prevalent in the present crisis even in financial institutions receiving government bail-outs. Hoping that financial institutions will voluntarily adhere to these common sense best practices when the incentives of the current regulatory regime are lined up against such behavior is not a prudent approach to ensuring systemic financial stability.