The Global Financial Crisis: What Are We Learning About Policy-Makers’ Data Needs? Tessa van der Willigen and Pedro Rodriguez Strategy, Policy, and Review Department IMF

Outline What happened Short-term actions Better early warning in future Data needs Disclaimer: I may stray outside SNA proper, but balance sheets are key...

What Happened? Background Macroeconomic conditions: Low global interest rates, reflecting large external surpluses in key emerging markets and easy monetary policy Very large increases in asset prices Financial sector regulation: Rapid growth in “subprime” mortgages in US Repackaging into traded structured products

What Happened? The Crisis Correction in the US housing market Fall in, and increased uncertainty in, the price of structured products Financial institutions: made losses and sold assets began to hoard liquidity because of increased uncertainty (about values and counterparties) reacted sharply to the collapse of Lehman Brothers

What Happened? International Linkages Origins of the crisis in the US Spillovers to Europe because of direct exposures and declines in wholesale funding Emerging markets hit after the collapse of Lehman: The “decoupling” hypothesis was probably always optimistic Accelerated deleveraging

Getting the Crisis Under Control--I Restoring confidence in mature financial systems: Providing short-term liquidity Removing damaged assets from banks’ balance sheets Recapitalizing banks

Getting the Crisis Under Control--II Dealing with capital flow reversals in emerging markets: Use reserve buffers Liquidity support (swap lines with major central banks, the IMF’s new Short-Term Liquidity Facility) Adjust as necessary Review contingency plans in case of banking sector problems

Getting the Crisis Under Control--III Addressing the fiscal consequences of intervention in the financial system Ensure debt sustainability Develop an exit strategy

Better Early Warning in Future--I Better financial stability analysis: Risks were moved to off-balance sheet vehicles Risks moved to a burgeoning superstructure of complex marketable products and derivatives and became untraceable

Better Early Warning in Future--II Better macroeconomic analysis: Need better identification of asset price bubbles Need a better understanding of how concerned we should be about external imbalances (e.g., the discrepancies between the development of US foreign assets and its current account)

Better Early Warning in Future--III International financial linkages: We had far too little idea of countries’ exposures to other countries, different kinds of institutions, and different kinds of instruments

Data Needs—Fiscal Accurate and transparent recording of the fiscal costs of intervention in the banking sector and implications for public debt contingent liabilities

Data Needs—Financial Sector A big agenda for regulators Related, we also need better aggregate financial stability analysis Considerable efforts in recent years: Balance sheet analysis (the IMF’s Standardized Report Forms for Monetary and Financial Statistics cover banks, non-bank depository corporations, insurance companies, pension funds, investment funds, special purpose entities, etc.) Financial Soundness Indicators (Coordinated Compilation Exercise; though these are lagging indicators)

Data Needs—Financial Sector, Ctd. Importance of information on: Off balance sheet entities Contingent exposures (derivatives) Maturity of liabilities and assets Intrasectoral exposures/market structures Valuation

Data Needs—External Sector We need: better analysis of the buildup of external vulnerabilities; and better analysis of the potential for international spillovers through the financial sector. Again, considerable efforts in recent years: initiatives on debt and reserves data after the Asian crisis Balance of Payments Manual 6th edition, with more emphasis on the International Investment Position (IIP) and its composition (e.g., maturity, currency) Coordinated Portfolio Investment Survey Coordinated Direct Investment Survey (forthcoming)

Data Needs—External Sector, Ctd IIP: Sectoral composition Geographical composition Currency composition (incl. of reserves) Expand CPIS (key countries not covered, annual frequency, long lags) Valuation issues, esp. of FDI

Conclusion Some themes that may be relevant for SNA: Balance sheets are indeed crucial We need not just their amounts but their sensitivities to various developments (for stress testing) Off balance sheet and contingent exposures are crucial Aggregation can mask important features Valuation issues are very difficult