Recently, the International Monetary Fund (IMF) released the latest three chapters of the October Global Economic Outlook Report (WEO) and the Global Financial Stability Report (GFSR), reviewing the global economy after the financial crisis ten years later. The recovery and the effectiveness of global financial regulatory reforms.
The IMF pointed out that after ten years of financial crisis, the output of many countries in the world is still lower than the level that should be maintained before the pre-crisis trend. In the future, it is necessary to pay attention to some side effects of the crisis response policy. However, in the IMF's view, the security of the global financial system has improved over the past decade and reminds policymakers of the need to guard against fatigue and complacency.
In addition, along with the normalization of global monetary policy, some emerging market countries have suffered triple-chip debt recovery. The Turkish lira and the Argentine peso have depreciated by about 50% against the US dollar since the beginning of the year. The MSCI Emerging Markets Index has fallen by 5.65% as of October 4.
In this regard, the IMF analyzes the challenges of emerging market monetary policy under the normalization of the global financial environment. The IMF pointed out that emerging markets have maintained low and stable inflation rates for many years, but the Fed's interest rate hike has put inflation in some emerging market countries under pressure. The ability of countries to resist external shocks mainly depends on the central bank's credibility and the anchoring of its inflation expectations. degree. The IMF recommends that emerging market countries enhance their resilience to external shocks by raising fiscal and monetary policies.
National output is still lower than before the crisis, some policies have a mitigating effect
In the newly released WEO Analytical chapter, the IMF studied samples from 180 countries to measure the decline in economic activity after 10 years of Lehman Brothers' collapse. According to the report, today, ten years after the financial crisis, the output of many countries is still far below the level of output that assumes that the crisis has not occurred and the pre-crisis trend has continued.
The reason for the decline in output, in the view of the IMF, is the lack of investment, capital and total factor productivity. According to IMF statistics, as of 2017, investment in countries around the world was about 25% lower than before the crisis, and two important consequences of weak investment were the lack of capital stock and slow adoption of technology.
Although the decline in output is a global situation, the extent of impact varies from country to country. Developed economies and low-income developing countries that depend on commodity exports have been hit harder than others. The IMF believes that the difference in the extent of the impact on countries depends in part on the type of shock that was affected at the time. Some countries suffered from severe banking crises in the crisis, while others were only affected by the weakening of economic activity in developed economies.
According to the IMF statistics, the economy that experienced the banking crisis from 2007 to 2008, about 85% of the output level is still lower than the level that should last before the crisis. In an economy that has not experienced a banking crisis, this proportion is small, about 60%.
In addition, the IMF pointed out that countries with better fiscal conditions, better supervision and supervision of banks, and countries with more flexible exchange rate regimes suffered less. The policy choices made by countries in the first time before and after the crisis have led to differences in economic output. These policies have affected the vulnerability, damage and resilience of countries in the financial crisis.
These policies fall into three categories: First, to curb financial fragility. According to the report, countries with faster credit growth and large current account deficits in the years before the crisis broke out more severely when financial conditions tightened after the crisis. In addition, countries that tightened certain banking operations (such as restricting bank underwriting and conducting securities transactions) before the crisis would reduce the probability of a banking crisis from 2007 to 2008.
The second is the buffer and the framework. The IMF pointed out that there is evidence that countries with stronger fiscal pre-crisis economies have seen smaller reductions in output since then, and higher exchange rate flexibility has also helped to reduce losses.
The third is the policy response after the crisis. After the 2008 financial crisis, some countries adopted unprecedented unconventional policies to support the economy. The IMF believes that these actions, especially bank guarantees and capital injections, support quasi-fiscal measures in the financial sector to help mitigate post-crisis losses.
The report warned that although policy efforts over the past decade have unleashed demand and prevented worse outcomes, financial regulatory reforms have made the banking industry safer, but some of these policies have significant side effects: advanced economies maintain ultra-low interest rates for a long time. Accumulating financial fragility, especially for non-bank financial sectors outside the scope of regulation; many economies have accumulated a large amount of public debt, the fiscal buffer has been weakened, and there is an urgent need to rebuild these defensive measures to prepare for the next recession; 2008 Some of the crisis management tools used in the year ~2009, such as the Fed's direct redemption financial institutions, are no longer applicable, and future financial aid is difficult to replicate.
"Responding to the next crisis will largely require the resolution of the side effects of unconventional policies over the past decade," the report said.
The global financial system is safer, beware of reform fatigue
In addition to the economic recovery, the IMF also evaluated the financial regulatory reforms of the past decade in the new GFSR analytical section.
According to the report, shortly after the global financial crisis, international regulators gathered at the 2009 G20 meeting to comprehensively reform the financial regulatory framework and set a series of high-level targets in various fields. The new framework aims to: increase capital buffers, reduce leverage and financial procyclicality; curb mismatches and currency risks; strengthen supervision and oversight of large interrelated institutions; improve oversight of complex financial systems; and improve bank governance and compensation Practice is consistent with risk taking; correct the processing mechanism of large financial institutions.
Based on an assessment of the implementation of these regulatory agendas, the IMF believes that the global financial system is safer than it was a decade ago: banks have more capital buffers to absorb losses and better convert assets into cash when faced with financial pressures; Countries use stress tests to check the health of “big but not down” banks and set up special oversight bodies to monitor their risk to the financial system. The regulation of the financial industry has increased significantly, and the risk of another crisis has decreased.
But the IMF warned that at the moment, a new kind of risk has emerged - reform fatigue. As the memory of the crisis subsided, financial market participants, policy makers and voters became tired of new regulatory rules, and some even proposed to cancel some of the new regulations.
“The (regulatory) reform agenda to prevent a recurrence of the financial crisis has not yet been fully implemented, and new risks that threaten global financial stability are also emerging,” the IMF said.
Looking ahead, the IMF believes that regulatory reforms should continue to be promoted in four areas:
First, the liquidity aspect. Before the crisis broke out, many financial companies borrowed short-term loans to finance long-term assets. When the funds are in a hurry, they can only sell assets at a price. To this end, the global standards body, the Basel Committee on Banking Supervision, introduced Liquidity Coverage (LCR) and Net Stable Capital Ratio (NSFR) to encourage banks to hold more liquid assets in response to a sudden drop in capital and debt maturity. . The report states that most countries have adopted LCR, but further efforts are needed to implement NSFR.
Second, macro-prudential supervision. Although many countries around the world have established authorities to monitor and control systemic risks, in many countries they still lack sufficient power and tools to limit the leverage of non-financial companies and the household sector. The IMF believes that in the future, data sharing among countries should be enhanced and cross-border cooperation should be carried out in response to systemic risks.
Third, shadow banking and market financing. Countries have achieved results in monitoring and prudential supervision of non-bank financial institutions such as asset management companies, that is, shadow banking institutions. However, efforts in this area are not yet to be continued. In the future, it is necessary to explore activity-based rather than institution-based regulation. If necessary, it is necessary to establish macro-prudential tools for non-bank financial institutions. “In many countries, such as China and other emerging market countries, the rapid growth of shadow banking may pose risks to other areas of the financial system,” the report said.
Fourth, the bank's processing mechanism. During the financial crisis, regulators used taxpayers' money to bail out large banks. Although the financial system was protected from damage, it caused strong opposition from the public. After the crisis, countries adopted a series of measures in an effort to make the shareholders of large banks bear greater costs in dealing with banks. How to improve the processing mechanism of multinational banks through cross-border cooperation is a special challenge.
Emerging markets need to build stronger resilience to deal with external shocks
Since the beginning of this year, emerging market countries have been turbulent. The IMF studied inflation in 19 emerging market economies between 2004 and 2018, during which time emerging market economies have maintained low and stable inflation rates. However, in the past few months, interest rate hikes in developed economies such as the United States have triggered a currency depreciation in emerging market economies, testing their ability to withstand inflationary pressures.
The IMF also found that the main factor affecting inflation in emerging market economies is the expectation of long-term inflation. Inspired by this, the IMF used four complementary indicators to measure the anchoring of inflation expectations in emerging markets. According to estimates, the overall anchoring of inflation expectations in emerging market economies has increased over the past two decades. At the same time, however, the degree of anchoring of long-term inflation expectations between emerging economies and emerging economies and developed economies varies widely. For example, the degree of anchoring in Chile and Poland is comparable to that of developed economies, but the degree of anchoring in Russia and Argentina is significantly smaller than this level.
The report pointed out that when the long-term inflation expectations are insufficiently anchored, the inflation rate tends to rise with external shocks, thereby restraining economic activities and putting the central bank into a policy dilemma. If the central bank uses monetary tightening to cope with rising inflation expectations, it will damage production. On the contrary, if monetary easing is used to stimulate economic activity, inflation expectations will be further aggravated.
Based on this, the report said that the credibility of monetary policy and the intensity of inflation expectations anchored significantly affect the economy's ability to withstand economic shocks. In fact, regardless of the credibility of monetary policy, external shocks will lead to a sharp depreciation of the nominal currency, and thus increase the actual inflation rate. But in those economies with strong central bank credibility, long-term inflation expectations are anchored to a better degree. Once the impact of the shock disappears, the inflation rate will return to normal levels faster, that is, it has a stronger ability to withstand external shocks.
The report recommends that policy makers in emerging market countries plan ahead and consolidate and further increase the anchoring of inflation expectations when the economic situation is better. For countries with low anchorage and poor monetary policy credibility, it is more important to clearly articulate the drivers behind their response to policies when they encounter shocks.
“Emerging markets have improved their fiscal and monetary policy frameworks over the past two decades, keeping inflation at a low and stable level,” the report said. Continued enjoyment of the benefits it benefits depends on policy development in emerging markets. Adherence to the continued improvement of the fiscal framework. It is equally important to enhance the credibility of the central bank, including consolidating and strengthening the independence of the central bank and enhancing the timeliness, clarity, transparency and openness of communication.
