The genies are coming out of the bottle as a result of recent financial market turbulence, International Monetary and Financial Committee (IMFC) chairman Tommaso Padoa-Schioppa said yesterday. Problems in the system may be deeper than realized, he said, after leading finance ministers and central bank governors on the IMFC took stock of the situation.
They pledged to continue working together, including multilaterally to analyze the nature of the disturbances and to consider lessons to be learned and actions needed to prevent further turbulence. The IMFC will formally review the situation in April 2008, but Padoa-Schioppa told Emerging Markets that the committee will meet regularly between now and then. The IMFC said in a communique that financial innovation and securitization, while having contributed to enhanced risk diversification and improved market efficiency have also created some new challenges that need to be properly addressed.
Member countries stressed that the Financial Stability Forum (FSF), the Bank for International Settlements (BIS) and the IMF all had roles to play in analyzing issues arising out of the crisis. The call echoed that made at the G7 finance ministers meeting on Friday but was made on behalf of a much wider group of developed and developing countries.
Issues to be addressed include risk management practices on complex structured products; valuation and accounting for off-balance-sheet instruments; clarifying treatment of complex products by rating agencies; addressing principles of prudential oversight for regulated financial entities, and liquidity management.
The committee urged the IMF to broaden and deepen its financial expertise to identify future issues. Multilateral institutions have come under attack in some quarters for failing to foresee the US sub-prime mortgage crisis, but managing director Rodrigo de Rato emphasized yesterday that the IMF had sounded warnings well in advance of the crisis.
Padoa-Schioppa claimed that real progress had been made on the need for quota reform within the IMF, including the need for a shift from advanced to developing counties in terms of voting power. The IMFC supported the inclusion of GDP size as criterion for determining quota allocation in future, and said that purchasing power parity should play a role in this regard.
The IMFC offered a warm farewell tribute to de Rato, who will leave the IMF at the end of this month. The statement referred to his skilful and strategic leadership in positioning the Fund to meet the challenges of a rapidly evolving global economy. They praised his dedication and vision, which have helped set the Fund on a strong and positive path to the future.