The Problem of Resource Insufficiency
Since Bagehot first expressed his ideas, it has been understood that if emergency funding is to be effective, it must be unlimited—at least in principle. Within the national context, central banks have long been identified as the proper locus of the crisis-lending mechanism because they control the
IMF introduced the EFF as a complement to the SBA for countries needing medium-term assistance. SBA request and approval dates were collected by the author at the IMF archives in Washington, DC, and on the IMF’s website. SBA request and approval dates as well as all EFF request and approval dates were collected by an assistant via the IMF’s digital archives, the IMF’s website, and various hard copies of the IMF’s annual reports. One outlier is not shown in Figure 2.1 as the y-axis is capped at 200 days in order to improve interpretation.
money supply. As a crisis is unfolding, how much liquidity is necessary in order to calm a financial panic is often unclear. Thus, the central bank’s ability to create money makes it especially well suited for managing national liquidity crises. Indeed, the mere presence of a willing crisis lender with unlimited resources may be sufficient to prevent a crisis in the first place. As a former US Treasury secretary, Henry Paulson, once explained in testimony before Congress: "If you have got a squirt gun in your pocket, you may have to take it out. If you have got a bazooka and people know you have got it, you may not have to take it out.” A lender of last resort with limited resources may be unable to reassure markets that it has the capacity to provide the credit necessary to meet threatened financial institutions’ liquidity needs. Consequently, its efforts will be less likely to have the desired effect. "Partial insurance,” it turns out, "is no insurance at all.”
IMF resources are limited in two ways. First, in individual cases, the size of IMF loans are constrained by its rules and, in some cases, bureaucratic politics. Each member country’s drawing rights are constrained by the amount of money it has paid in. The amount of resources the IMF will lend to each country at one time and in a given year is linked to the size of the member’s quota. This cap is called an access limit. Such limits have been gradually increased over time and loans can exceed the cap if the board deems the circumstances to be "exceptional.” Yet this added flexibility did not become common until the 1990s when larger rescue packages became necessary to address large capital outflows from emerging markets in crisis. Moreover, the Fund’s ability to significantly exceed access limits is constrained in another way: Loans far in excess of these limits can generate political pushback from executive directors who feel a package is too generous. Thus, the possibility always exists that the board may reject a package because it is viewed as being too large. This can constrain the size of loan proposed in the first place.
Such bureaucratic pushback relates to the second way IMF resources are constrained: The institution’s total lendable resources are finite. Access limits are necessary in order to ensure that a few borrowers cannot severely deplete Fund resources such that it renders the IMF incapable of assisting other members in times of distress. In aggregate, IMF resources are largely constrained by the amount that all of its members pay into the Fund based on their assigned quota. Of course, the IMF can expand its
IMF Resources in Relation to World GDP, 1960-2010
resource base by increasing member quotas. However, this process takes time as it requires an 85 percent supermajority of voting power within the organization to approve any quota change. In many cases, the time between beginning a general quota review and the actual implementation of quota increases has taken years. Consequently, when unanticipated crises erupt that require financing significantly in excess of its lendable resources, the institution may find its resources are insufficient. In other word, it may find itself holding a squirt gun rather than a bazooka.
To help illustrate these points, Figure 2.2 depicts the IMF’s resources over time in relation to world gross domestic product (GDP). Dotted vertical lines identify years in which the Fund adopted a resolution to increase IMF quotas upon review. Thus, they indicate moments when the IMF believed its ability to meet the financing needs of its members was growing inadequate. The figure shows how, over time, the Fund’s resources relative to world GDP shrinks before requiring a quota increase. Of course, world GDP is not the best yardstick by which to measure the sufficiency
IMF Resources in Relation to Global Cross-Border Capital Flows
of IMF resources. The IMF is charged with stabilizing the international financial system, which, relative to world GDP growth over the past fifty years, has expanded at a much faster rate. Thus, Figure 2.3 displays the IMF’s resources in relation to global cross-border capital flows (both in constant 2007 dollars) from 1980 to 2007. Total capital flows presented include, at the aggregate level, all cross-border portfolio debt and equity investments, deposits, and all other lending. The Fund’s resources (in constant dollars) have not expanded at the same rate as the global financial system. Indeed, the differential growth here is quite staggering. In 1980, the IMF maintained resources equivalent to 28 percent of international capital flows; by 2007 this stood at just 3.6 percent! Consequently, the Fund’s ability to effectively manage a systemic international financial crisis has declined over time. In sum, because of its constrained resource base, the Fund falls short of Bagehot’s ideal ILLR mechanism that lends freely during panics.
-  US Senate 2008, p. 19.
-  For more on this subject, see Jeanne and Wyplosz 2001.
-  Cottarelli and Giannini 2002, p. 3.
-  The Fund can, however, temporarily augment its resources by borrowing from members willing to lend additional funds.
-  For example, the IMF adopted a resolution in favor of increasing quotas by 50.9 percent in December 1978. However, because of the time needed to round up sufficient member support (in particular, from the United States) for the increase, Fund quotas did notreflect the increase until November 1980.
-  IMF resource data were compiled from relevant IMF annual reports available athttp://www.imf.org/external/ns/cs.aspx?id=326 and http://www.imf.org/cgi-shl/create_x.pl?liq. Total resources represent the highest aggregate amount and do not equate to“usable” resources; they include total member quotas as well as monies available under theGeneral Arrangements to Borrow (GAB) and New Arrangements to Borrow (NAB). WorldGDP was calculated by the author using data from the World Bank’s World DevelopmentIndicators (WDI) database available at http://databank.worldbank.org/data/home.aspx.
-  IMF resource data are from relevant IMF annual reports. Global cross-border capitalflow data are from Farrell et al. (2008) and Lund et al. (2013).
-  Foreign direct investment (FDI) is excluded because such investments tend to be lesssubject to volatility and are not typically implicated in international financial crises.