The IMF held its first-ever blogger meet-up on Friday, with PR honcho Caroline Atkinson, first deputy managing director John Lipsky, and various other Fund types sitting rather formally around a big table at IMF headquarters in Washington. “The discussion here is on the record, because I’ve been told that bloggers don’t do on-background,” said Atkinson — which made for an interesting contrast with how they do things at Treasury.
Everybody was kind of feeling their way at this first meeting, so it’s too early to draw much in the way of conclusions; I did get the impression that Fund staffers would like to engage the blogosphere in theory, but don’t actually spend as much time reading blogs as their Treasury counterparts do. That makes sense: the blogosphere has lot more in the way of policy prescriptions aimed at Treasury, or even the World Bank, than it has wonky discussions about the Fund’s areas of expertise.
I went in to the meeting with the idea that the Fund is on something of a downward trajectory these days. Its high point was surely the 2009 G20 meetings in London, which ended with a much beefed-up role for the IMF, and a lot more money too. But since then, the occasional Germany-mandated foray into Greek fiscal policy notwithstanding, the IMF seems to have played less of a role, especially in terms of crisis resolution and prevention, than I and many others expected it would.
I left the meeting a bit more impressed at what the Fund has managed to achieve in the past 18 months: it’s not hogging the financial-press headlines, but it is doing quiet, necessary work, especially in non-G3 nations where its expertise and money can be put to best use.
Matt Yglesias said the most interesting thing along these lines — that maybe the IMF didn’t want to get caught up in the headlines, and could actually be more effective if the eyes of the world were pointed elsewhere, at institutions like the G20. Just like Basel, it’s often easier to get things done when what you’re doing isn’t particularly politicized.
It’s also asking some important questions. I spoke to Lipsky a bit about cross-border resolution, and the way in which neither Basel III nor any other international agreement seems to have made it any likelier that a failed international bank might get resolved in a non-messy manner. Much of the worst damage from the Lehman collapse came as a result of the forced liquidation of its London operations — something the panicked meeting at the New York Fed over the previous weekend had barely stopped to consider. And Lipsky pointed out in a speech in July that even European bank failures have run into significant problems associated with duelling national authorities.
In the case of Fortis, [resolution] was complicated by national interests coming to the fore even between jurisdictions whose financial regulators have a long tradition of co-operation and whose legal frameworks are considerably harmonized. As a result, the Fortis group was resolved along national lines in a protracted process.
“Basel III is microprudential”, said Lipsky, and there’s very much still a need for big-picture cooperation between countries when international financial institutions get into trouble. That said, he was at pains to say that he didn’t want the job: “we’re not supervisors, we’re not regulators, and we do not aspire to be either. We can provide perspective to the standard setters. This will be an agreement among sovereigns.”
I’m not going to hold my breath. Here’s what Lipsky said in his speech:
A basic problem with many national regimes is that the authorities often are effectively precluded from cooperating in an international resolution exercise. For example, in liquidating the local branch of a foreign bank, some countries require their authorities to ring-fence the local assets of the branch for the benefit of local creditors and, in this manner, effectively prevent participation in a broader international process. Under our approach, national legislation would be amended to remove these obstacles. Moreover, it would call for national authorities to cooperate with other countries in the framework, but only when they believed such cooperation to be consistent with the interests of creditors and supportive of financial stability. A jurisdiction will be willing to defer to another only if it is clear that local creditors will be treated equitably and will receive at least what they would have received had the entity been liquidated on a strictly national basis.
In order for Lipsky’s proposed framework to work, then, two highly improbable things need to happen. First, the U.S., along with lots of other countries, would need to change its national legislation so that it can cede control of bank-resolution processes to other countries’ regulators. I wouldn’t like to be the legislator proposing that.
And secondly, if an international institution failed, the regulators of the good bits would have to decide that they’d be better off throwing those good bits into the international pot, rather than holding onto them themselves. Think of AIG, for instance: it had one huge black hole in London, and another big black hole in its U.S. securities-lending operation. It was highly profitable in Asia. Why would Asian regulators, if they had the power to keep the Asian operations for themselves in a resolution, give up that power and accept whatever fate befell the counterparties of the parent company more generally?
As Lipsky says, these questions are tough — so tough, indeed, that I doubt anybody’s going to seriously address them. Financial institutions will always spill across borders, and when cross-border institutions fail, it’s always going be messy. Lipsky’s warnings might make policymakers think about such issues, but I doubt that they’ll prompt them to actually do anything substantive about them.