Back to the BLOG? ..... Back to the HOMEPAGE? Today (February Tuesday the 25th, 2009), in testimony before the House Financial Services Committe, an exchange between Rep. Gregory Meeks (NY-D) and Fed chairman Bernanke really lifted the eyebrow of listener Keri. Her research is impeccable. Read this. This is what happened: Meeks: "Mr. Chairman, let me just ask you a quick question on international monetary policy for a second. Who do you think should be responsible for providing survilliance of systemtic risk for the international ecomony?" Bernanke: "Well, we have international institutions like the IMF, for example, which has expertise in financial matters, which does, for example, what's called an FSAP--a Financial Stability Assessment Program. It goes to different countries and tries to assess the strength of their financial systems, regulatory systems alike. The United States, currently, is about to ready to undergo one of those FSAP programs." FSAP? What the fsap is an FSAP? I'm gonna fsapin' find out, so I have taken the last three hours finding out exactly what that is. My first thought when I heard this was, ‘Of course, it’s the credit rating audit that we crazy people knew was coming this month, Feb 2009.’ But this is much more than a credit rating. In his testimony, Bernanke called it a "financial stability assessment program," but after finding the source from the IMF, I learned it is actually a Financial Sector Assessment Program. Here's the IMF's definition: "The FSAP, a joint IMF and World Bank effort introduced in May 1999, aims to increase the effectiveness of efforts to promote the soundness of financial systems in member countries. Supported by experts from a range of national agencies and standard-setting bodies, work under the program seeks to identify the strengths and vulnerabilities of a country's financial system; to determine how key sources of risk are being managed; to ascertain the sector's developmental and technical assistance needs; and to help prioritize policy responses." source: IMF, http://www.imf.org/external/NP/fsap/fsap.asp Since 1999, 80 plus countries have undergone auditing by the IMF's FSAP, including some "industrial" ones like Australia, the UK (2003) and Canada (2007). The information is used to influence policy, laws, and regulatory changes, etc, and has also become essential to domestic and international credit rating companies, like Moody's Investor Services, Standard & Poor, and Fitch, who--of course--use the information to apply credit risk to sovereign debt issuances for sale by these countries. So we are back to credit ratings, or more specifically, Sovereign Credit Ratings (SCR). You can see any countries SCR right here http://www.estandardsforum.org/jhtml/ca/. But more importantly, you can see the United States credit rating here http://www.estandardsforum.org/jhtml/country/United%20States/gc/19/ Of course, the New York Federal Reserve has looked hard and well at this topic, sending no other than Richard Cantor (Moody’s) to write the report. And directly from that report, Determinants and Impacts of Sovereign Credit Rating (Oct 1996, page 3) is the following: "In their statements on rating criteria, Moody’s and Standard and Poor’s list numerous economic, social, and political factors that underlie their sovereign credit ratings (Moody’s 1991; Moody’s 1995; Standard and Poor’s 1994). Identifying the relationship between their criteria and actual ratings, however, is difficult, in part because some of the criteria are not quantifiable....We explain below the relationship between each variable and a country’s ability and willingness to service its debt: • Per capita income. The greater the potential tax base of the borrowing country, the greater the ability of a government to repay debt. This variable can also serve as a proxy for the level of political stability and other important factors. • GDP growth. A relatively high rate of economic growth suggests that a country’s existing debt burden will become easier to service over time. • Inflation. A high rate of inflation points to structural problems in the government’s finances. When a government appears unable or unwilling to pay for current budgetary expenses through taxes or debt issuance, it must resort to inflationary money finance. Public dissatisfaction with inflation may in turn lead to political instability. • Fiscal balance. A large federal deficit absorbs private domestic savings and suggests that a government lacks the ability or will to tax its citizenry to cover current expenses or to service its debt. • External balance. A large current account deficit indicates that the public and private sectors together rely heavily on funds from abroad. Current account deficits that persist result in growth in foreign indebtedness, which may become unsustainable over time. • External debt. A higher debt burden should correspond to a higher risk of default. The weight of the burden increases as a country’s foreign currency debt rises relative to its foreign currency earnings (exports). • Economic development. Although level of development is already measured by our per capita income variable, the rating agencies appear to factor a threshold effect into the relationship between economic development and risk. That is, once countries reach a certain income or level of development, they may be less likely to default. We proxy for this minimum income or development level with a simple indicator variable noting whether or not a country is classified as industrialized by the International Monetary Fund." [from New York Federal Reserve, http://www.newyorkfed.org/research/epr/96v02n2/9610cant.pdf, page 3] Note that these criteria were written before the IMF's development of the FSAP. Standards cites FSAP data as now essential for establishing Sovereign Credit Ratings, and also notes that, in their inspection of the United States, "as of April 2008, no third-party assessment (of the U.S.) had been conducted to verify the information provided in the self-assessment, nor had an update of the self-assessment been undertaken. More importantly, the IMF has not conducted a Financial Sector Assessment Program (FSAP) of the U.S. financial system as it has with most other developed economies, and neither have the U.S. authorities published annual financial stability reports (as is the case with other mature market economies), arguing that such reports add little value to the overall regulatory process. According to the 2007 Article IV (IMF), the U.S. has agreed to participate in an IMF Financial Sector Assessment Program in late 2009. Three main federal banking supervisory agencies comprise the U.S. banking regulatory system, namely, the Board of Governors of the Federal Reserve System (the Fed), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency." [source Standard's, http://www.estandardsforum.org/jhtml/country/United%20States/gc/19/ ] I guess now it’s our turn. But when? This report, and the original 2007 agreement between the US and the IMF said the same thing, that the US would accept this FSAP inspection in late 2009. But, just today, Bernanke said that the US "currently, is about to ready to undergo one of those FSAP programs." Why the change in time frame? Well, remember the G-20 Financial Summit in November? You can guess what was decided there. According to the summit's closing document released by the IMF on Nov 15 2008, the Group had come to an agreed "commitment" for all G-20 nations. Under the section titled "Immediate Actions by March 31, 2009" are the following (as well as much more): "To the extent countries or regions have not already done so, each country or region pledges to review and report on the structure and principles of its regulatory system to ensure it is compatible with a modern and increasingly globalized financial system. To this end, all G-20 members commit to undertake a Financial Sector Assessment Program (FSAP) report and support the transparent assessments of countries’ national regulatory systems.” And then, "Regulators should take steps to ensure that credit rating agencies meet the highest standards of the international organization of securities regulators and that they avoid conflicts of interest, provide greater disclosure to investors and to issuers, and differentiate ratings for complex products. This will help ensure that credit rating agencies have the right incentives and appropriate oversight to enable them to perform their important role in providing unbiased information and assessments to markets. [source, Bloomberg "G-20 Statement on Finanical Markets, World Economy Full Text"http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aBkxf.HO2P00 ] So there you have it, all that before March 31, 2009. Now consider this: you know that new word "stress test" that we have been hearing lately? It’s such a new idea to Americans that when you do a google search for "US stress test", all the news articles literally put the "stress test" in quotation marks to indicate its newness. But, as I learned today, stress tests are nothing new at all. In fact, the IMF has been doing stress tests for years...and considering that our new Treasury Secretary used to work for the fsapin' IMF, isn't it funny that he's the first one to use that term, to "stress test the banks?" From the abstract of a paper on Stress Tests: "For almost a decade, the IMF been using stress tests to identify vulnerabilities across institutions that could undermine the stability of a country's financial system. This working paper focuses on the IMF's experience with stress testing in the Financial Sector Assessment Program (FSAP). [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1266539# Stress Tests and the FSAP] The IMF does stress tests, and now, suddenly, the US is doing stress tests. But everything is okay, its just fine, don't worry about the FSAP inspector over there, no he's just waiting for a cab. It's official: We are currently under audit by the International Monetary Fund. The domestic reaction this is, uh, NO ONE KNOWS! The government has not bothered to mention this! Or have they? Remember that $27 Billion in 3 month t-bills that sold for a negative return back last year? Yeah, that was on Dec 9. Those bills will mature in two and a half weeks, and the holders will get back less than they bought them for. Will that be a good deal? Who knows. The original agreement for the FSAP to occur in late 2009 required the FSAP report, called an FSSA (Financial Sector Stability Assessment), to be released in 2010. Well, its not happening in late 2009 anymore, its happening now. And the "commitment" from the G-20 indicates that all member nations commit to undertake the FSAP by March 31, 2009. I can't imagine they can do it and generate any kind of report in weeks, but hey, they're the IMF! No one (of us) knows this time frame. As far as the the international reaction to this, from what I can gather from a few google searches, seems to be full of contempt for the idea that the US has escaped IMF inspection to date, but those results are, of course, overwhelmed by recent international sentiment against the US for ruining the party. The former Indian finance minister put it this way in June, "I believe that the international institutions we have at the moment, are woefully inadequate in dealing with the global challenges...There is a major regulatory failing in the US. What is the IMF doing about the US? Nothing." (source http://www.brettonwoodsproject.org/art-562423) Well, until now. He said that at about the same time as the Germans said this: (From an article in Der Spingel dated June 6 2008): "No Fed chief in US history has been forced to submit to the kind of humiliation that Ben Bernanke is facing. This is partly down to circumstances... After years of growth, the United States is now on the brink of a recession, one that is more likely to be deepened than softened by a tight money policy... Officials with the International Monetary Fund (IMF) have informed Bernanke about a plan that would have been unheard-of in the past: a general examination of the US financial system. The IMF's board of directors has ruled that a so-called Financial Sector Assessment Program (FSAP) is to be carried out in the United States. It is nothing less than an X-ray of the entire US financial system. As part of the assessment, the Fed, the Securities and Exchange Commission (SEC), the major investment banks, mortgage banks and hedge funds will be asked to hand over confidential documents to the IMF team. They will be required to answer the questions they are asked during interviews. Their databases will be subjected to so-called stress tests -- worst-case scenarios designed to simulate the broader effects of failures of other major financial institutions or a continuing decline of the dollar. Under its bylaws, the IMF is charged with the supervision of the international monetary system. Roughly two-thirds of IMF members -- but never the United States -- have already endured this painful procedure." And so it is our turn. But I almost forgot to add Bernanke's last sentence in his exchange with Rep Meeks. Answering Meeks' question as to who should "provide survelliance for the international economy," Bernanke assured us all that "Even though there is a great deal of international cooperation and coordination, we certainly we don't have any central authority that has the ability to require a country to make certain changes--we use more of a cooperation attempt to come together on certain principles." Riiiiiiight. This is a global takeover. |