1 Economic and Social Council of the Bretton Woods Institutions Christopher Towe Monetary and Capital Markets Department April 14, 2008

2Outline… Risks of a further deterioration Risks of a further deterioration Key policy requirements Key policy requirements The multilateral response The multilateral response

3Outline… Risks of a further deterioration Risks of a further deterioration Key policy requirements Key policy requirements The multilateral response The multilateral response

4 The global conjuncture and threats to systemic stability remain worrisome… Markets have stabilized somewhat in recent weeks… Markets have stabilized somewhat in recent weeks… But only in response to a massive policy response: But only in response to a massive policy response: Extraordinary liquidity provision by central banks Extraordinary liquidity provision by central banks Cuts in official interest rates Cuts in official interest rates Fiscal stimulus Fiscal stimulus Reform proposals Reform proposals And private market participants have also had to bolster capital… And private market participants have also had to bolster capital… But interbank markets still impaired and there is a significant “tail risk” of self-sustained debt spiral But interbank markets still impaired and there is a significant “tail risk” of self-sustained debt spiral

5 Risks Monetary and financial Conditions Emerging market risksCredit risks Market and liquidity risks Macroeconomic risks Risk appetite Closer to center signifies less risk or tighter conditions October 2007 GFSR April 2008 GFSR Our Global Financial Stability Map shows where the risks are most worrisome

6 IMF estimates of potential losses illustrate it’s not just a “sub-prime” problem… Estimates of Potential Write-downs to Holders of U.S.-Issued Securitized and Unsecuritized Debt 56% 4% 25% $945 billion 2% 8% 4%

7 The U.S. remains a key concern, with default rates rising now in “prime” markets

8 Non-U.S. real estate markets are also vulnerable to a downturn

9 Interbank liquidity problems increasingly reflect solvency concerns…

10 Bank losses are spreading beyond the U.S….

11 The U.S. corporate sector is vulnerable to rising credit strains…

12 Emerging market economies are feeling the pressure of the global financial crisis

13 In summary, we still see significant threats to systemic stability from:  A spreading of the U.S. sub-prime crisis in several dimensions  To other real estate markets, both in the U.S. and abroad  Beyond the banking sector, including to investment banks and monoline insurers  Beyond the industrial world and into the emerging markets and developing countries  To the macro-economies of both mature and developing countries

14Outline… Risks of a further deterioration Risks of a further deterioration Key policy requirements Key policy requirements The multilateral response The multilateral response

15 In the short term, the focus must remain on avoiding a self-sustained credit crunch  Support for interbank markets  Enhance bank disclosure  Encourage bank recapitalization  Early action by supervisors to deal stressed institutions  Develop contingency plans for dealing with potentially large stocks of impaired assets

16 But steps over the medium term are also needed avoid future such episodes… The causes of the crisis were multi-faceted, so too must be the policy response The causes of the crisis were multi-faceted, so too must be the policy response Strengthen credit discipline: Tighten regulation and oversight over mortgage originators to improve underwriting standards Strengthen credit discipline: Tighten regulation and oversight over mortgage originators to improve underwriting standards Stricter application of consolidated supervision: Basel II reduces the incentives to move off-balance sheet, but vigilance will still be required Stricter application of consolidated supervision: Basel II reduces the incentives to move off-balance sheet, but vigilance will still be required Fair value accounting: Care is needed to minimize the procyclicality of this system Fair value accounting: Care is needed to minimize the procyclicality of this system Improve liquidity risk management: Supervisors need to more actively stress test Improve liquidity risk management: Supervisors need to more actively stress test Crisis management Crisis management Enhance central bank liquidity frameworks Enhance central bank liquidity frameworks Improve interagency coordination and information sharing Improve interagency coordination and information sharing Clarify enforcement responsibility Clarify enforcement responsibility

17Outline… Risks of a further deterioration Risks of a further deterioration Key policy requirements Key policy requirements The multilateral response The multilateral response

18 These messages have been given strong endorsement during the weekend… By the Fund’s International Monetary and Financial Committee By the Fund’s International Monetary and Financial Committee The G7, too, called for: The G7, too, called for: A 100-day plan A 100-day plan Enhanced disclosure Enhanced disclosure Review of (fair-value) accounting standards Review of (fair-value) accounting standards New liquidity risk and credit rating guidelines New liquidity risk and credit rating guidelines And by end 2008: And by end 2008: Tighter capital requirements for structured credit products Tighter capital requirements for structured credit products Enhanced transparency guidelines Enhanced transparency guidelines More fundamental changes in the use of credit ratings More fundamental changes in the use of credit ratings And cross-border supervisory cooperation is set to be strengthened in Europe and beyond And cross-border supervisory cooperation is set to be strengthened in Europe and beyond

19 And for the Fund…? We will be responding on the multilateral front: We will be responding on the multilateral front: Our Global Financial Stability Report (GFSR) provides a critical vehicle for disseminating our analysis and pressing our policy advice to a wide audience Our Global Financial Stability Report (GFSR) provides a critical vehicle for disseminating our analysis and pressing our policy advice to a wide audience We will work closely with the Financial Stability Forum to help forge the consensus on specific policy responses We will work closely with the Financial Stability Forum to help forge the consensus on specific policy responses We will be actively engaged with the key standard setters (e.g., Basel Committee) and key private industry groups We will be actively engaged with the key standard setters (e.g., Basel Committee) and key private industry groups And on the bilateral side: And on the bilateral side: The lessons above will inform our FSAP and Article IV assessments, and our dialogue with national policymakers The lessons above will inform our FSAP and Article IV assessments, and our dialogue with national policymakers

20 Economic and Social Council of the Bretton Woods Institutions Christopher Towe Monetary and Capital Markets Department April 14, 2008