The Financial Crisis and Information Gaps
Speech by Murilo Portugal, Deputy Managing Director, IMF
October 20, 2010
As prepared for delivery
1. Good afternoon. It is a pleasure to congratulate the European Central Bank’s statistical community on this celebration of the World Statistics Day. This is a time to celebrate our statistical achievements, to honor our colleagues who work so hard to produce, cross-check, and validate the data we need for decision-making; and an opportunity to take stock of what needs to be done to improve the world statistical system.
We are recovering from a devastating global financial crisis which has inflicted tremendous costs around the world and served as a humbling experience and wakeup call for most of us, and I guess including for statisticians. So I would like to focus my remarks on the financial sector issues and, in particular the data gaps revealed by the financial crisis.
2. The official statistical community has made a great deal of progress in developing a methodologically consistent economic and financial statistics system covering traditional datasets, and in developing and implementing data transparency initiatives. This has brought significant benefits to policy makers and analysts in terms of the availability, comparability, and broad consistency of data across countries.
3. Europe has set a fine example in this area, under the leadership of the ECB and Eurostat, publishing quarterly financial accounts for the Euro area, broken down by sector. These data are highly valuable not only in providing a comprehensive overview of economic and financial developments in the Euro area, but also for cross-checking the consistency of high frequency data on monetary and financial accounts statistics, balance of payments statistics, and capital market data. This effort will prove extremely useful for the work of the newly founded European Systemic Risk Board.
4. Despite the remarkable progress made in the production of official statistics, the recent crisis revealed serious data gaps in key areas. Even for the most advanced statistical systems such as in Europe, the crisis highlighted “black holes” in data that now need to be addressed.
5. There is a broad agreement that, in the run-up to the crisis, a large number of financial institutions took on unacceptable levels of risk in their operations. Financial institutions provided loans with inadequate checks on borrowers’ ability to pay and developed new and highly complex financial products in an attempt to extract higher returns. Many financial regulators and supervisors—were lulled into complacency and did not respond adequately to the buildup of risks in the financial sector. As a result, financial systems became widely distorted along several dimensions.
- First, the financial system grew highly complex and opaque. Lack of transparency and limited disclosure of information on the types and locations of risks made it difficult to assess the extent of exposures and potential spillovers. Some studies have shown that a portion of financial activity was not serving the needs of the real economy.
- Second, the financial system became over-leveraged. Short-term incentive structures undermined good governance and encouraged excessive risk taking. Actual leverage was even greater than was apparent, in part because it was embedded in instruments in ways that were not transparent and in part because regulatory requirements did not capture key risks. This meant that capital was inadequate as a buffer against the drop in asset prices. And the interconnectedness of institutions meant that the shocks were propagated across the system, both domestically and globally.
- Third, liquidity risk was also higher than recognized. Financial firms and key markets relied increasingly on short-term, wholesale funding and took on excessive maturity mismatches while failing to build adequate liquid asset buffers.
- Fourth, large complex institutions exploited the benefits of being “too-important-to-fail.” The lack of market discipline allowed them to borrow at preferential rates, operate with higher levels of leverage, and engage in riskier activities.
- Fifth, financial intermediation increasingly shifted to the “shadow” banking sector. This meant that relatively unregulated nonbank financial institutions and markets thrived in large part because they avoided the more stringent requirements imposed on banks.
6. Concerted efforts are needed to close key data gaps identified in the IMF and FSB report to the G-20 ministers of finance and central bank governors. These efforts include:
- The need of data for identifying the build-up of risk in the banking sector, improving coverage in those segments of the financial sector where the reporting of data is not well established, such as the non-bank financial corporations.
- The need for enhanced information on the financial linkages of Systemically Important Global Financial Institutions (SIFIs) and a strengthening of data gathering initiatives on cross-border banking flows, and investment positions and exposures.
- The need to strengthen the sectoral coverage of national balance sheet and flow of funds data, including timely and cross-country standardized and comparable government finance statistics and data on real estate prices. Country practices in compiling data on real estate prices are uneven, and as we know the impact of house prices on household net worth was highly relevant to the global financial crisis.
- The need to enhance awareness of available data for policy purposes.
7. I would underscore the importance of better aligning the needs for, and the collection of, micro data and macro-financial data, and of improving the cooperation between regulatory and economic statisticians.
8. We need to make the world statistical system more robust and better equipped to cope with the new and diverse needs for data. There is no doubt that additional resources and, in some cases, strengthened legislative frameworks will be needed to improve the ability of regulatory and statistical agencies to collect the necessary data. Let me underscore the importance of making progress in improving data collection and information sharing on linkages across Systemically Important Global Financial Institutions (SIFIs), and in drafting a common template on the exposures of these institutions. This initiative, part of a joint effort by the IMF and FSB to address G-20 recommendations, aims to broaden the set of data available for mapping and assessing risks associated with financial networks. We expect the reporting template to play an important role in standardizing information and in facilitating the process of sharing data on common exposures and linkages that exist among these institutions.
9. Moving from the identification of data gaps to efficient systems of data collection, management and reporting requires prioritization of activities, and an appropriate balance between confidentiality and transparency. It is also imperative that data collection efforts on global financial networks recognize international dimensions and seek appropriate participation from regulators worldwide, particularly in jurisdictions with significant financial centers. The task before us therefore requires strong international coordination, and cooperation. Working together, we can lay the foundations for a sound and stronger world statistical system.
10. I wish to commend the work of the Inter-Agency Group on Economic and Financial Statistics in which the ECB is an active member and contributor. The BIS, ECB, Eurostat, IMF, World Bank and the UN have a strong partnership in this group to move forward the G-20 data gaps initiative. We have jointly established the Principal Global Indicators (PGI) website, which has been very successful in bringing data series for the G-20 economies on a common platform. The IMF obtains its Euro area financial data directly from the ECB. We should continue to strengthen these mutually beneficial avenues of cooperation. In concluding, I wish to applaud the ECB’s statistical community for their excellent contribution to the world statistical system, and encourage them to continue and deepen their efforts. I wish also to extend congratulations to the world statistical community at large on this very special occasion.