On Friday, the IMF Executive Board held discussions regarding the initial lessons learned from the ongoing financial crisis. The Executive Board had previously convened on February 25, 2009, to address the conclusions of a comprehensive staff paper entitled “Initial Lessons of the Crisis” prepared by the Research, Monetary and Capital Markets and Strategy, Policy and Review Departments of the IMF.

The staff paper “summarizes the initial lessons of the financial crisis along three dimensions – regulation, macroeconomic policy, and the global architecture for stability.” These dimensions, however, are addressed in more detail in three separate companion papers that, together with the comprehensive staff paper, compose a study that was requested by the International Monetary and Financial Committee in preparation for the upcoming G-20 summit to be held in London next month. The IMF intends for the study to be used in part by the G-20 members to “come up with a blueprint for reforming the way financial markets are regulated and for making international financial institutions, such as the IMF and the World Bank, more effective.” In its discussions related the analysis and conclusions of the companion papers, the IMF’s Executive Board emphasized “the need for remedial actions across a broad front and at many levels” and also the need for coordinated action among policymakers.


The first companion paper entitled “Lessons of the Financial Crisis for Future Regulation of Financial Institutions and Markets and for Liquidity Management,” primarily “draw[s] lessons for financial sector regulation and supervision and central bank liquidity management from the ongoing crisis, focusing principally on implications for the future rather than on immediate crisis management policies.” While the paper does not “seek to prescribe the specifics of various policy measures” it notes that the Fund is well positioned to “both help and define priorities and assist in [the] implementation” of measures and initiatives in some of the following areas: regulation of systemic risk, procyclicality, filling in information gaps, and strengthening the capacity of central banks to provide liquidity.

Mr. Jamie Caruana, head of the IMF’s Monetary and Capital Markets Department, noted that “[w]hat is clear from the crisis is that the perimeter of regulation must be expanded to encompass systemic institutions and markets that were operating below the radar of regulators and supervisors.” He further stated that the IMF has recommended “a two-tiered approach to expand regulation: extending disclosure to provide enough information for supervisors to determine which institutions are big or interconnected enough to create systemic risk, and intensified functional regulation and oversight.”

Global Architecture

The second paper, entitled “Initial Lessons of the Crisis for the Global Architecture and the IMF,” acknowledges that the present financial crisis “has revealed important flaws in the current global architecture” and specifically identifies four areas where the “existing architecture failed to respond adequately as growing vulnerabilities eventually produced a crisis.” These areas include regulation of systemic risk and “international coordination of macro-prudential responses to systemic risk,” cross-border coordination and arrangements for financial regulation, and augmentation of funding “for liquidity support or external adjustment[s].”

Macroeconomic Policy

The third paper, entitled “Lessons of the Global Crisis for Macroeconomic Policy,” re-examines “the role of macroeconomic policy in the management of credit and asset price booms.” The paper concludes that the current financial and economic crisis “underscores the need to develop new measures of systemic risk” and that “[t]here is now a stronger case for monetary policy decisions to be based on a framework that incorporates the longer-term implications of asset-price booms for inflation and economic growth.” The paper further acknowledges that, in retrospect, “[r]egulation may have been the better tool in theory, but in practice huge risks accumulated below the regulator’s radar, in banks and in the shadow banking system.” In addition, the paper notes that “the depth of the crisis is refuting any notion that the ex-post clean up can be relatively costless and easy.”

The IMF noted in its discussions that “given its mandate, [it] has a singular responsibility to analyze the crisis and work closely with other plays – both national and international – to help restore global financial stability and economic growth. The IMF hopes that the upcoming G-20 summit will provide an opportunity to make real progress.

Also on Friday, the IMF released a separate paper, entitled “The State of Public Finances: Outlook and Medium-Term Polices After the 2008 Crisis,” which addresses the direct fiscal implications of the financial crisis “assesses the status of fiscal balances after the shock, and discusses the strategy to ensure fiscal solvency.”