Lessons from IMF/WorldBank Bank Meeting 2009

1. Global Crisis and Policy Responses

The global recession appears to be at, or reaching, the bottom of the trough, so there is a good chance recovery will emerge. When will the recovery take place depends on where you are located. Growth in Asia seems revived. The US economy has somewhat stabilized. But Europe has signs of suffering from huge hangover.

Strong policy actions are recommended to continue to ensure stable economic restoration. The top priority is to revive the health of the financial sector. Noteworthy is that, as the steps of recovery moves forward, policy makers should start to plan for a systematic absorption of an extraordinary amount of public finance poureed into the system.

1. Financial Sector Policies Implemented during Crisis

Countries have taken strong action to support the financial system during the crisis. Many interventions focused on liquidity support while a number of other policy measures focused on enhancing capital adeqaucy of financial institutions. The interventions were debated widely in the use of public funds. In some cases, financial institutuions were nationalized. In some cases, banks were allowed to fail. Given the extensive communication between financial authorities (central banks, regulators, supervisors, and finance ministers), however there was a shortfall on formal collaboration.

1. Fiscal Policies for Crisis and Recovery

Major implications were seen on public finance management during the global financial crisis. For most countries, their fiscal revenues declined. For the emerging markets and low income countries, their economies shrunk because of falling commodity prices and lower export demand. There are political pressures to provide more fiscal support including that of the social sectors. Many countries have implemented fiscal stinulus to increase domestic demand. Negative budgets associated with the fiscal stimulus packages have not been before except during war. These fiscal actions today will have severe implications for long-term fiscal management of the future.

1. Lessons of Global Experience from Central Banks

The crisis has been charaterized by acute stress across international capital markets. In particular banking distress has been a major factor underlying the weakening of financial systems. Research suggests that downturns due to banking and financial distress tend to be persistent. While global economic recovery may be determined by the policies of advanced economies, the experiences of emerging economies with systemic crisis could be insightful for policy makers in advanced economies. Specifically countries that have experienced particualrly harsh banking related financial crises in the recent past have implemented reforms which seem to have supported their financial systesm resiliency. The relevant lessons from past experiences of crisis management and resolution can be43 accessed. Potential solutions to the new challenges of the present crisis can be found from monetary policymakers in emerging economies.

1. Future of the Global Financial System

The action plan put forward by bank regulators include the following:
• Seek changes that can be expected in the scale and trend of financial globalization and necessary risk management for stability across the world;
• Dollar may be less important as a currency of cross border transactions and as a reserve asset;
• SDRs can play a prominent role;
• New forms of financial intermediation;
• New forms of financial engineering;
• Derivative markets and products should be more regulated;

1. Improving the Regulatory Architecture

There is a consensus that regulatory reform is part of minimizing the severe future financial crisis. Suggestions include extending the framework and scope of regulation, incorporating systemic risk assessment, implementing macro prudential regulations, improving cross border regulatory arrangements and addressing information gaps.

1. Crisis Preventon and Resolution

Many regulators expressed that there are no easy answers to prevent another crisis. The Chairman of China Regulatory Commission provided his views:
• The Basel II was untested till now and now shows that it didn’t work, so maybe there would be a Basel III;
• China banking uses simple and basic rules for supervising banks which are very effective if used appropriately;
• Banks have to be made responsible for their actions;
• Strong leadership is needed as the “fish stinks from the head”
• Whoever takes over the role of providing the reserve currency it is hoped that the country is responsible for global economic management;

1. Back to Business

The global economic crisis has already impacted job growth more than any recession in recent history. As the crisis may persist, the public and private sectors must respond creatively to preserve jobs and stimulate new employment. Experieince from the past, points to the need for an efficient and flexible business environment to achieve these goals. Close cooperation between the public and private sector is necessary to ensure a business environment that will facilitate economic recovery and job creation.

1. How the Crisis Impacts Globalization

The global financial system has been adversely afected by the global crisis. It may have not only long term implications for international trade but also for global integration. Commerical banks can longer sell loans easily to secondary markets. Regulatory limits are preventing commercial banks from meeting demand for trade finance. Weaker financial institutions, including the more regulations for US investment banks will cut investment flows. These effects may be long lasting, preventing innovative firms in developing countries from gaining access to the required funding to become international players. The pace and level of FDIs may not recover its pre-crisis levels.

1. Comments from HSBC Chairman Steven Green

He said that the entire banking industry "owes the real world an apology".
There needs to be a change in culture and governance to improve the public's perception of bankers. Regulations alone are inadequate. And more rules will make the financial center is less attractive. He hoped regulators have learn their lessons. The industry needs to pay more attention to liquidity. He also confirms that Asia’s market share of global trade is developing.

1. Comments from IMF and World Bank Chiefs

Mr Strauss-Kahn IMF Chief and Mr Robert Zoellick World Bank President, called for the world to continue co-operating on international economic issues even as the economic and financial crisis recedes. They said that international co-operation on currencies should be developed further. The US and Europe believe the Chinese renminbi needs to appreciate to help reduce China's large trade surplus. Mr Strauss-Kahn commented that rigid currency policies were not the only reason for the rise in global trade imbalances. The other reasons include poorer countries' desire to build huge reserves, rather than turn to the IMF for lending. They kept their exchange rates low to build exports and provide ready funds to deal with a crisis. This build-up of reserves can be replaced in future by a "less costly and more efficient pooling of reserves" at the IMF. Mr Zoellick also called for a shift in world demand. He believes that a multi-polar economy, less reliant on the US consumer, will be a more stable economy.