Tag: IMF

LTV and DTI Limits—Going Granular

DFA analysis of Australian mortgages highlight that we have high LTI ratios, and high LVR ratios, both indicating a build up of systemic risks in the system. We used postcode level analysis, and believe that it is essential to “get granular”.

Now the IMF has released a working paper on the effectiveness of using loan-to-value (LTV) and debt-service-to-income (DTI) limits as many countries face a new round of rising house prices. Yet, very little is known on how these regulatory instruments work in practice. This paper contributes to fill this gap by looking closely at their use and effectiveness in six economies—Brazil, Hong Kong SAR, Korea, Malaysia, Poland, and Romania.

IMF-LTI-LVRIn most cases,the caps on LTV and DTI started in the range of 60–85 percent and 30–45 percent, respectively, for mortgage loans. In all countries, there were changes to the limits of LTV/DTIs typically because the authorities noted that they were not having the desired effect. In some cases, house price and mortgage growth did not fall, and in other cases, the limits did not bind. Concerned with speculative activities, authorities in some countries lowered the caps selectively either for speculative prone (geographical) areas or for individuals with multiple mortgages. In one case, the centrally set caps were removed and banks were allowed to set their own limits, validated by supervisors. However, this did not work, and stricter requirements were put back in place.

To curb leakages, the limits were extended in some of the countries to insurance companies, mutual funds and finance companies that advertised mortgage products. It was also extended to development financial institutions.

Insights include: rapid growth in high-LTV loans with long maturities or in the number of borrowers with multiple mortgages can be signs of build up in systemic risk; monitoring nonperforming loans by loan characteristics can help in calibrating changes in the LTV and DTI limits; as leakages are almost inevitable, countries strive to address them at an early stage; and, in most cases, LTVs and DTIs were effective in reducing loan-growth and improving debt-servicing performances of borrowers, but not always in curbing house price growth.

Note: 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.

IMF World Economic Update

The latest IMF World Economic Update just released, highlights slower growth in Emerging Markets, but a gradual pickup in Advanced Economies.

Global growth is projected at 3.3 percent in 2015, marginally lower than in 2014, with a gradual pickup in advanced economies and a slowdown in emerging market and developing economies. In 2016, growth is expected to strengthen to 3.8 percent.

A setback to activity in the first quarter of 2015, mostly in North America, has resulted in a small downward revision to global growth for 2015 relative to the April 2015 World Economic Outlook (WEO). Nevertheless, the underlying drivers for a gradual acceleration in economic activity in advanced economies—easy financial conditions, more neutral fiscal policy in the euro area, lower fuel prices, and improving confidence and labor market conditions—remain intact.

In emerging market economies, the continued growth slowdown reflects several factors, including lower commodity prices and tighter external financial conditions, structural bottlenecks, rebalancing in China, and economic distress related to geopolitical factors. A rebound in activity in a number of distressed economies is expected to result in a pickup in growth in 2016.

The distribution of risks to global economic activity is still tilted to the downside. Near-term risks include increased financial market volatility and disruptive asset price shifts, while lower potential output growth remains an important medium-term risk in both advanced and emerging market economies. Lower commodity prices also pose risks to the outlook in low-income developing economies after many years of strong growth.

Risks to the Forecast

The distribution of risks to the near-term outlook for global growth is broadly unchanged from that in the April 2015 WEO and is slightly tilted to the downside. The main risks highlighted in April remain relevant. In view of the muted consumption response so far, a greater boost from lower oil prices is still an upside risk, especially in advanced economies.

Disruptive asset price shifts and a further increase in financial market volatility remain an important downside risk. Term and risk premiums on longer-term bonds are still very low, and there is a possibility of markets reacting strongly to surprises in this context. Such asset price shifts also bear risks of capital flow reversals in emerging market economies. Developments in Greece have, so far, not resulted in any significant contagion. Timely policy action should help to manage such risks if they were to materialize. Nevertheless, recent increases in sovereign bond yields in some euro area economies reduce upside risks to activity in these economies, and some risks of a reemergence of financial stress remain. Further U.S. dollar appreciation poses risks of balance sheet and funding risks for dollar debtors, especially in some emerging market economies. Other risks include low medium-term growth or a slow return to full employment amid very low inflation and crisis legacies in advanced economies, greater difficulties in China’s transition to a new growth model, as illustrated by the recent financial market turbulence, and spillovers to economic activity from increased geopolitical tensions in Ukraine, the Middle East, or parts of Africa.

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IMF Enhances Financial Safety Net for Developing Countries

The Executive Board of the International Monetary Fund (IMF), has adopted a set of proposals to enhance the access of developing countries to IMF financial support. These proposals, and the case for adopting them, are contained in the staff paper “Financing for Development: Enhancing the Financial Safety Net for Developing Countries.”

The staff paper makes proposals to strengthen the financial safety net for developing countries by increasing access to concessional Fund resources for all Poverty Reduction and Growth Trust (PRGT)-eligible countries and to fast-disbursing support under the Rapid Financing Instrument (RFI) for all members when faced with urgent balance of payments needs. Developing countries’ efforts to achieve sustained and inclusive growth remain vulnerable to global volatility in the form of external shocks, unpredictable sudden stops and reversals of capital inflows, and significant commodity price volatility. Enhanced access to Fund financing provides countries with greater flexibility to meet balance of payments needs as they pursue inclusive growth and poverty reduction.

The proposals aim to provide developing countries with greater access to Fund resources while better targeting access to concessional resources towards the poorest and most vulnerable countries. The proposals include: i) increasing access to Fund concessional resources for all countries eligible for the Fund’s PRGT; ii) rebalancing the mix of concessional to non-concessional financing towards more use of non-concessional resources for better-off PRGT-eligible countries that currently receive “blended” financial support from the Fund; iii) increasing access to fast-disbursing concessional and non-concessional resources for countries in fragile situations, hit by conflict, or natural disasters, and (iv) setting the interest rate on loans under the Rapid Credit Facility (RCF) at zero percent.

IMF on The USA Economy; Still More To Do

The IMF released their report on the United States. They reiterated the need for a credible medium-term fiscal strategy that would anchor ongoing consolidation efforts, underpin debt sustainability, and reduce fiscal uncertainties. Although the U.S. banking system has strengthened its capital position, the search for yield during the prolonged period of low interest rates, rapid growth in assets in the nonbank sector, and signs of stretched valuations across a range of asset markets point to emerging pockets of vulnerabilities. Potential financial sector risks include the migration of intermediation to the nonbanks; the potential for insufficient liquidity in a range of fixed income markets that could lead to abrupt moves in market pricing; and life-insurance companies that have taken on greater market risk.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

The U.S. economy’s momentum in the first quarter was sapped by unfavorable weather, a sharp contraction in oil sector investment, and the West Coast port strike. But the underpinnings for a continued expansion remain in place. A solid labor market, accommodative financial conditions, and cheaper oil should support a more dynamic path for the remainder of the year. Despite this, the weaker outturn in the first few months of this year will unavoidably pull down 2015 growth, which is now projected at 2.5 percent. Stronger growth over the next few years is expected to return output to potential before it begins steadily declining to 2 percent over the medium term.

Inflation pressures remain muted. In May headline and core personal consumption expenditure (PCE) inflation declined to 0.2 and 1.2 percent year on year, respectively. Long-term unemployment and high levels of part-time work both point to remaining employment slack, and wage indicators on the whole have shown only tepid growth. When combined with the dollar appreciation and cheaper energy costs, inflation is expected to rise slowly staring later in the year, reaching the Federal Reserve’s 2 percent medium-term objective by mid 2017.

An important risk to growth is a further U.S. dollar appreciation. The real appreciation of the currency has been rapid, reflecting cyclical growth divergences, different trajectories for monetary policies among the systemically important economies, and a portfolio shift toward U.S. dollar assets. Lower oil prices and increasing energy independence have contained the U.S. current account deficit, despite the cyclical growth divergence with respect to its main trading partners and the rise in the U.S. dollar. Nevertheless, over the medium term, at current levels of the real exchange rate, the current account deficit is forecast to widen toward 3.5 percent of GDP.

Despite important policy uncertainties, the near term fiscal outlook has improved, and the federal government deficit is likely to move modestly lower in the current fiscal year. Following a temporary improvement, the federal deficit and debt-to-GDP ratios are, however, expected to begin rising again over the medium term as aging-related pressures assert themselves and interest rates normalize. In the near-term, the potential for disruption from either a government shutdown or a stand-off linked to the federal debt ceiling represent important (and avoidable) downside risks to growth and job creation that could move to the forefront, once again, later in 2015.

Much has been done over the past several years to strengthen the U.S. financial system. However, search for yield during the prolonged period of low interest rates, rapid growth in assets in the nonbank sector, and signs of stretched valuations across a range of asset markets point to emerging pockets of vulnerabilities. The more serious risks are likely to be linked to: (1) the migration of intermediation to the nonbanks; (2) the potential for insufficient liquidity in a range of fixed income markets that could lead to abrupt moves in market pricing; and (3) life-insurance companies that have taken on greater market risk. But several factors mitigate these downsides. In particular, the U.S. banking system has strengthened its capital position (Tier 1 capital as a ratio of risk-weighted assets is at about 13 percent) and appears resilient to a range of extreme market and economic shocks. In addition, overall leverage does not appear excessive, household and corporate balance sheets look generally healthy, and credit growth has been modest.

The consultation focused on the prospects for higher policy rates and the outlook for, and policy response to financial stability risks, integrating the findings of the latest IMF Financial Sector Assessment Program for the U.S.

Executive Board Assessment2

Executive Directors agreed with the thrust of the staff appraisal. They noted that the economic recovery continues to be underpinned by strong fundamentals, despite a temporary setback, while risks remain broadly balanced. Directors observed that considerable uncertainties, both domestic and external, weigh on the U.S. economy, with potential repercussions for the global economy and financial markets elsewhere. These include the timing and pace of interest rate increases, prospects for the dollar, and risks of weaker global growth. Directors stressed that managing these challenges, as well as addressing longstanding issues of public finances and structural weaknesses, are important policy priorities in the period ahead.

Directors agreed that decisions on interest rate increases should remain data-dependent, considering a broad range of indicators and carefully weighing the trade-offs involved. Specifically, they saw merit in awaiting clear signs of wage and price inflation, and sufficiently strong economic growth before initiating an interest rate increase. Noting the importance of the entire path of future policy rate changes, including in terms of the implications for outward spillovers and for financial markets, Directors were reassured by the Federal Reserve’s intention to follow a gradual pace of normalization. They welcomed the Federal Reserve’s efforts, and commitment to continue, to communicate its policy intentions clearly and effectively. Directors acknowledged that financial stability risks could arise from a protracted period of low interest rates. In this regard, they underscored the importance of strong regulatory, supervisory, and macroprudential frameworks to mitigate these risks.

Directors commended the authorities for the progress in reinforcing the architecture for financial sector oversight. They concurred with the main findings and recommendations of the Financial Sector Assessment Program assessment. Directors highlighted the need to complete the regulatory reforms under the Dodd-Frank Act and to address emerging pockets of vulnerability in the nonbank financial sector. They encouraged continued efforts to monitor and manage risks in the insurance sector, close data gaps, and improve the effectiveness of the Financial Stability Oversight Council while simplifying the broader institutional structure over time. Directors looked forward to further progress in enhancing cross-border cooperation among national regulators, and the framework for the resolution of cross-jurisdiction financial institutions.

Directors noted that there remain a range of challenges linked to fiscal health, lackluster business investment and productivity growth, and growing inequality. They agreed that reforms to the tax, pension, and health care systems will help create space for supporting near-term growth, including through infrastructure investment. Directors reiterated the need for a credible medium-term fiscal strategy that would anchor ongoing consolidation efforts, underpin debt sustainability, and reduce fiscal uncertainties. They called for renewed efforts to implement structural reforms to boost productivity and labor force participation, tackle poverty, address remaining weaknesses in the housing market, and advance the multilateral trade agenda.

 

 

IMF Confirms Greece is in Arrears and Seeking an Extension

Mr. Gerry Rice, Director of Communications at the International Monetary Fund (IMF), made the following statement June 30th regarding Greece’s financial obligations to the IMF due today:

“I confirm that the SDR 1.2 billion repayment (about EUR 1.5 billion) due by Greece to the IMF today has not been received. We have informed our Executive Board that Greece is now in arrears and can only receive IMF financing once the arrears are cleared.

“I can also confirm that the IMF received a request today from the Greek authorities for an extension of Greece’s repayment obligation that fell due today, which will go to the IMF’s Executive Board in due course.”

Does Easing Monetary Policy Increase Financial Instability?

An IMF working paper “Does Easing Monetary Policy Increase Financial Instability?” looks at the interaction between monetary and macro-prudential policies.

Using modelling, they show that that real interest rate rigidities have a different impact on financial stability depending on the sign of the shock hitting the economy. In response to positive shocks to the risk-free interest rate, real interest rate rigidity acts as an automatic macro-prudential stabilizer. This is because higher debt today associated with lower interest rates (relative to the flexible interest rate case) is offset by lower interest repayments, resulting in higher net worth and lower probability of a crisis in the future. In contrast, when the risk-free rate is hit by a negative shock, real interest rate rigidity leads to a relatively higher crisis probability through the same mechanisms working in reverse (borrowing and consumption are relatively lower today, but they are offset by relatively higher debt service tomorrow, resulting in lower future net-worth and higher crisis probability).

In addition, they show that when the interest rate is the only policy instrument to address both the macroeconomic and the financial friction, and a shock that lowers interest rates hits the economy, a policy trade-off emerges. This is because the two frictions require interventions of opposite direction on the same instrument. Other instruments, however, may be at the policy-maker’s disposal in order to achieve and maintain financial stability.

An implication of their analysis is that the weak link in the U.S. policy framework in the run up to the Global Recession was not excessively lax monetary policy after 2002, but rather the absence of an effective regulatory framework aimed at preserving financial stability.

Note that IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

 

IMF Warning To Australia – Ambitious Reform Needed

The IMF released their Concluding Statement of the 2015 Article IV Mission today.

Australians have enjoyed exceptionally strong income growth for the last couple of decades. But the waning of the resource investment boom and the recent sharp fall in the terms of trade have brought this to a halt. Incomes should start rising again as the terms of trade stabilize, but likely more slowly than in the past. Improving this outlook requires policymakers being on the front foot to enable Australia to make the most of its considerable potential. This means supporting aggregate demand in the shorter term and boosting productivity in the longer term. And ensuring banks are unquestionably strong would reduce vulnerabilities. Such an ambitious reform agenda would require strong and sustained commitment.

Outperformance fading

Australia has grown almost twice as fast as its peers in the last two decades. This reflected both strong policy frameworks (such as the floating exchange rate and flexible labor market) and the boom in global demand for its resources. But output growth has been below trend for two years, unemployment has risen to six percent, and real incomes have declined. While moving from the investment to the production phase of the resource boom was always going to be bumpy and the economy is handling this transition relatively well, the recent sharp fall in resource prices has made it more difficult.

Weaker medium-term growth prospects

Over the next couple of years, activity should gradually pick up and narrow the output gap, supported by strong resource exports, accommodative monetary policy, and rising confidence. But over the medium term and without reform, growth is likely to converge to a slower potential rate, reflecting less capital accumulation and only modest productivity growth. This lower potential would still mean income growth in line with other advanced countries, but significantly slower than Australians have been used to over the last two decades. Slower growth would also make fiscal consolidation more difficult. The risks around this outlook seem somewhat skewed to the downside, in particular:

• On the downside, the envisaged pick up in non-resource business investment may remain elusive, a house price correction could knock confidence and demand, and China could slow more sharply.

• On the upside, domestic demand could respond more quickly to recent monetary policy stimulus, and the exchange rate could depreciate further, stimulating the tradable sector.

Policies to re-energize growth

This weaker outlook can be avoided. Australia has strong institutions, a flexible economy, and is well placed to seize opportunities created by Asia’s rapid growth and rising middle class, helped by the recent free trade agreements. Policymakers should build on these strengths by re-invigorating the reform agenda:

• Sustaining demand through the resource boom transition

• Lifting productivity to sustain strong income growth

• Building resilience to reduce the risk of financial disruption

Sustaining demand though the resource boom transition

Keeping monetary policy accommodative

A sizeable output gap, elevated unemployment, subdued inflation pressure, and an exchange rate still on the strong side, call for supportive aggregate demand policies. While monetary policy is already accommodative and may have lost some effectiveness, it should still stand ready to ease further should the recovery fall short of expectations and provided the financial stability risks remain contained.

Prudential policy to address housing risks

APRA has appropriately been taking targeted and gradual action to address areas of risk in the housing market for some time. Banks, however, seem only to have responded more recently and the results are yet to be fully reflected in the lending data. We expect APRA’s approach to succeed, but it may need to be intensified, for example, if investor lending and house price growth do not slow appreciably in the second half of the year. Such intensification could include requiring banks with fast-growing investor lending to hold more capital, raising risk weights on investor lending, and restricting the duration of interest-only loans.

Boosting public investment

A small surplus should remain a medium-term anchor of fiscal policy and budget discipline should be maintained. But the planned pace of consolidation nationally (Commonwealth and States combined) towards this medium-term objective is somewhat more frontloaded than desirable given the weakness of the economy, the size and uncertainty around the resource boom transition, and the possible limits to monetary policy. Increasing public investment (financed by more borrowing rather than offsetting measures) would support aggregate demand and ensure against downside risks. It would also employ resources released by the mining sector, catalyze private investment, boost productivity, take advantage of record-low borrowing rates, and maintain the government’s net worth. Indeed, IMF research suggests that economies like Australia—with an output gap, accommodative monetary policy, and fiscal space—benefit most from debt-financed infrastructure investment, with the growth boost largely containing the impact on the (low) debt-to-GDP ratio.

Commonwealth-State coordination critical

Boosting public investment, especially in the short term given inherent lags, and without waste and compromising governance, will be difficult, not least as most investment is carried out by States whereas the Commonwealth has the most borrowing capacity. The Commonwealth is already doing much to encourage investment with recent initiatives, including co-financing. However, public investment has been a drag on growth in recent quarters and the outlook is not for a sharp pick-up. A strategy for boosting public investment could include:

• Broadening the scope of investments supported by the Commonwealth, for example, to include a wider range of projects, including repairs and maintenance.

• Continuing to establish a pipeline of quality larger projects with transparent cost-benefit analysis, such as that being prepared by Infrastructure Australia. Broad political support for such a pipeline would reduce uncertainty and boost confidence.

• In addition to direct funding arrangements, the Commonwealth could consider guaranteeing States’ borrowing for additional investment—this would keep the accountability with the States, but reduce their concerns about credit ratings and would not affect the Commonwealth’s deficit.

Maintaining budget discipline

While the capital budget should expand, the recurrent budget should not. The government should maintain its envisaged structural consolidation of the recurrent budget. Any slippage would reduce the government’s net worth and could undermine the credibility of the medium-term surplus objective, which continues to serve the country well. Indeed, we see risks that the envisaged consolidation of the recurrent budget will not be achieved (given the tight spending targets, strong revenue projections, and with some measures still unapproved), which may well require additional measures.

Lifting productivity to sustain strong income growth

No silver bullet, but many targets

Maintaining income growth at past rates requires raising total factor productivity growth substantially. This will be challenging as Australia has already undertaken comprehensive productivity-boosting reforms in the 1980-early 2000s and a number of sectors are at, or near, the global productivity frontier. But other sectors have gaps, and these provide an opportunity to catch up—the distribution (including retail, wholesale, and transport) sector suggests most scope. The Competition Policy Review recommended many reforms to strengthen competition and improve efficiency, including in human services and the retail sectors. Filling infrastructure gaps would relieve bottlenecks, as would reducing the long-standing constraints on housing supply (which, critically, requires more responsive planning and zoning). More generally, the Productivity Commission has identified a wide-ranging list of reforms and is a world-class resource that could help guide this policy agenda.

Tax reform—a key policy lever

Though politically challenging, a comprehensive tax reform could both increase growth and generate revenue over time to help return the budget to surplus. A comprehensive and decisive package would be needed to deliver tangible results. The on-going Tax and Federation reviews provide the opportunity to craft such a package, which should include the following inter-connected elements:

• Shifting towards more efficient and simple taxes. In particular: by preventing a large share of individual taxpayers from facing higher tax rates through unchecked bracket creep (which would affect those on lower and middle incomes most), reducing the corporate tax rate to international levels, and eliminating stamp duties and minor taxes. This would be paid for by broadening the base of the GST and possibly raising the rate—while at least fully compensating those on lower incomes—and relying more on a broad-based real-estate tax and excises.

• Ensuring fairness. A number of measures, such as reducing the concessional treatment of superannuation contributions and earnings for those on higher incomes, and the discount on capital gains, would be important for fairness. They would also enhance revenue and could improve housing affordability and financial stability. Adjusting any of these policies would need careful calibration and phasing, and should be introduced in tandem with the measures to enhance efficiency.

• Adjusting federal fiscal relations. Federal-State relations will likely need to be adjusted to facilitate the tax reform. There are many options—one could be for States to receive higher GST revenue and autonomy in return for greater spending responsibilities. This could also help increase spending efficiency.

Building resilience to reduce the risk of financial disruption

Ensuring unquestionably strong banks

Banks are highly rated and profitable, non-performing loans and funding costs are low, and wholesale funding reliance has declined and its maturity lengthened substantially since the global financial crisis. Nonetheless, the system is dominated by four large banks with similar business models which rely significantly on wholesale external borrowing, most lending is housing related, and household debt and house prices are elevated. And although capital ratios have risen since the global financial crisis, this largely reflects a shift towards mortgages and a lowering of risk weights. Implementing the recommendations of the Financial System Inquiry should be a priority.

Raising capital

While international comparisons are fraught with difficulty, Australian banks do not appear to have particularly high capital ratios and the global trend is upwards. More tangibly, the recent APRA stress test indicates that in a severe adverse scenario, bank capital would have to be substantially higher to ensure a fully-functioning system. Putting a floor of 25-30 percent on mortgage risk weights would help, but capital ratios would also need to rise substantially. Given major banks’ high profitability, such ratios can be achieved at little, if any, macroeconomic cost, especially if done gradually, and will make the financial system, the budget, and the economy stronger.

Macroprudential Case Studies

The IMF just released a working paper “Experiences with Macroprudential Policy—Five Case Studies” which discusses the implementation of macroprudential policies, mainly to attempt to manage the housing sector at a time of rising prices and high levels of bank lending.

The paper presents case studies of macroprudential policy in five jurisdictions (Hong Kong SAR, the Netherlands, New Zealand, Singapore, and Sweden). The case studies describe the institutional framework, its evolution, the use of macroprudential tools, and the circumstances under which the tools have been used. In all cases macroprudential tools have been used to address risks in the housing market. In addition, some of them have moved to enhance the resilience of their banks to more general cyclical and structural risks.

In all the cases reviewed, the macroprudential tools have been used primarily to address risks in the real estate sector. Partly for this reason, the loan-to-value (LTV) limit was the most popular macroprudential tool, used in the five cases. Some jurisdictions have used multiple tools to help the effectiveness of the measures. For instance, Hong Kong SAR and Singapore have used the debt service–to-income (DSTI) ratio and taxes applied to real estate transactions along with the LTV ratio. Sweden and Hong Kong SAR also have imposed additional capital requirements for mortgages.

To enhance the resilience of the banking system, some authorities in these five cases also have used, or plan to use, additional macroprudential tools to address risk in the time and structural dimensions. Most of these measures were adopted in response to the global financial crisis. New Zealand, for instance, moved quite quickly compared to other countries and imposed liquidity requirements to contain bank funding risks, and gradually increased the requirement. Sweden did the same in 2013. Banks in both countries rely heavily on wholesale funding. Countercyclical capital buffers will take effect in Sweden in the Fall of 2015 and in Hong Kong SAR in phases beginning 2016, while the Netherlands intends to impose them too. Furthermore, systemically important institutions will have to hold additional capital buffers starting in 2015 in Sweden and 2016 in Hong Kong SAR and the Netherlands.

It is too early to gauge the full impact of the measures that have been undertaken. In addition, some measures will only take effect in the future. Nevertheless, there is some early evidence that the implementation of macroprudential measures have enhanced banking system resilience and helped reduce the build-up of housing sector leverage in the cases reviewed. For instance, LTV ratios declined in Hong Kong SAR, New Zealand, and Singapore following the adoption of LTV limits. House prices growth was also affected. For example, the rate of growth of house prices peaked in New Zealand following the imposition of a cap on LTVs. House prices also leveled off in Hong Kong SAR under the combined weight of macroprudential tools and taxes, with the taxes appearing to have a more immediate impact.

CONCLUDING REMARKS
Increasing attention has been given to the field of macroprudential policy following the global financial crisis. This paper reviews the use of macroprudential policy in five economies (Hong Kong SAR, the Netherlands, New Zealand, Singapore, and Sweden). All these jurisdictions actively implemented macroprudential policy measures following the global financial crisis. The analysis shows that each jurisdiction reviewed adopted an institutional framework for macroprudential policy suited to their own circumstances. The evidence reviewed confirms that “one size does not fit all,” and that it is possible to conduct macroprudential policy with a heterogenous set of institutional frameworks. In all cases, most of the macroprudential tools used were directed at containing risks arising from a booming housing market (for e.g., LTV and DSTI ratio limits). Some of the cases studied also took steps to enhance the resilience of the banking system to more general cyclical and structural risks (for e.g., liquidity requirements and additional capital requirement for systemically important institutions). While there is some early evidence that the measures taken have enhanced banking system resilience, it is still early to determine their full impact.

Note: 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.

Sovereign Bond Volatility, Deterioration in Market Liquidity and Longer Term Challenges – IMF

Senior officials from 42 advanced and emerging market economies, and international financial institutions, together with representatives of the private sector and academia met on June 11–12 at the International Monetary Fund (IMF) IMF Headquarters in Washington D.C. to discuss issues relevant for public debt management. The forum allows debt managers, IMF officials and other participants to connect challenges facing debt markets to broader macroeconomic and financial stability developments. The discussions were insightful, thought-provoking, and enriched by the diversity of participants’ experience from advanced and emerging markets.

The forum took place against the background of the uneven global recovery and recent volatility in global bond markets. Participants remarked that secondary market liquidity had deteriorated, adding to sovereign bond market volatility. This is, in part, the result of banks’ evolving business models as they adapt to the post-crisis market and regulatory environment, and the continued take-up of sovereign bonds by central banks. In addition, a prolonged low yield environment poses challenges for a number of financial institutions which are the traditional investors of sovereign bonds.

In his opening remarks, José Viñals, the IMF’s financial counselor and director of the monetary and capital markets department, reflected on the varied and complex issues debt managers face in both advanced and emerging market economies. “The divergence in monetary policies in advanced economies will continue to influence capital markets including sovereign bonds,” he said, pointing to risks around the Fund’s baseline of a smooth normalization of monetary policy. A delayed path could imply a continued accumulation of financial stability risks. Faster-than-expected tightening could trigger rapid decompression of yields, with heightened volatility and global market spillovers.

In his keynote speech, David Lipton, IMF’s first deputy managing director, focused on the challenges for debt mangers of long-term structural issues such as low potential economic growth, high public debt, and demographic trends. “Debt managers can help ensure through their actions that debt remains sustainable,” he said. They play a pivotal role in the two-way communication between the fiscal authorities and markets, in mitigating the potential consequences of high public debt, and in supporting growth by facilitating the private sector’s access to financing. Debt managers also need to consider and plan for potential risks from contingent liabilities, as they are in the front line in terms of meeting the obligations should such risks materialize, Mr. Lipton added.

The forum also reflected on lessons learnt from the crisis, where participants discussed re-accessing the capital markets after a period of hiatus, contingent liabilities from the bank-sovereign nexus, and addressing collective action problems in sovereign debt restructurings.

Peter Breuer, deputy chief of the IMF’s debt and capital market instruments division, concluded the forum by accentuating a common theme—the need for debt managers to remain vigilant against emerging risks in an environment of diverging monetary policies, structural changes, and reduced market liquidity.

Solvency Or Bust?

Public debt is a normal part of a government’s finances, but too much debt can have serious consequences for a country. During a seminar at the IMF-World Bank Meetings, Helen Clark, one former head of state, who left office with public finances in good standing, explains how her administration in New Zealand succeeded where others have so often failed.

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