Honduras.Strengthen the Financial Security Network and Improve Access to Financing

The program has three components: (i) macroeconomic stability; (ii) srengthening of the financialsafety net (FSN) through: (a) strengthening prudential regulation and supervision, (b) strengthening the other basic institutional elements of the FSN; (iii) improving access to financing, with the following subcomponents:

(a) promoting transparency of information and protection for financial service customers;

(b) improving the regulatory framework and the process for enforcing secured transactions; and

(c) institutional strengthening of the savings & loan cooperatives.

Honduras. HO-L1069:Strengthen the Financial Security Network and Improve Access to Financing

IMF Calls for Further Reforms in China’s Financial System

IMF. Press Release No. 11/409.November 14, 2011. China’s financial system is robust overall, but faces a steady build-up in vulnerabilities. While significant progress has been made towards developing a more commercially-oriented financial sector, and supervision and regulation are being strengthened, risks stem from the growing complexity of the system and the uncertainties surrounding the global economy. Further reforms are needed to support financial stability and encourage strong and balanced growth, the International Monetary Fund (IMF) says in its first formal evaluation of China’s financial sector published today.

The IMF’s first Financial Sector Assessment Program (FSAP) review of China was carried out jointly with the World Bank. China is one of 25 systemically important countries that have agreed to mandatory assessments at least once every five years. The FSAPs are part of the IMF’s activities in financial surveillance and the monitoring of the international monetary system.

“China’s banks and financial sector are healthy, but there are vulnerabilities that should be addressed by the authorities,” says Jonathan Fiechter, deputy director of the IMF’s Monetary and Capital Markets Department and the head of the IMF team that conducted the FSAP. “While the existing structure fosters high savings and high levels of liquidity, it also creates the risk of capital misallocation and the formation of bubbles, especially in real estate. The cost of such distortions will only rise over time, so the sooner these distortions are addressed the better.”

Risks

According to the FSAP report, China’s financial sector is confronting several near-term risks: deterioration in loan quality due to rapid credit expansion; growing disintermediation by shadow banks and off-balance sheet exposures; a downturn in real estate prices; and the uncertainties of the global economic scenario. Medium-term vulnerabilities are also building and could impair the needed reorientation of the financial system to support the country’s future growth. Moving along this path will pose additional risks, so priority must be given to establishing the institutional and operational preconditions that are crucial for a wide-ranging financial reform agenda.

The main areas of reform should include:

• Steps to broaden financial markets and services, and developing diversified modalities of financial intermediation that would foster healthy competition among banks;
• A reorientation of the role of government away from using the banking system to carry out broad government policy goals and to allow lending decisions to be based on commercial goals;
• Expansion of the use of market-based monetary policy instruments, using interest rates as the main instrument to govern credit expansion, rather than administrative measures;
• An upgrading of the financial infrastructure and legal frameworks, including strengthening the payments and settlement systems, as well as consumer protection and expansion of financial literacy.

The Chinese authorities have begun to move on many of its recommendations, and the IMF stands ready to provide technical cooperation in areas relating to strengthening the financial stability framework in China.

Stress Tests

Stress tests conducted jointly by the Fund and Chinese authorities of the country’s largest 17 commercial banks indicate that most of them appear to be resilient to isolated shocks, which include: a sharp deterioration in asset quality (including a correction in the real estate markets), shifts in the yield curve, and changes in the exchange rate. If several of these risks were to occur at the same time, however, the banking system could be severely impacted, the report warns.

About the FSAP

The Financial Sector Assessment Program, established in 1999, is an in-depth analysis of a country’s financial sector. The IMF conducts mandatory FSAPs for the 25 jurisdictions with systemically important financial sectors, and any member countries that request it. Assessments in developing and emerging market countries are conducted jointly with the World Bank. FSAPs include two components: a financial stability assessment, which is the responsibility of the Fund; and, in developing and emerging market countries, a financial development assessment, conducted by the World Bank.

To assess the stability of the financial sector, IMF teams examine the soundness of the banking and other financial sectors; rate the quality of bank, insurance, and capital market supervision against accepted international standards; and evaluate the ability of supervisors, policymakers, and financial safety nets to respond effectively to a systemic crisis. While FSAPs do not evaluate the health of individual financial institutions and cannot predict or prevent financial crises, they identify the main vulnerabilities that could trigger one.

In September 2010, the IMF made financial stability assessments under the FSAP a mandatory part of IMF surveillance every five years for jurisdictions deemed systemically important based on the size of the financial sector and their global interconnectedness. The countries affected by this decision are: Australia, Austria, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, Italy, Japan, India, Ireland, Luxembourg, Mexico, the Netherlands, Russia, Singapore, South Korea, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.

For more information on FSAPs, see Press Release No. 10/357.

Can Emerging Market Central Banks Bail Out Banks? A Cautionary Tale from Latin America

This paper investigates whether developing and emerging market countries can implement monetary policies similar to those used by advanced countries during the recent global crisis - injecting significant amounts of money into the financial system without facing major short-run adverse macroeconomic repercussions. Using panel data techniques, the paper analyzes episodes of financial turmoil in 16 Latin America during 1995-2007.

The results show that developing and emerging market countries should be cautious because injecting money on a large scale into the financial system may fuel further macroeconomic instability, increasing the chances of simultaneous currency crises.
 IMF. Author/Editor: Jácome, Luis Ignacio ; Saadi Sedik, Tahsin ; Townsend, Simon.Authorized for Distribution: November 01, 2011.Series:Working Paper No. 11/258
This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Can Emerging Market Central Banks Bail Out Banks? A Cautionary Tale from Latin America

IMF.People’s Republic of China: Financial System Stability Assessment

This financial sector stability assessment on the People’s Republic of China was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on June 24, 2011. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of the People’s Republic of China or the Executive  Board of the IMF.

This report is based on the IMF/World Bank Financial Sector Assessment Program (FSAP) exercise for China undertaken during June–December 2010. The assessment concluded that reforms have progressed well in moving to a more commercially-oriented financial system. Despite success and rapid growth, China’s financial sector is confronting several near-term risks, structural challenges, and policy-induced distortions.

The main sources of risks are:

(i) the effects of a rapid crisis-related credit expansion on credit quality,

(ii) growing off-balance sheet exposures and disintermediation,

(iii) a reversal in rapidly rising real estate prices, and

(iv) an increase in imbalances due to the current economic growth pattern. Medium-term vulnerabilities—the relatively inflexible macroeconomic policy framework, and the government’s important role in credit allocation and in the financial sector at the central and provincial levels—are building up contingent liabilities and could impair the needed reorientation of the financial system to support China’s future growth. A properly composed and timely implemented set of reforms would help address these challenges.

This will require further progress in multiple areas, including

(i) deepening the commercial orientation of banks and other financial firms;

(ii) moving to more market-based means of influencing monetary and financial conditions;

(iii) continued strengthening o he capacity of the central bank on financial stability issues, and that of the supervisory commissions;

(iv) further development of financial markets and instruments to deepen and strengthen China’s financial system; and

(v) upgrading the framework for financial stability, crisis management, and resolution arrangement.

Moving along this path, however, will pose additional risks and new situations. Hence, priority must be given to establishing the institutional and operational preconditions that are crucial to successfully managing a wide-ranging financial reform agenda, and the intent outlined in the latest 12th Five-Year Plan.

The FSAP team comprised Jonathan Fiechter (IMF, Mission Co-Chief), Thomas A. Rose (World Bank, Mission Co-Chief), Udaibir S. Das (Deputy Mission Chief, IMF), Mario Guadamillas (Deputy Mission Chief, World Bank), César Arias, Martin Cihák, Silvia Iorgova, Yinqiu Lu, Aditya Narain, Nathan Porter, Shaun Roache, Tao Sun, Murtaza Syed (all IMF); Massimo Cirasino, Patrick Conroy, Asli Demirgüç-Kunt, Catiana Garcia-Kilroy, Haocong Ren, Heinz Rudolph, Jun Wang, Ying Wang, Luan Zhao (all World Bank); Nuno Cassola, Henning Göbel, Keith Hall, Nick Le Pan, Greg Tanzer, Nancy Wentzler, Rodney Lester, and Walter Yao (all experts). The team met senior officials and staff from relevant government agencies, as well as representatives from financial institutions, industry organizations, and private sector representatives in Beijing, Chongqing, Nanchang, Ningbo, Shanghai, and Shenzhen.

Subsequent to the FSAP mission, the authorities have begun to move on the various FSAP recommendations, and have asked for technical cooperation in several areas relating to the existing financial stability framework.

IMF.Country Report No. 11/321.China, People's Republic of. Published: November 14, 2011.Prepared by the Monetary and Capital Markets and Asia and Pacific Departments. Approved by José Viñals and Anoop Singh.June 24, 2011. People’s Republic of China: Financial System Stability Assessment

People’s Republic of China: Financial System Stability Assessment

On Endogenous Risk, the Amplification Effects of Financial Systems and Macro Prudential Policies

The recent global financial crisis has put the spotlight on macro prudential policies to protect firms and households from problems emanating from the financial sector. Frictions in financial markets including information asymmetries and their implications may amplify shocks and deepen financial crises. In this paper we propose a framework of analysis that combines exogenous and endogenous risks; the latter we see as stemming from these frictions.

We argue that endogenous risks may be systemic and costly. We then employ a database of corporate bond spreads across emerging markets and find evidence that endogenous risks are present and have amplified the effects of financial crises. We also find evidence that larger financial systems exacerbate the impact of crises and that weaker financial systems exacerbate the impact particularly of banking crises.

We discuss the policy implications of our results and suggest that policy makers should monitor time varying systemic risks using both price and quantity signals and take actions in the good times to mitigate potential amplifying effects at times of stress.

IDB, Giovanni Majnoni (Banca d’Italia) and Andrew Powell (IDB)1. May, 2011.

All opinions expressed in this paper are of the exclusive responsibility of the authors and do not
necessarily reflect the opinions of the Banca d’Italia or the Inter American Development Bank. We wish to thank Oscar Becerra for invaluable research assistance. Contact: Giovanni Majnoni:giovanni.majnoni@bancaditalia.it

On Endogenous Risk, the Amplification Effects of Financial Systems and Macro Prudential Policies