2023 BSP-IMF financial stability conference

The excessive monetary easing by governments and central banks during the pandemic, the ensuing inflation due to the over-liquidity and the supply chain disruptions, then the corrective increases of policy interest rates in many countries have destabilized the global financial system. Medium-sized regional banks in the US have to be rescued by bigger banks with the FDIC and the Federal Reserve Banks assistance. Credit Suisse, a large European bank had to be sold to Union Bank of Switzerland, with its bond portfolio written down to almost zero to make it salable. Many banks in many countries were also affected in varying degrees but their governments supported them.

The International Monetary Fund (IMF), aside from being the lender of last resort to the member countries, has the major task of promoting financial stability and economic growth. It is always on the lookout for economic/financial destabilization events and developments. Once in four years or earlier it convenes regional conferences among the member countries to assess, dialogue, learn, resolve, and hopefully contain/prevent financial/economic instability. For the Asian region, it was held in Shangri-La Mactan in Cebu last May 14 to 16, co-hosted by the Banko Sentral ng Pilipinas. This was the 23rd Financial Stability Board-Regional Consultative Group in Asia Meeting. This was attended by 100 delegates from Asian countries with the governors/deputy governors of the central banks and representatives from the financial institutions of their countries. It was also attended by the directors, and advisors of the IMF, and officers of the Asian Development Bank, Bank of International Settlements, and representatives of regional think tanks. I was invited to the conference as representative of the Chamber of Thrift Banks in the Philippines.

The theme of the conference was “The New Frontier of Financial Stability: Global problems, Global Solutions, Local Challenges” to emphasize the inter-connectedness of financial stability and solutions. After discussing the state of the instability and the recent causes/effects and the management of systemic risks, the impact of tighter financial conditions on the overall economic growth was assessed and the importance of calibrated policy rates increases and decreases were evaluated, especially in response to the US interest rates movements and its impact on developing countries’ economies, over and above the negative price implications of the banks bond holdings. These led to the discussions on the complementarities, contagion, and correlations in a globalized world economy. Despite efforts to slow down world trade and retard global supply chain, due to ideological and geo-political animosities between the Western alliance and the Soviet-China bloc, economies and financial systems are still very inter-connected as to capital flows, payment systems, and trade finance. This was partially tackled in Session 4 of the conference, where the importance of communications and transparency among the economic/financial system participants and all the stakeholders.

There were presentations of technical macro-economic models of predicting, preventing and resolving systemic risks that cause or add to financial instability. These were impressive but it is acknowledged that it is difficult to predict events that cause financial instability, especially if it is from outside the system or a black swan event. In a volatile, uncertain, complex, ambiguous world, we just have to be prepared from the lessons learned, studies done, and the resolutions implemented in the previous periods of instability.

It was a productive conference with substantive discussions of the issues from the presenters and the participants. There are some issues that were not adequately covered partly due to the limited time and the absence of experts from financial systems outside of the formal financial system. The impact of crypto-currencies, the block chain as a payment system, the shadow banking and other non-bank financial intermediaries that are outside the loop, and their impact on the formal economy and financial system are issues that have to be tackled with more depth eventually.