The full speech is available at http://www.bankofengland.co.uk/publications/Pages/speeches/2015/841.aspx
Promoting cross border capital flows as a means of allowing resources to flow to where they will be best used is a logical extension of the arguments David Hume first put forward in favour of free trade more than 250 years ago. However, such flows leave nations exposed to a ‘capital stop’, in much the same way that banks can experience a run on their deposits.
The mix of self- and multi-lateral insurance arrangements that have arisen in response to recent events and liquidity pressures appears suboptimal – resembling more of a patchwork than a safety net. We need a better global financial safety net with the IMF at its heart and three key additional elements that will make the safety net more effective.
First, a more reliable and flexible source of funding for the IMF and greater clarity on coordination with Regional Financial Arrangements.
Second, a stronger mandate for IMF surveillance and stress testing to reduce the likelihood that countries might need recourse to the safety net, and possible prequalification to reduce stigma when liquidity is needed.
Third, better mechanisms for dealing with debt restructuring and reducing the risk of disorderly spillovers.
None of this will be easy. As Hume said “it must, however, be confessed that…all these questions of trade and money are extremely complicated.19” But there are some important lessons from the experience of central bank reforms since the crisis that, while complicated, show us what might be possible.