Interview with Barry Johnston IMF's offshore assessments probe for weak links in global financial system

• Pages: 38-41

Page 38

JOHNSTON: Offshore centers originally evolved through regulatory arbitrage-in effect, transactions moved offshore in response to monetary policy measures and regulations in major industrial countries. The chief question after the financial crises of the 1990s was whether these offshore jurisdictions-many of them nonmembers of the IMF or dependent territories-could contribute to potential vulnerabilities in the global financial system. Specifically, the IMF was asked to examine whether there might be weaknesses in regulatory and supervisory systems or financial integrity concerns. In response to heightened concerns about the stability of the global financial system, the IMF was already placing greater emphasis on financial supervision and regulation worldwide. It was natural to extend our efforts to the offshore centers.We knew we needed more statistics and more background on the centers. The fear was that, in the absence of surveillance, vulnerabilities would go undetected.

IMF SURVEY: Critics have argued that the IMF assessments are meant to squeeze the offshore centers andPage 39 that smaller offshore centers are scrutinized more closely than larger onshore centers.

JOHNSTON: There seemed to be some concern that we would apply different standards to offshore centers, but the IMF takes a global approach to financial sector assessments and uses uniform instruments. When we review banking systems, we use the Basel Core Principles. When we evaluate anti-money laundering efforts, we apply the [Financial Action Task Force] FATF-40 recommendations. And over the past two years, while we were assessing the Cayman Islands, The Bahamas, Jersey, Guernsey, and the Isle of Man, for example, under the offshore financial centers program, we also undertook assessments under the FSAP [Financial Sector Assessment Program] for the United Kingdom, Germany, Japan, Switzerland, Hong Kong, and Singapore, among others.

I'd also like to add that offshore financial centers, while geographically small, account, by our calculations, for about 20 percent of total cross-border banking flows. The concern about offshore centers has always been that they can attract business in two ways: by delivering more efficient services or by offering a weaker, less costly regulatory structure. We are finding that the more established, wealthier centers do compete on the basis of efficient services, but newer, smaller, and poorer centers have not yet had the time to develop the skills...