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Stitching together the global financial safety net

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  • Edd Denbee

    () (Bank of England)

  • Carsten Jung

    () (Bank of England)

  • Francesco Paternò

    () (Bank f Italy)

Abstract

Financial globalisation brings a number of benefits but can also increase the risk of financial crisis. In recent years, to reduce these risks to stability, countries have reformed financial regulation, enhanced frameworks for central bank liquidity provision and developed new elements, and increased the resources of the global financial safety net (GFSN). The traditional GFSN consisted of countries’ own foreign exchange reserves with the IMF acting as a backstop. But since the global financial crisis there have been a number of new arrangements added to the GFSN, in particular the expansion of swap lines between central banks and regional financing arrangements (RFAs). The new look GFSN is more fragmented than in the past, with multiple types of liquidity insurance and individual countries and regions having access to different size and types of financial safety nets. This paper finds that the components of the GFSN are not fully substitutable. We argue that while swap lines and RFAs can play an important role in the GFSN they are not a substitute for having a strong, well resourced, IMF at the centre of it. By running a series of stress scenarios we find that for all but the most severe crisis scenarios, the current resources of the GFSN are likely to be sufficient. However, this finding relies upon the IMF’s overall level of resources (including both permanent and temporary) being maintained at their current leveland masks some vulnerabilities at the country level.

Suggested Citation

  • Edd Denbee & Carsten Jung & Francesco Paternò, 2016. "Stitching together the global financial safety net," Questioni di Economia e Finanza (Occasional Papers) 322, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:opques:qef_322_16
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    References listed on IDEAS

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    Cited by:

    1. IRC Task Force on IMF issues & Broos, Menno & Ghalanos, Michalis & Kennedy, Bernard & Landbeck, Alexander & Lerner, Christina & Menezes, Paula & Schiavone, Alessandro & Tilley, Thomas & Viani, Frances, 2016. "Dealing with large and volatile capital flows and the role of the IMF," Occasional Paper Series 180, European Central Bank.
    2. repec:nbb:ecrart:y:2017:m:september:i:ii:p:87-112 is not listed on IDEAS
    3. Dennis Essers & Stefaan Ide, 2017. "The IMF and precautionary lending : An empirical evaluation of the selectivity and effectiveness of the flexible credit line," Working Paper Research 323, National Bank of Belgium.
    4. Hoggarth, Glen & Jung, Carsten & Reinhardt, Dennis, 2016. "Capital inflows — the good, the bad and the bubbly," Bank of England Financial Stability Papers 40, Bank of England.
    5. Scheubel, Beatrice & Herrala, Risto & Stracca, Livio, 2016. "What do we know about the global financial safety net? Data, rationale and possible evolution," Annual Conference 2016 (Augsburg): Demographic Change 145676, Verein für Socialpolitik / German Economic Association.
    6. Dennis Essers & Stefaan Ide, 2017. "The IMF and precautionary lending : An empirical evaluation of the selectivity and effectiveness of the flexible credit line," Working Paper Research 323, National Bank of Belgium.
    7. Stracca, Livio & Scheubel, Beatrice, 2016. "What do we know about the global financial safety net? Rationale, data and possible evolution," Occasional Paper Series 177, European Central Bank.
    8. Beatrice D. Scheubel & Livio Stracca, 2016. "What Do We Know About the Global Financial Safety Net? A New Comprehensive Data Set," CESifo Working Paper Series 6184, CESifo Group Munich.

    More about this item

    Keywords

    balance of payments; global financial safety net; IMF; foreign exchange reserves; regional financing arrangements; swap lines;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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