Journal Issue

Interview with Stefan Ingves: Evolving Financial Sector Broadens Role of Monetary and Exchange Affairs Department Ingves Stresses Need for Effective Standards

International Monetary Fund. External Relations Dept.
Published Date:
January 1999
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IMF Survey:You recently joined the staff of the IMF, coming directly from the Bank of Sweden, which gives you the unique opportunity of having viewed events from the outside. How is this perspective useful to you and to MAE? In what ways do you think the IMF should think about modifying its operations in the areas you are concerned with?

Ingves: Virtually all of my professional career has been in the financial sector, not only as a central banker but in many other areas as well. So I have a reasonably good idea about what a financial sector looks like in a country, or perhaps, what it should look like—particularly if you are looking at a heavily regulated system that needs to change. The financial sector issues we are working on in MAE are, therefore, very familiar to me.

When it comes to the IMF, what strikes me is that in a world with increasing free capital flows, information becomes more and more important—the story you tell people about what you are doing becomes more and more important. Thirty or forty years ago, in a world with heavily regulated capital flows, the IMF talked mainly to governments about what they were doing when they had a balance of payments problem. But in a world with free capital movements and widespread and instantaneous flows of information, you end up talking to everybody. Also, things used to move more slowly, and there was more time to adjust. Today, the focus is instantaneous. We have to live with that because that is the way the world works.

The IMF has a long history and has done things in a particular way for many years. In this situation, a certain institutional vocabulary or shorthand develops to describe what the institution is doing. But for outsiders not used to working with the IMF, words like “ESAF” and “HIPC,” for example, may be difficult to understand. Given that there is a growing focus on what the IMF is doing, not only from government officials or experts in different countries, but also from market people, there is a need to keep talking clearly about what we are doing.

There is a need for the IMF to keep talking clearly about what we are doing.

IMF Survey:A year ago, the IMF Executive Board was considering an amendment to the Articles to extend IMF surveillance to capital account liberalization. Where does this initiative stand now, and have the crises in Asia, Russia, and Brazil had any effect on current thinking about capital account liberalization?

Ingves: It is true that the formal discussions on these issues have been put on the back burner, but I believe that the initiative will be revived because of the way the markets have been evolving over the past decades. My guess is that regardless of what has happened in Asia and elsewhere, these issues are going to continue to be discussed. It seems reasonable that some agency should keep track of what countries are doing in the area of capital controls and that this information should be collected in a systematic and standardized way.

It makes sense for the IMF to be dealing with capital account issues, because it has a history of keeping track of what countries are doing. Looking at the capital account goes hand in hand with the IMF’s general surveillance, because if a country has capital controls in place, somebody in this organization is already thinking about what the country is doing under all circumstances.

IMF Survey:Do you see a trend toward more capital controls?

Ingves: In the end, it is up to individual countries to decide. But if a country wants the opportunity to use other people’s savings—and I’m talking about foreign savings—it is hard to see why it would choose to maintain strict capital controls for any period of time. My view is that a country benefits from not having controls in place, because a liberalized system allows the country to be a part of the international community and gives it the possibility of borrowing abroad.

IMF Survey:One of the criticisms leveled at the IMF, according to its recent assessment of its response to the Asian crisis, was that it placed too heavy an emphasis on structural reform as a condition for its support. What are your views on this?

Ingves: In the Asian crisis, the banking sector ran into difficulties, basically because banks did not have enough equity capital. Whenever this happens and no effort is made to address the problem, people want to get their money out of the bank, and they want it immediately. My specialty is not structural reform in general, but it is hard for me to see how you can address serious banking problems without implementing structural measures in the banking sector. If a problem arises in the banking sector, it is better to recognize that there is a problem, rather than ignoring it and hoping it will go away. You end up having to deal with the restructuring in one way or another. A sensible and timely restructuring will probably lower the cost of dealing with banking problems, because the cost is already in a troubled system and it is not going to disappear.

IMF Survey:According to the December 1998 update of the World Economic Outlook and Capital Markets (see IMF Survey, January 11, page 1), the turbulence experienced in mature markets that were apparently grounded in sound fundamentals raised questions about the working and design of financial markets. What efforts need to be made by all participants to improve the performance and enhance the stability of international banks?

Ingves: There is plenty of work to be done in dealing with what I call the “plumbing.” When markets evolve or when the “rules of the game” change, there is always some learning by doing involved, and that takes time. One has to think about how this new evolving environment operates and to get used to it. That usually means having to put a new risk-control system in place, which means having to think hard about what sorts of risks one is taking and what it means to take risks outside of familiar areas. This work needs to be done in many countries.

Markets tend to function worst when you need them most. If everybody is heading to the door at the same time, risk-control systems that seem to work under normal conditions are not really going to be fully operational under extreme conditions. So you need to think more about abnormal conditions, devise stress tests, come up with really bad scenarios, and figure out whether your system would survive under these scenarios.

IMF Survey:The IMF has been working with other multilateral institutions, like the Basle Committee on Banking Supervision, to coordinate sound banking practices, risk-management systems, supervisory oversight, and legal and institutional frameworks. How can the IMF work with these organizations to get the best results?

Ingves: This is largely an issue of how to develop standards and come up with international best practices. It is very hard to develop standards in isolation. You need a process that lets people talk to each other about what seems reasonable, particularly since what seems reasonable as an international best practice at a certain moment in time is not necessarily written in stone but rather changes over time. One needs to know how those changes evolve, and it is difficult for one organization to know everything by itself. The Basle Committee and other agencies can serve as a sounding board—keeping us informed about what is going on and how people are looking at how things should be done.

One way of looking at it is to say, OK, there’s this universe of ideas out there about dealing with standards and how the financial sector is functioning or should be functioning. The IMF acts as a facilitator or translator, communicating the material coming out of the multinational discussions to countries in an understandable way. If, for example, country X wants its banking sector to evolve in a certain way, it needs to understand how the sector measures up against the international best practice to see how it differs and what needs to be done to move up to whatever the standard happens to be.

Many of the issues taken up in the Basle Committee and other forums are highly technical. Some of this is really nitty-gritty stuff, rather than general statements about what needs to be done. The devil is hidden in the details, so the IMF needs to be able to communicate these thoughts and ideas in specific and practical terms. The IMF’s role, therefore, is to know what is going on, be able to participate in all the international discussions about what constitutes a best practice, try to translate that into something usable locally, and help countries to implement whatever action is necessary.

IMF Survey:At the beginning of the year, we had a truly epochal event with the launching of the third stage of European Economic and Monetary Union (EMU). The European Central Bank (ECB) has been given oversight over the conduct of monetary policy. At the same time, fiscal policy remains decentralized. How do you see this relationship evolving over time and will there be problems developing out of the different responsibility for monetary and fiscal policy?

Ingves: There is something about the EMU process that tends to make people skeptical. I have given more than one hundred speeches over the past two or three years on EMU, and I have heard this sort of question many times. At first, the question was, do you really think that EMU is going to come about? And now that it exists, the question, is do you really think that it is going to work?

What has struck me in the work on EMU I have done is that the existence of the project rests on the very strong political consensus in Europe—this is something that Europeans want. For that reason, it has been possible to deliver EMU, in the sense that the ECB is up and running. Political consensus is also very important to fiscal policy coordination, because the ECB is not operating in a vacuum. If the politicians in Europe want EMU—as they seem to do—it is up to them to deal with the challenge of fiscal policy. If there is political consensus, it doesn’t really matter what the people dealing with the technical stuff think about it. Take, for example, the Stability and Growth Pact, which sets limits on fiscal deficits.

For many years before the third stage of EMU, discussions centered on the Maastricht convergence criteria and how countries could comply with them. But when it started to become clear that more countries than originally expected would become members of EMU, the convergence criteria began to be seen as a one-time-only eligibility check. It was understood that something more was needed to maintain convergence and stability, which is why the EMU countries have agreed to the Stability and Growth Pact.

IMF Survey:MAE is a major provider of technical assistance. Do you envisage any changes in the technical assistance you provide, particularly as a result of recent events and in the context of discussions about the reform of the international financial system?

Ingves: When I talk to people about the history of the department and what they have been doing over the past 10 years, I am struck by how much the department’s reach has grown. At the beginning, the department was concerned solely with central banking—what central banks do, how to put one together, how to conduct monetary policy, how to manage foreign exchange reserves and sell government bonds in the markets, and what sort of infrastructure is needed to run a central bank.

In recent years, countries have started asking more general questions, not only about central banking but about the features of a good payments system. In the banking system, they are asking how one should look at what banks are doing, what they should be doing, what is dangerous, and what kind of infrastructure is appropriate. As markets have evolved, the subject has become even broader.

MAE’s activities have also changed in tandem with the move away from quantitative measures and controls, which in the 1950s and, in some cases, through the 1970s and into the late 1980s, were the basic tools used by central bankers. In a small country like Sweden, for example, all that was basically needed was to call the bankers to the central bank, have them sit around the table, and tell them how much they could lend and what they could and could not do.

As markets have evolved, however, the banking system has become increasingly market-based. It is up to the banks themselves to lend and to find deposits and capital, but there is still a need for a legal infrastructure and an understanding of how a market-based banking system should operate. Many people think such systems operate totally without rules. But this is not the case. Rather, it is a case of a totally different set of rules replacing the old quantitative measures. MAE has become increasingly involved with this new set of rules—what the rules, and the financial infrastructure, should look like in different countries.

We are, in effect, dealing with the equivalent of the national power grids that send electricity back and forth. In our case, what is sent through the wires is money. We look at the system to see what it is producing, what it is not producing, and how it should function. But although our involvement has grown from central banking issues into many new areas, in one sense, the issues remain the same: it always has to do with the financial infrastructure in a country.

IMF Survey:What major challenges face MAE and the IMF in the difficult period that lies ahead?

Ingves: To borrow a word from the private sector, we have to think hard about what our product is and how we are producing it. How can we best help countries to formulate workable ideas about what a financial sector is and what it should do? How can we—that is, MAE in particular and the IMF in general—put to use what people are talking about in countries and in various international forums and translate that into specific recommendations? How can we say, this is the way it should be done, not that way, and this is how you change? We are something like a public sector version of a large consulting firm. We are, in effect, consultant to the financial world, and it is therefore important that we, first, keep current with all the thinking that is going on in the financial world and, second, be able to transmit this information in specific and understandable language to our clients.

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