IIF proposes eight-point reform programme to strengthen the global financial system

The Institute of International Finance (IIF) today proposed an eight-point integrated package of actions designed to forge a new partnership between the IMF, capital markets and countries in order to strengthen the global financial system. The IIF's proposals are highlighted in a letter on behalf of its board of directors by IIF MD Charles Dallara to UK chancellor of the exchequer Gordon Brown in his capacity as chairman of the International Monetary and Financial Committee (IMFC), which guides IMF policy.

Dallara addressed the need for new approaches by market participants and national authorities, as well as by the IMF. He noted that abundant liquidity in the markets has contributed to diminished market discipline, while providing fewer incentives for some authorities to reinforce policies or take tough reform decisions. He also noted that lending by the IMF has diminished and important questions have been raised recently regarding the role of the Fund in today's globalised environment. He called for a reform of the Fund, but said that “a broader systemic approach is required if the stability of the international monetary system is to be reinforced and the role of the Fund adapted to meet the needs of today's-and tomorrow's-global economy."

Underlying risks to the economy, ranging from uncertainty in the oil market, tension over trade issues and concerns about global current account imbalances all contribute to the need for reform to the fund. In addition, he said, "There are economies which remain vulnerable to event risk, to a more challenging global environment, or to populism. Lax policy frameworks, the lack of transparency, or incomplete reforms could exacerbate tighter market conditions and contribute to sharp investor reactions unless policies are strengthened and the system is reinforced."

Dallara emphasised that by advancing the changes proposed by the IIF, the IMFC "would reinforce the Fund's core role as the guardian of the global financial system saying that, "In a world of rapid change and increased globalisation, there is no substitute for a strong, dynamic IMF which operates according to its convictions and provides a beacon of sound policies and practices for countries to follow and for markets to respect."

The IIF’s eight-point plan from the Institute’s release is outlined below:

1. IMF management and shareholders should put multilateral surveillance front and centre. This requires a commitment by IMF members to a multilateral surveillance framework that could involve clear assessments of individual policies of key countries. For example, noting that arguably the greatest risk today to the well-being of the global economy and the financial health of emerging markets stems from a potentially disorderly unwinding of global imbalances, the IIF suggested that the IMF should be the facilitator of a multilateral process that recommends mutually compatible G-11 policies and that articulates how each economy could contribute to an orderly easing of the imbalances. By offering independent and dispassionate analysis of the spill-over effects of individual country policies, the Fund could help these countries forge consensus on a package of policies that could preserve open markets, sustain growth and minimise the potential of a disorderly unwinding of imbalances.

2. The IMF should leverage the expertise of market participants, use their influence to increase the impact of its own policy recommendations, and consider markets a key audience for much of its country analysis. The IIF said that the influence of the Fund would be increased and the financial system would operate more efficiently if the Fund routinely sought more input from the private sector, incorporated more market thinking in its analysis and policy recommendations, and published far more of its findings. The IIF proposed that the IMF staff hold regular and systematic exchanges of views with market participants; that the IMF Board could consider establishing a private sector advisory board; and, that the IMFC could engage in discussions with the private sector or meet with the recently announced Group of Trustees for the Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets, composed of eminent personalities in emerging markets finance.

3. Market participants should be consistent in their assessments of risks over the credit cycle. The IIF said, "We should not only look to the Fund for change. Risk management skills and practices have generally improved in the private financial community. Nevertheless, more needs to be done, especially in the investor community and in the area of sovereign risk management." The IIF proposed that analysts should be rigorous in reporting to clients on fundamental economic developments that may run against the grain of market sentiment. Investors should strive toward adopting the expectations set forth in the Principles with regard to sound risk management.

4. Markets and rating agencies should coalesce around industry standards for transparency and investor relations and make better use of a more transparent IMF. The IIF pointed out that data transparency and investor relations' best practices are being updated and advanced through the implementation of the Principles. Analysts should pay greater attention to this data. Rating agencies should explicitly incorporate best practices for transparency and investor relations into their rating frameworks.

5. Emerging market countries should implement policies and reforms consistently across the liquidity cycle and persevere even during times of market enthusiasm. The IIF stated that, "Slow forward movement on structural reforms and institution building that could deliver higher growth has become the Achilles' heel of many emerging market economies." It noted the need for action by governments on a range of structural policies, such as legal and judicial systems, corporate governance, accounting and disclosure standards are crucial for creating a business environment conducive to sustainable growth and investment. It added that these reforms are essential "if populist policies are not to gain the upper hand, possibly sacrificing in some cases years of hard-won economic gains".

6. The IMF should support emerging markets' structural reform agendas more effectively, including through close collaboration with other international institutions. The IIF recommended that the IMF should strengthen coordination with the World Bank and the regional development banks in order to help identify the reforms that require the most attention from authorities. To deliver consistent advice and the most effective expertise, the distribution of responsibilities should be based on comparative advantage.

7. IMF crisis prevention tools should be complemented by a short-term, fast-disbursing liquidity facility. Such a facility could limit the need for self-insurance, thus reducing prevailing distortions in currency markets as well as global imbalances, noted the IIF. It said that, "The substantial reserve build-up in some countries is perhaps symptomatic of a sense among some emerging markets that they may not be able to rely heavily on the Fund should another crisis arise."

8. The IMF should adapt its governance structure to global economic realities. The IIF pointed out that the distribution of quotas and votes among IMF member countries should be modified to reflect the realities of the world economy, including the relative size and importance of the largest emerging market economies. The IIF said that, "Failing to address prevailing discrepancies undermines the Fund's legitimacy as well as its effectiveness."

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