2011 represents a pivotal year for the global economic recovery and for international policy cooperation—as well as for the role of the Fund in addressing these two principal challenges.
The devastating impact of the global financial crisis created a consensus that pre-crisis financial regulation didn’t take the “big picture” of the system as a whole sufficiently into account and, as a result, supervisors in many markets “missed the forest for the trees.” In other words, they did not take into account the macro-prudential aspects of regulation, which has now become the focus of many authorities.
“Never again can we let ourselves be caught unprepared by an economic and financial crisis of such global magnitude.” This was the spirit in which G-20 Finance Ministers in late 2008 tasked the IMF and the newly-formed Financial Stability Board to jointly develop an Early Warning Exercise (EWE), to be ready by the IMF’s 2009 Istanbul Annual Meetings.
The economic and financial crisis of the past two years has placed in high relief profound changes in global economic and financial realities. Most notably, the crisis has underscored the shift in relative economic weight in favor of dynamic emerging market economies. In response, the G-20— a grouping that includes both advanced and large emerging economies—has stepped forward as the premier political venue for addressing economic and financial policy challenges.
There is a broad consensus on at least one conclusion from the turmoil of the past few years: Fundamental changes are needed in the global financial sector.
Some of these changes seem relatively clear:
- Risk management of many financial firms needs strengthening
- Compensation schemes need to be re-evaluated
- Capital standards need to be bolstered
- Regulation needs fundamental reform
- Supervision needs to be improved
- And financial institutions’ balance sheets need to be freed of the burden of impaired assets.
Nonetheless, important tradeoffs will have to be addressed—and political hurdles surmounted—before significant progress can be achieved.
The year 2010 has opened amid generalized—–but tempered—optimism about the global economic and financial outlook.
The unprecedented scale and scope of the anti-crisis measures taken during the past year—and the unprecedented degree of multilateral policy coordination involved in their design and implementation—appear to have succeeded in averting a downturn of historic proportions.