Today’s financial market turmoil has exposed weaknesses in the current global financial system, of which many were known but went unaddressed. This lack of action reflects the increased complexity and linkages of the global financial system, and the absence of an effective anchor for financial stability. Restoring financial market confidence has had to rely on liquidity injections by major central banks. While this appears to have been successful, questions remain as to whether the turmoil could have been averted and its impact mitigated.
The IMF can play an important role in this regard, owing to its truly global perspective – one that encompasses both advanced economies and emerging and developing economies, which are increasingly integrating into the global financial system. Moreover, the IMF does not focus on financial markets per se , but has unique expertise on the linkages between the real and financial economy. Finally, the IMF’s perspective is universal, looking across sectors and markets.
So far, the Fund has not fully exploited its unique position, because it has often been passive in reaching out, giving clear messages, and making recommendations to its members. But the current financial market turmoil has shown that there are regulatory and supervisory gaps and poorly understood international linkages that call for a global response.
We believe that the IMF needs to move decisively on financial stability issues and be more proactive to help prevent and mitigate future crises. The IMF should work closely with the Financial Stability Forum, the Bank for International Settlements and other relevant international bodies. To strengthen the Fund’s financial stability role, we propose action in three related areas.