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What Are International Financial Institutions, and How Did They Respond to the Global Financial Crisis?


The global financial crisis of 2008 was the worst economic crisis since the Great Depression of the 1930s. The crisis began in the United States, but it quickly spread to other countries around the world. The crisis was caused by a number of factors, including:

  • Subprime mortgages: Subprime mortgages are mortgages that are made to borrowers with poor credit history. During the housing boom of the early 2000s, lenders made a large number of subprime mortgages to borrowers who were unlikely to be able to repay them.
  • Securitization: Securitization is the process of pooling together a large number of loans and then selling shares in the pool to investors. This process allows lenders to sell off risky loans and to raise more money to make new loans. However, it also made it more difficult for investors to assess the risk of the loans they were buying.
  • Credit default swaps (CDSs): CDSs are insurance contracts that protect investors from losses if a borrower defaults on a loan. CDSs were used extensively by investors to hedge their risk from subprime mortgages. However, they also made the financial system more interconnected and more vulnerable to shocks.

The global financial crisis had a devastating impact on the world economy. Millions of people lost their jobs and their homes. The stock market crashed, and many banks and financial institutions failed.

International financial institutions (IFIs) played a major role in responding to the global financial crisis. IFIs such as the International Monetary Fund (IMF) and the World Bank provided financial assistance to countries that were struggling to cope with the crisis. IFIs also helped to reform the global financial system to make it more stable and resilient.

The global financial crisis has led to a number of reforms to IFIs. These reforms include:

  • Increased transparency and accountability: IFIs have become more transparent and accountable to their member countries. This has helped to improve public trust in IFIs and to ensure that they are using their resources effectively.
  • Strengthened financial regulation: IFIs have worked with countries to strengthen financial regulation. This has helped to reduce the risk of another financial crisis.
  • Greater focus on development: IFIs have placed a greater focus on development in their work. This is important because the global financial crisis has shown that financial instability can have a devastating impact on developing countries.

The future of IFIs is uncertain. Some people believe that IFIs have become too powerful and that they should be reformed or abolished. Others believe that IFIs are essential for promoting global financial stability and development.

It is important to note that IFIs are not monolithic. Each IFI has its own mandate and its own way of operating. Some IFIs, such as the IMF, are focused on promoting financial stability. Others, such as the World Bank, are focused on promoting development.

It is also important to note that IFIs are not the only actors that can help to prevent and respond to financial crises. Governments and central banks also play an important role.

Illustrations

"The TED spread (the difference between the London Interbank Offer Rate [LIBOR] and the U.S. Treasury bill rate at the same maturity), which is an indicator of confidence in the credit markets, rose from its normal 0.5 percent to 4.5 percent in October 2008 (figure 2.1)."

Figure 2.1. TED Spread

"The Institute of International Finance estimates that private flows to emerging economies will decline to no more than $165.3 billion in 2009, compared with $465.8 billion in 2008 and $928.6 billion in 2007 (see table 2.1)."

TABLE 2.1 EMERGING MARKET ECONOMIES’ EXTERNAL FINANCING US$ BILLIONS

Conclusion

The global financial crisis of 2008 was a major event that has had a lasting impact on the global economy and on international financial institutions. IFIs played a major role in responding to the crisis, and they have implemented a number of reforms to make the global financial system more stable and resilient.

The future of IFIs is uncertain, but they continue to play an important role in promoting global financial stability and development.

Source(s): "The Global Financial Crisis and the Future of International Financial Institutions." by James Bond, apart of Lu, Kevin W., Gero Verheyen, and Srilal M. Perera. Investing with Confidence: Understanding Political Risk Management in the 21st Century. Washington, D.C.: World Bank, 2009.