On Tuesday, the International Monetary Fund released its semiannual Global Financial Stability Report. The report acknowledges a broadening of the current financial crisis and calls for “further decisive and effective policy actions and international coordination” to normalize market conditions and restore public confidence.

As previously recognized in February’s G-7 Communiqué, the IMF continues to emphasize several broad goals, including:

  1. Ensuring that the banking system has access to liquidity;
  2. Indentifying and dealing with impaired assets; and
  3. Recapitalizing weak but viable institutions while resolving nonviable banks.

The Report also outlines the elements the IMF believes are necessary for achieving bank stability. These elements include:

  1. A more active role for supervisors in determining the viability of institutions and appropriate corrective actions;
  2. Full disclosure of the impairment of banks’ balance sheets; and
  3. Clarity by supervisors regarding the type of capital required and the time periods allotted to reach new capital ratios.

The IMF estimates the capital needs of banks to range from $275-500 billion in the U.S., $125-250 billion in the U.K. and $375-725 billion in the Euro Zone, and estimates global asset writedowns to reach $4.1 trillion in 2009.

The Report establishes five “priority areas” for regulatory reform:

  1. Extending regulation to cover all systemically important institutions and activities;
  2. Preventing excessive leverage and reducing procyclicality;
  3. Addressing market discipline and information gaps;
  4. Improving cross-border and cross-functional regulation; and
  5. Strengthening systemic liquidity management.

The Report further emphasizes the importance of preventing the spread of the economic crisis to emerging economies, and predicts that emerging markets will see net outflows of private capital “under reasonable scenarios” in 2009, “with slim chances of a recovery in 2010 and 2011.” The Report states that the resources available to the IMF following April’s G-20 summit will “buffer the impact” of the crisis on such economies, but describes a particularly difficult situation in Eastern Europe, where many emerging markets are closely linked with developed economies. The IMF calls on nations to work together to solve the crisis, particularly nations in the European Union, rather than resort to unilateral action that could lead to financial protectionism. The Report also warns against public disillusionment resulting from a perceived “abuse of taxpayer funds.”

Notwithstanding the discouraging outlook for 2009, the Report lauds the “international commitment and determination” as demonstrated at the G-20 summit, and states that “promising efforts are already underway for the redesign of the global financial system that should provided a more stable and resilient platform for sustained economic growth.”