IMF Developing New Tools To Find Financial Trouble Spots

by Mike Godfrey, Tax-News.com, Washington

18 January 2008

The International Monetary Fund (IMF) announced recently that it is developing new applications for stress tests and other quantitative risk-assessment models to help identify financial system vulnerabilities in member countries, in the wake of the US subprime crisis.

It revealed that it has enhanced and expanded its research agenda on quantitative financial stability modelling in an effort to meet with the new challenges arising from financial globalization, in which markets are linked in complex patterns.

The IMF explained that:

"The recent turmoil in credit markets is a clear reminder that financial globalization brings not only benefits—the deepening of financial markets and internationalization in capital allocation—but also new risks and challenges for policymakers."

"Globalization links national economies into a vast network of closely interconnected on- and off-balance-sheet positions, creating the potential for financial instability to be transmitted from one country to other countries or affect regional and global markets."

"A range of analytical tools that are being developed by the IMF's Monetary and Capital Markets Department (MCM) as part of this extensive research agenda will be able to better account for the complex linkages between the global economy and modern financial markets."

"These tools will therefore help sharpen and strengthen IMF's monitoring of member countries' financial systems."

According to the IMF, the primary objectives of this quantitative work are to:

• Enhance the quality of stress tests and other quantitative analyses performed in the context of the Financial Sector Assessment Program (FSAP);
• Support technical cooperation on risk-based supervision and on the implementation of the Basel II capital framework; and
• Facilitate "offsite" surveillance of national and global financial systems, and hence IMF surveillance more broadly.

The specific areas on which the IMF is actively working include:

• Further developing credit risk analysis;
• Focusing more on "second-round effects" of shocks—both interactions within the financial sector and feedback between the financial sector and the macroeconomy; and
• Expanding existing approaches to liquidity risk modeling.

The IMF is committed to continue exchanging knowledge and experience on financial stability modeling, including through organizing and attending workshops and seminars, such as the Expert Forum on Advanced Stress Testing Techniques.

This IMF-organized event, which takes place every 18 months, is attended by supervisory agencies and the central banks that are leading the work in this area.

Recommended