The International Monetary Fund (IMF) failed to issue risk warnings in the run-up to the financial and economic crisis that began to manifest in mid-2007, the fund's internal watchdog said Monday.
The IMF needs to enhance its surveillance, the Independent Evaluation Office (IEO) said in a report.
The evaluation focused on the performance of IMF surveillance during 2004-2007. IEO Director Moises Schwartz explained that the evaluation's main aim was to improve the effectiveness of IMF surveillance in warning the members on emerging risks and vulnerabilities to the global economy.
"Warning member countries about risks to the global economy and the buildup of vulnerabilities in their own economies is arguably the most important purpose of IMF surveillance," Schwartz said. But the IMF provided few clear warnings about the risks and vulnerabilities associated with the impending crisis before its outbreak.
During the run-up to the crisis, the banner message of IMF surveillance was characterized by over-confidence in the soundness and resiliency of large financial institutions, and endorsement of the financial practices in the main financial centers. The risks associated with housing booms and financial innovations were downplayed, as was the need for stronger regulation to address these risks.
The IEO found that the 187-member IMF's ability to identify the mounting risks was hindered by a number of factors, including a high degree of groupthink and a general mindset that a major financial crisis in large advanced economies was unlikely.
To address these factors, the report stresses the need to modify institutional structures and incentives to strengthen accountability and foster better assessment of risks, candor and clarity in messages, and the ability to "speak truth to power."
The report also said the international community needs a strong, effective, and well-equipped IMF to face the many economic and financial challenges that lie ahead, while the IMF needs to reform its culture, governance, and practices, so that the Washington-based institution is better prepared to confront future challenges.