UPDATE 1-IMF says it must do more to detect financial risks

Tue Dec 11, 2012 3:50pm EST

Related Topics

* Some IMF staff lack financial expertise

* IMF uncertain if countries listening to advice

* Analyst says real test is predicting next crisis

* New surveillance could also cost more money

By Anna Yukhananov

WASHINGTON, Dec 11 (Reuters) - The International Monetary Fund must improve its ability to monitor financial risks around the world, as it seeks to guard against future economic crises, IMF staff said on Tuesday in a report largely backed by the fund's board.

The IMF has sought to play a greater role in policing the world economy since it failed to predict the last global financial crisis, and was unprepared for how quickly the crisis spread across borders and destabilized the world economy.

Moving beyond its traditional role of analyzing exchange rates, the IMF said last year it would look at capital flows as well as monetary and fiscal policies to assess the risk of cross-border spillovers. It also plans to examine clusters of financially connected countries.

In the first assessment of the new strategy, IMF staff said the fund has made progress in analyzing financial risks, but should do more to quantify them and monitor how each country's policies impact its neighbors.

The fund should also make sure this analysis is part of its annual health check of countries' economies.

"Several teething problems are delaying progress in the implementation of the 2011 (surveillance) priorities," IMF staff said in the report.

The report also said not all IMF staff have sufficient financial expertise, and existing experts do not have enough time to help everyone. The IMF also needs better models to assess how risks spread through financial channels.

In July, the IMF expanded the reach of its country reviews to assess how domestic policies affect global financial stability. Previously, the IMF only had to consider how a country's policies affected its own economy.

In reviewing the staff report, some of the IMF's board directors said the fund may have practical difficulties in trying to analyze multiple countries' policies at the same time, but said it was important to try.

ANYONE LISTENING?

The report said it was still to early to tell whether countries were listening to the IMF's advice.

In the past, the IMF had failed in its efforts to fix trouble spots in the economy through multilateral consultations with the world's major powers.

The IMF hopes its new surveillance can be influential if it provides convincing, relevant advice to countries and follows up on problem areas.

"There is some evidence that the fund is generating more public debate, including in advanced countries," the staff said.

Domenico Lombardi, a former IMF board member who is now a senior fellow at the Brookings Institution, said the report attested to the progress the fund has made in its surveillance framework. But the "acid test" is whether the new rules are enough to detect future economic crises.

It also remains unclear if countries would be willing to take the IMF's advice, he said.

"In the end, it's impossible for the IMF to force implementation of certain policies in member countries, especially the most important ones that are key for systemic stability," Lombardi said. "I think this is a fundamental tension that is up to the membership to resolve."

The IMF staff also questioned whether the IMF had enough resources to really dig into financial risks and surveillance while still devoting enough time to economic problems in low-income countries.

The IMF board of directors said the new surveillance was likely to cost the fund more money, but directors disagreed on whether the IMF should ask for more funds or just try to find internal cost savings.

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