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The Global Financial Crisis:
Causes, Policy Response, and Outlook
Max Alier *
Resident Representative in Ukraine
* The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.
Main Message
Despite recent economic indicators showing signs of an
incipient recovery, it is too early to say that the economy is
“out of the woods”. A number of issues still need attention and
an adequate solution to these issues will be key in determining
how fast and how strong we emerge from the crisis. In
particular, restoring solvency of the financial system is key.
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Outline
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
A Crisis in the Making

Macroeconomic Policy Response

Bringing the Financial System to a Sound Footing: Dealing with
Bank Insolvency

Outlook
A Crisis in the Making
The root cause of the global financial crisis can be traced back
to the optimism bred by a long period of high growth, low
interest rates, low volatility, and policy failures in:
 Financial regulation
 Macroeconomic policies
 Global Architecture
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A Crisis in the Making
The global financial crisis brought to an end the longest period
of strong global economic growth on record.
Broadly speaking it was “healthy” growth:
 High productivity growth
 Low inflation
 Low long-term and short-term interes rates
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A Crisis in the Making
World Output Growth 1983-2007
(In percent)
World CPI Inflation 1983-2007
(In percent per annum)
6.0
40
5.0
35
30
4.0
25
3.0
20
15
2.0
10
1.0
5
7
20
07
20
05
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
20
07
20
05
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
0
19
85
19
83
0.0
A Crisis in the Making
However, these benign conditions fed the build up of systemic
risk. Low interest rates, together with increasing and excessive
optimism about the future, pushed up asset prices, from stocks
to housing prices.
Low interest rates and limited volatility prompted a search for
yield and underestimation of risks leading to the creation and
purchase of ever riskier assets.
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Macroeconomic Policy Response
The magnitude of the crisis and the clear threat of a global
financial meltdown prompted a strong policy response
characterized by an unprecedented level of policy coordination
across the globe involving industrialized countries as well as
emerging market economies.
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A Crisis in the Making
World Ouput, Trade Volumen, and Commodity Prices
(Percentage change)
40
15
Commodity Prices
(LHS Axis)
30
10
20
5
10
0
GDP Growth
(RHS Axis)
0
-10
-5
Trade Volumes
(RHS Axis)
-20
-10
-30
-40
-15
2005
10
2006
2007
2008
2009
Macroeconomic Policy Response

Fiscal policy was loosened to offset the decline in private
demand prompted by the balance sheet effect resulting from
the asset price correction, as well as, the deterioration in labor
market conditions.

Monetary policy was rapidly loosened, including by using nontraditional instruments, to ensure an adequate level of liquidity
in the financial sector and to prevent a collapse of the payment
system.
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Bringing the Financial System to a
Sound Footing
Beyond the near-term liquidity support needed to preserve the
financial system, major challenges lie ahead:


Dealing with solvency problems and restoring credit flows.
Improving regulatory and oversight frameworks to prevent a
repetition of current crisis.
I would like to focus on the first issue. In particular, on the
frameworks to deal with bank insolvency and debt
restructuring.
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Bringing the Financial System to a
Sound Footing: Bank Insolvency
The primary objective of the bank insolvency framework is to
safeguard the stability of the financial system.
Why a special bank insolvency regime?
A special bank insolvency regime, separate from the corporate
insolvency, may facilitate timely action and provide for
consistency between the supervisory and insolvency-related
functions of the banking authorities. It is particularly useful
where the corporate insolvency regime is weak and ineffective.
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Bringing the Financial System to a
Sound Footing: Bank Insolvency
“Insolvency proceedings” refers to all types of official action
involving…


the removal of management and/or the imposition of limits
on/suspension of, the rights of shareholders;
assumption of direct control by the banking authority or other
officially appointed person;
…over a bank that has crossed a threshold for the
commencement of insolvency proceedings.
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Bringing the Financial System to a
Sound Footing: Bank Insolvency
Types of bank insolvency proceedings:
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
Official administration: the purpose is to protect the bank’s
assets, assessing its true financial condition, and conduction all
the necessary restructuring operations, or placing the bank in
liquidation.

Liquidation proceedings: the purpose is to maximize the value
realization of assets, and an orderly and equitable distribution of
proceeds to creditors. Liquidation results in dissolution of the
bank as a separate legal entity.
Bringing the Financial System to a
Sound Footing: Bank Insolvency
Bank restructuring operations should:



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minimize the disruption of the financial system;
limit the costs to depositors, other creditors, and taxpayers;
aim at addressing the causes and not just the symptoms of bank
insolvency.
Bringing the Financial System to a
Sound Footing: Bank Insolvency
Types of bank restructuring operations:




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Mergers and Acquisitions
Purchase-and-Assumption Transactions
“Good-bank/Bad-bank” Separation and Bridge Banks
Publicly Assisted Bank Restructuring
Bringing the Financial System to a
Sound Footing: Bank Insolvency
Systemic Banking Crises are characterized by financial sector
distress of such a magnitude that it has an adverse in effect on
the real economy, and usually include:




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Severe financial problems in a large part of the banking system.
A system-wide loss in bank asset quality.
Widespread loss of credit discipline.
Danger of collapse of the payment and settlement systems.
Bringing the Financial System to a
Sound Footing: Bank Insolvency
Response to systemic banking crises: should aim at:



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Protecting the payment system.
Limiting the loss of depositor and creditor confidence.
Restoring solvency, liquidity, and stability of the banking system.
Outlook
There are nascent signs that the world economy has bottomed
out. Credit and trade flows are resuming.
Particularly encouraging are developments in EMs, in particular
in Asia and Latin America.
The IMF has started to revise
its output growth projections.
However, the recovery is still
fragile and large reform agenda
lies ahead to put the world
economy on a strong footing.
World Output 2007-2014
(In percent)
6.0
5.0
4.0
WEO October 2009
3.0
2.0
WEO April 2009
1.0
0.0
-1.0
-2.0
2007
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2008
2009
2010
2011
2012
2013
2014
Thank you
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