Strengthening the Framework For Financial Stability

• Pages: 338-340

Page 338

Weak banking systems-whether in industrial, developing, or transition economies-can threaten financial stability and severely disrupt macroeconomic performance. As countries increasingly move toward removing remaining restrictions on their capital account transactions, and as banking assumes a more regional and international dimension, the cross-border impact of banking system problems is likely to increase. These considerations have prompted calls for concerted international action to promote banking sector stability and soundness. In response, several official bodies, including the Basle Committee on Banking Supervision, the Bank for International Settlements, the World Bank, and the IMF, have intensified their examination of ways to strengthen financial stability. The Basle Committee has been at the forefront of this effort with the recent release of its Core Principles for Effective Banking Supervision. These principles constitute a blueprint for enhanced banking supervision and have become the focal point for the effort to strengthen financial sectors around the world. They also provide the foundation for a proposed framework for financial stability developed by a staff team of the IMF, which is to be published in the IMF's World Economic and Financial Surveys series early in 1998. The objective of this framework, summarized below, is to enhance IMF surveillance over banking sector issues of macroeconomic significance.

Efforts to strengthen the financial sector must originate with the national authorities.

While the thrust of policy efforts to strengthen financial sector performance must originate with national authorities, the IMF-with its near-universal membership and responsibility to engage in surveillance of member countries' economic policies- has an important role to play in this area. The increase in IMF surveillance of financial sector issues will focus on identifying those weaknesses in financial systems- particularly in banking systems-that have major macroeconomic implications. As such, a framework for financial stability centers on maintaining the soundness of relatively large and complex banking organizations-those that have the potential to create systemic problems domestically or internationally.

The IMF can make a major contribution to an effective framework for financial stability by:

* enhancing its surveillance to cover developments in member countries' banking systems, particularly where they exhibit problems with the potential for generating serious macroeconomic disturbances;

* applying conditionality to the use...