如何建设更加公平与包容的全球金融安全网

ABSTRACT

The Challenge

With global economic uncertainties rising and international financial crises breaking out frequently, it is of great significance to strengthen the global financial safety net (GFSN). The current GFSN includes four parts: the first is foreign exchange reserves at the national level; the second is bilateral swap agreements (BSAs) between countries; the third is regional financing agreements (RFAs); and the fourth is the IMF at the multilateral level.

The current GFSN is more fragmented than in the past, and individual countries and regions have access to different sizes and types of financial assistance (Denbee et al 2016). The current GFSN cannot guarantee the stability of the global financial system, nor can it cope with systemic financial risks, especially after the experiences of the global financial crisis and the COVID-19 epidemic. The current GFSN is more of a suboptimal patchwork than a systematic design (Shafik 2015), and its structure is facing the following five challenges.

First, accumulating foreign exchange reserves is inefficient, and the risk of being sanctioned by powerful countries like the US is gradually rising. Nonetheless, individual countries’ foreign exchange reserves remain the largest component of the GFSN. However, reserve accumulation brings several problems. First, the cost of holding reserves is high, and the return from it is low. Most of reserve assets are low-yield, low-risk foreign government bonds, and they are exposed to both valuation and foreign exchange risks. For example, from 2022 to 2023, the Federal Reserve raised interest rates 13 times in a row, causing sharp price decline of U.S. Treasury bonds. Emerging market countries (EMEs) which invest a large proportion of foreign exchange reserve in U.S. Treasury bonds suffered large valuation losses. Second, foreign exchange reserves are distributed very unevenly across different regions. Moreover, on some occasions even those countries with abundant reserves are reluctant to use them to intervene in the foreign exchange market. For example, during the global financial crisis, nine of the largest emerging market economies refrained entirely from using their reserves (Shafik 2015). The major reason was that those economies deemed foreign exchange reserves as the most important self-insurance tool, and they were reluctant to use these reserves unless absolutely compelled. Third, the risk of sanction has increased. After the outbreak of the Russia-Ukraine conflict, the United States has frozen the Russian Central Bank’s foreign reserve assets. After that other EMEs began to worry about the safety of their own overseas assets. As a result, EMEs have begun to reduce their investments in U.S. Treasury bonds and increase their holdings of gold.

Second, the Federal Reserve swap lines may occupy the core position of the GFSN, replacing the IMF and other regional financial arrangements. During the US subprime crisis and European sovereign debt crisis, the Fed conveyed dollars through bilateral US dollar swaps in order to alleviate funding liquidity shortages in the offshore dollar market. This new established bilateral Federal Reserve swap lines provided timely liquidity support, helping stabilize global financial markets and cross-border capital flows, avoiding a full-blown dollar funding crisis. We had similar story during the 2020 pandemic. These episodes highlighted the importance of an international lender of last resort (Carstens 2021). However, only a few countries benefited from these swap lines (McCauley and Schenk 2020). Fed currency swaps are exclusive, affecting only developed countries with close economic, trade, financial and military relations to the US, like the ECB, Bank of England, Bank of Japan and Bank of Canada. Among the EMEs, only Brazil and Mexico had the opportunity to establish a currency swap agreement with the United States. Major EMEs such as China and India cannot participate in it (Zhang and Chen 2023), which is problematic. Although the European Central Bank (ECB) and the People's Bank of China are also establishing currency swaps, they are not as effective as the Fed currency swap in solving liquidity shortages. For example, after the outbreak of the European debt crisis, a large amount of funds flowed from financially fragile member states to relatively stable member states. The balance of payments of each member state became seriously polarized. Commercial banks had to turn to their national central banks to make up for the gap in cross-border fund settlement. This resulted in a rapid expansion of imbalances in the ECB's clearing system. Although it is also true that target 2 helped to contain the crisis.Thus, in the future, we need a resilient global financial safety net that does not rely solely on the Federal Reserve (Carstens 2021).

Third, Regional financing arrangements lack the ability to conduct a sound and comprehensive macro-economic and macro-prudential supervision. The occurrence of major international financial crises always prompts the establishment and development of RFAs. However, once the crisis has passed, the development of these RFAs slows down. Compared with the European Stability Mechanism, the Chiang Mai Initiative Multilateralisation (CMIM) process faces the following problems. First, the CMIM's funding is insufficient, and its operation efficiency is low. Moreover, the CMIM loan mainly focuses on short-term financing needs, and the loan maturity is relatively short (Asian Development Bank 2019). Second, limited by the insufficient supervision capacity and in order to avoid moral hazard, the CMIM requires that when the financing exceeds a certain proportion, the borrowing country must abide by the IMF loan conditionalities. Third, due to the distrust between countries in the region, it is difficult to develop a truly sufficient and independent regional financial safety network (Gao et al 2024).

Fourth, The IMF faces serious problems in the fields of funding scale, resource composition, and quotas allocation, which weaken its core position in the current GFSN. (1) The IMF’s current loan capacity is insufficient to deal with global systemic financial crises. (2) The proportion of IMF quota-based permanent funding to overall funding is too low. In other words, IMF loans relies heavily on temporary funding sources, which will hurt the IMF’s legitimacy in the long run. (3) The current status and power of emerging markets and developing countries is not fully reflected in the IMF governance structure. The voting power of the IMF depends on the quota of the member states, and the quotas of some large emerging markets and developing countries are significantly unrepresented (Gao 2023). (4)The IMF’s loan conditional policies are relatively stringent. In 2009, IMF Board has approved a major overhaul to the Fund’s lending framework by modernizing IMF conditionality, introducing a new flexible credit line, enhancing the flexibility of the Fund’s regular stand-by lending arrangement, doubling access limits, adapting and simplifying cost and maturity structures for its lending, and eliminating facilities that were seldom used. However, conditionality policies still limit the loan availability of borrowing countries.

Fifth, Central Bank Digital Currencies (CBDCs) could bring unprecedented risks to the GFSN. Without appropriate safeguards, especially for countries with open capital accounts, capital flows facilitated by CBDC may lead to an increasing demand for GFSN resources by introducing new shocks or amplifying existing shocks via currency substitution, exchange rate depreciation, and bank runs. In turn, this new phenomenon could instigate policymakers to expand the GFSN as a way to mitigate shocks. Finally, even if it is improved, the GFSN may increase in size but become more uneven and fragmented (Kim et al 2024).

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