Stitching Together the Global Financial Safety Net

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.

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

JEL Classification: F33, E58