Exit from extraordinary financial sector support measures
In June 2009, FSB members agreed to exchange notes on their planned exits from the exceptional financial sector support measures introduced since 2007, so as to avoid surprises and facilitate coordination where needed. This note draws on these contributions and in the main focuses on policies to exit from wholesale debt guarantees, deposit guarantees, capital injections to financial institutions, direct market-wide asset purchases (in some cases as part of quantitative easing by central banks), asset guarantee programs, special lending facilities, and/or extraordinary central bank liquidity facilities.
The note does not cover emergency fiscal or monetary policies. Nonetheless, it is important to recognize that there are clear links between exceptional policies to support the financial system and policies to support the macroeconomy. In particular, the effectiveness of exceptional financial support measures depends on the credibility of the macroeconomic policy stance being maintained. And the transmission of monetary policy depends on the functioning of the financial system. However, the timing of exit from the financial system support policies and the exceptional macroeconomic measures need not be the same, as different criteria govern the respective policy judgements.
FSB members agree that the removal of emergency policies requires a considerable amount of judgement and flexibility with respect to timing and sequencing. Withdrawal of support measures may also have spillover effects on other countries. Although decisions on the timing of withdrawal of measures will depend on judgements on the strength of national financial systems, there are consequently gains from advance information exchange and from stronger forms of co-ordination where such spillover effects are potentially significant.
As many of the institutions that initially took advantage of the various emergency policies have started to regain access to private debt and equity markets and to exit from government programs, and only the weakest institutions continue to rely on these policies, the case for system-wide measures is diminishing. Authorities are likely to focus increasingly on firm specific interventions. There is also likely to be an increased expectation in financial markets for firms themselves to develop their own exit strategies and to reduce their use of emergency government support. Continue reading