7. International monetary and financial system

International monetary and economic cooperation have gained further significance over the past few decades. However, the increasing globalisation of trade and financial relations also brings with it additional challenges for economic stability. For this reason, numerous international bodies and organisations are working to maintain and improve the stability of the monetary and financial system.

In a broad sense, the term “currency” denotes the constitution and organisation of a country’s entire monetary system. However, it often refers only to the monetary unit used in a given country or territory. A currency is closely tied to a country’s history and makes up part of its identity. Most countries still have their own national currency. One exception to this is the euro area, where 19 countries use a single currency.

For everyday use, currencies are represented by a non-standardised abbreviation (like the Swiss franc (SFr)), or by their own currency symbol, such as the US dollar ($), the pound sterling (£), the Japanese yen (¥) and the euro (€). In international currency trade, however, all currencies are listed using a standardised three-letter code. The first two letters usually represent the country while the third letter stands for the currency (e.g. USD for the US dollar, or JPY for the Japanese yen). The euro, with its acronym EUR, is an exception.

Owing to the fact that the currencies are different, transactions across national borders require domestic payment instruments to be exchanged for foreign ones. Such currency exchanges are carried out at the prevailing exchange rate. The exchange rate is the rate of exchange between two currencies, and it can be represented in two different ways. Indirect quotation shows how many units of foreign currency can be obtained for one unit of the domestic currency. Direct quotation states how much one unit of the foreign currency costs in the domestic currency. Mathematically speaking, the two quotations are the inverse of each other.

The technical term for a payment instruction to a country abroad in a foreign currency is “foreign exchange”. This is why we talk about a foreign exchange rate when dealing with cashless transactions involving different currencies. In this vein, foreign book money is referred to as “foreign exchange”, while foreign cash comprising foreign banknotes and coins is referred to as “foreign currency”. Foreign currency is usually exchanged at a special exchange rate (“counter rate”) based on the foreign exchange rate. Banks and bureaux de change use the foreign exchange rate to set a buying rate for foreign currency. Their selling rate is lower. All banks and bureaux de change are free to set their own bid-ask spread. This difference is used to offset the costs of foreign currency dealing. As a rule, only banknotes are exchanged (not coins).

In a fixed rate regime, it is the central bank’s task to keep the exchange rate stable at the predetermined central rate of an “anchor currency”. To this end, the central bank buys and sells foreign exchange so that it can influence the supply of, and demand for, the foreign currency. The central rate is generally accompanied by a band determining the exchange rate’s maximum permissible fluctuation margins (“intervention points”) from this central rate. Some countries still peg their exchange rates to another currency, such as the US dollar. This is intended to create more confidence in the country’s own currency.

Other countries even set themselves the stipulation that the domestic money supply must always be fully backed by foreign exchange reserves (known as a currency board arrangement). The aim of a currency board is for the country in question to “import” the stability of the anchor currency into its own country by curbing domestic money creation through limited inflows of foreign exchange.

The European Central Bank (ECB) calculates and publishes daily euro foreign exchange reference rates for selected currencies. These exchange rates are not intended for foreign exchange transactions. Instead, they are often used for enterprises’ annual financial statements, tax declarations, statistical reports or economic analyses.

The balance of payments and the international investment position (i.i.p.) reflect the external sector. They show how the German economy is interconnected with that of the rest of the world, capturing trade in goods and services. In addition, payments and capital flows as well as financial asset positions arising from links between Germany and the rest of the world are shown. Owing to Germany’s strong interconnectedness with other countries, these data are important for the assessment of macroeconomic developments and for related policy decisions. The German balance of payments and the German i.i.p. are comparable with the statistics of other countries, as they all follow the same international rules. The handbook on compiling the balance of payments and the i.i.p. is in its sixth edition (Balance of Payments and International Investment Position Manual (BPM6)). In addition, the ECB and the European Union, through Eurostat, lay down legal reporting requirements for the Eurosystem national central banks.

The balance of payments covers economic transactions between residents and non-residents over a specific period of time. For example, it provides information on which goods and services Germany exports to which countries in a given year.

The balance of payments covers economic transactions between residents and non-residents over a specific period of time. For example, it provides information on which goods and services Germany exports to which countries in a given year.

The i.i.p. shows the accumulated holdings of financial assets and liabilities between residents and non-residents at a given reporting date. For example, it provides a breakdown of the shares of external assets attributable to portfolio investment, direct investment or TARGET2 claims.

The balance of payments shows a total of four different sub-accounts. The two most important of these are the real economy-related current account (I.) and its financial counterpart, the financial account (III.). In addition, there is also the capital account (II.) and an additional item that conceals net errors and omissions (IV.). Usually only the balance of these sub-accounts is shown – i.e. the difference between revenue and expenditure. The following relationship applies between the balances of the sub-accounts: financial account balance = current account balance + capital account balance + net errors and omissions.

The balance of payments as a whole is therefore always balanced. Only its sub-accounts can record a positive or negative balance. When we talk about balance of payments imbalances, we generally mean a high surplus or a large deficit in the current account.

The term “balance of payments” is actually misleading. For one thing, it is not a balance sheet in the sense of a point-in-time statement of assets and liabilities. Rather, it is a flow account based on months, quarters or years.

For another, it not only records cross-border payments, but also transactions that do not lead to (direct) payment.

The current account comprises trade in goods, trade in services, primary income and secondary income. In 2021, the German current account surplus totalled €265.3 billion, which was equivalent to around 7.4% of Germany’s gross domestic product (GDP).

The largest item in the German current account is trade in goods. The coronavirus pandemic triggered a deep slump in this area in 2020. Global trade suffered from the worldwide drop in demand, temporary business closures and disruption to international supply chains. In 2021, the German economy recovered markedly from the pandemic-induced recession, exporting goods worth a total of €1,367.4 billion, whilst imports of goods amounted to €1,175 billion. This represented a surplus of €192.4 billion. Measured in terms of the goods and services generated in Germany – i.e. gross domestic product (GDP), which amounted to around €3.6 trillion in 2021 – exports of goods accounted for around 38.3% of GDP and imports for just under 32.9% of GDP. The geographical focus of German trade in goods has been consistently within the euro area since 2012. In 2021, around 37% of all German exports went to euro area countries. The corresponding share of imports in the same year was approximately 37%.

The services account includes, amongst other things, travel, transport, financial services and IT services. As a rule, the services account has a negative balance because German citizens spend significantly more money abroad than the other way round. This changed in 2020, when the coronavirus pandemic led to massive restrictions. German travel expenditure fell sharply from €83 billion in 2019 to €34 billion in 2020 and remained low in 2021, at €40.7 billion. This resulted in the services account balance in 2020 entering positive territory for the first time since 1971, and in 2021, too, it was still slightly positive (+€0.3 billion).

The sub-account of the primary income balance documents cross-border transactions relating to employment and investment products. The latter comprise interest and dividend payments as well as income from investment fund shares, but also income from direct investment. As Germany has built up a high level of net external assets owing to its long-term current and financial account surpluses, this sub-account regularly reports surpluses. In 2021, the balance totalled around €126.6 billion.

Secondary income shows ongoing transactions that are rendered without a quid pro quo, among them Germany’s contribution payments to the EU, insurance premiums and benefits, as well as remittances from people with a migratory background living in Germany to their families in their home countries. Other items include social benefits and contributions, penalties and damages payments and lottery winnings. Germany’s secondary income records a deficit on account of the high contribution payments it makes to the EU. It totalled €54.1 billion in 2021.

A current account deficit indicates that the country concerned has consumed more goods and services than it has produced. Its imports exceed its exports. In order to “pay” this difference, the country has to borrow capital from other countries. This means that it reduces its external assets or takes out loans abroad. By contrast, if a country has a current account surplus, it consumes less than it has produced. Its exports exceed its imports. The country forms financial assets abroad in the amount of this difference.

If a current account deficit is offset by a decline in the country’s reserve assets, the central bank has financed the deficit by dissolving external assets (reserve assets). By contrast, if the government or businesses take out loans abroad, this import of capital covers the current account deficit. A current account balance is therefore always reflected in other items of the balance of payments, which reveal how external assets have been built up or run down.

The current account balance is a closely observed figure. There are various viewpoints with regard to its “right” level: is a balanced current account the best for a country’s economy? Or does it make more sense to accept surpluses or deficits in the current account? If so, on what scale? A further point of contention is whether economic policymakers should even attempt to influence the level of the current account balance through economic policy measures.

In the 1990s, Germany’s current account consistently posted deficits. These were due, in particular, to the large backlog of goods and services then being acquired by the eastern federal states following reunification. This led to a sharp increase in imports to Germany. Since then, large surpluses have been generated owing to the German economy’s high level of competitiveness as well as a surplus of savings.

The capital account records transactions that are unrequited but which change a country’s assets. Examples include inheritances, debt relief and development aid for infrastructure. As revenue and expenditure offset each other in the capital account, it usually records only a figure in the single-digit billions in net terms. In 2021, the capital account balance stood at -€1.4 billion.

The capital account records transactions that are unrequited but which change a country’s assets. Examples include inheritances, debt relief and development aid for infrastructure. As revenue and expenditure offset each other in the capital account, it usually records only a figure in the single-digit billions in net terms. In 2021, the capital account balance stood at -€1.4 billion. The financial account captures financial flows between residents and non-residents. As a financial counterpart to the current account, it has also recorded a high positive balance for years. In 2021, the surplus amounted to €314.8 billion. The financial account is broken down into direct investment, portfolio investment, financial derivatives and employee stock options, other investment and reserve assets.

Direct investment is defined as cross-border investment in enterprises with the objective of establishing a lasting and significant influence over business activities. Where the participating interest comprises 10% or more of the shares or voting rights, this is considered to be a significant degree of influence. A strategic long-term relationship is what differentiates direct investment from portfolio investment. The former includes, in addition to equity capital, intra-group loans and trade credits. The motives for direct investment are many and varied. The objective may be to secure purchasing and sales markets, to protect against exchange rate fluctuations by setting up production sites abroad or to benefit from tax advantages.

Portfolio investments recorded in the financial account include shares, investment fund shares and debt securities. The bonds issued by the German government represent an important sub-item. They are regarded as a safe investment and are therefore also popular with non-resident investors, especially in times of crisis.

Financial derivatives include options and forward transactions. They are used to hedge against certain risks or for speculation purposes. Employee stock options entitle employees to acquire a certain number of shares in their employer at a predetermined price, either at a specific point in time or within a certain timeframe.

Other investment comprises a wide range of financial instruments. The largest items are financial loans and “currency and deposits”. The latter also includes the Bundesbank’s TARGET2 claims, which have risen sharply in recent years. At the end of 2021, they exceeded the threshold of €1.2 trillion. Other items include trade credits and advances (where they are not part of a direct investment) as well as insurance and pension services.

In Germany, only the Bundesbank holds reserve assets. These comprise foreign currency claims on non-euro area residents as well as gold, gold receivables and special drawing rights (SDRs) allocated by the International Monetary Fund (IMF). In Germany, purchases and sales of reserve assets play only a minor role. The greatest change came about in August 2021, when the IMF reallocated SDRs in response to the global coronavirus pandemic. A share of new SDRs equivalent to €30.9 billion was allocated to Germany. Overall, the reserve assets amounted to €277.9 billion at the end of March 2022.

Net errors and omissions should not actually appear, as the current account balance plus the capital account balance should, in theory, exactly correspond to the financial account balance. In statistical practice, however, this is unfortunately not the case, due to the fact that there are reporting gaps and errors, estimates are not 100% accurate and transactions cannot always be assigned in the correct chronological order. The balance of payments is then mathematically offset using errors and omissions.

The international investment position (i.i.p.) shows the holdings of financial assets and liabilities between residents and non-residents at the end of the quarter, valued at the respective market prices and exchange rates. Thus, the i.i.p. provides information not only on the volume and structure of financial assets held abroad by residents, but also on those held in Germany by non-residents. The net position – i.e. assets minus liabilities – shows whether an economy is a net debtor or net creditor to the rest of the world.

The flows from which i.i.p. stocks are generated over time are shown in the financial account as a sub-account of the balance of payments. The balance on the financial account indicates whether financial claims and liabilities on non-residents have been decreasing or increasing over a certain period of time. If claims rise faster than liabilities, the balance on the financial account is positive. Net external assets are increasing.

Germany’s external assets have been rising for years owing to its high current account and financial account surpluses. At the end of 2021, they came to €2.4 trillion, which is 68% of GDP. German claims on non-residents stood at €11.3 trillion. This contrasted with German liabilities amounting to €8.9 trillion.

The ECB draws up the euro area balance of payments using the data supplied by the national central banks. These data comprise euro area transactions between the euro area and the rest of the world. Transactions within the euro area are excluded. Close ties between euro area countries mean that the national balances of payments partially offset each other in the aggregate balance. This is why the balances for the euro area as a whole mostly remain within narrow bounds even though individual Member States post large surpluses and deficits at times. The same applies to the EU’s balance of payments, which is compiled by the European Commission.

Hardly anyone – be it an individual, an enterprise or a government body – is likely to always receive exactly as much money as they spend. In other words, everyone is continuously accumulating or reducing their financial wealth. Anyone who has excess money can invest it, making them a supplier of financial resources. At the same time, there are enterprises who invest and individuals who wish to finance major purchases. They frequently require more money than they have at their disposal. Borrowing additional funds makes them demanders of financial resources. The financial system brings the supply of and demand for capital together.

The role of the financial system is to facilitate the transfer of funds from suppliers to demanders. In a financial system, financial intermediaries – particularly banks, insurance companies and investment funds – act as brokers between the suppliers and demanders of financial resources. This takes place through the financial markets and financial infrastructure. Payment settlement and securities trading systems therefore also form part of the financial system.

Banks are a key component of the financial system. Households and enterprises use banks to execute payments via current accounts, invest money (deposits), or take out loans. Banks can create new money by granting loans. The financial system also includes insurance companies and investment funds. In contrast to banks, they do not grant loans, but receive funds from investors and forward these to demanders of capital – by purchasing securities, for instance.

Investment funds are not a form of investment, but rather enterprises that invest in various forms of investment. They sell fund shares. These are securities that represent the demand for a specific part of the funds’ assets. The money received in this manner is channelled into various investments such as securities or real estate. Once fees have been deducted, the funds’ returns are passed on to the investors.

Open-end investment funds give their investors the option of redeeming the fund shares they have issued at short notice – usually every trading day. Closed-end investment funds, on the other hand, do not provide this option. Investment funds reduce the risk faced by their investors generally by investing in a range of different assets (known as diversification). Their investment activity may be focused on securities (e.g. shares and bonds) or real estate. Money market funds invest in short-term assets that are frequently regarded as products that compete with bank deposits.

Hedge funds are investment funds that are less stringently regulated. They are able to invest in assets that investors can use to hedge against price losses. They can also use all kinds of financial instruments to pursue risky investment strategies that generate high yields but may also result in significant losses.

Exchange-traded funds (ETFs) are investment funds that track an index such as the DAX. They therefore do not actively make any investment decisions. As less effort is required on their part, their costs are lower than those incurred by traditional investment funds. ETF shares are traded on the stock exchange and are subject to usual market risk.

For the most part, bonds envisage fixed interest payments made at specific intervals. The market in which they are traded is called the bond market. The German government, too, draws on debt securities such as Federal bonds or Federal notes when borrowing.

German banks also issue large volumes of their own debt securities in order to obtain refinancing over the longer term. Mortgage Pfandbriefe, a particularly well-known form of bank debt security, are used to refinance real estate loans. Shares in enterprises are traded on the equity market. Public limited companies (PLCs) raise equity by issuing shares. By purchasing shares, the shareholder also acquires a stake in the enterprise, thereby gaining the right to share in its profits. Currencies are traded on the foreign exchange market. Trading takes place primarily between banks. A currency’s exchange rate is determined by the supply and demand for that currency.

Over the past few decades, the international financial system has changed significantly. In the digital world, where capital moves freely for the most part, investors can choose from a great number of forms of investment. These days, the money deposited with a bank or an investment fund can be invested virtually anywhere in the world. Internationally active banks extend loans to enterprises from all over the world and conduct global trade in securities. Savers and investors, too, invest money abroad in order to achieve higher returns or to diversify their risks more effectively. From an economic perspective, it makes sense to be able to transfer funds across national borders. This allows investments to be made that could not have been covered by domestic funding sources alone.

While traditional bank loans and deposits dominated international financial business in the past, trading in securities – including complex financial instruments such as derivatives, often in the form of forward transactions, swaps and options – has since gained the upper hand. They are better able to meet the requirements arising from the highly interconnected global economy and new technological possibilities in securities trading.

Outside of the traditional banking system, other financial market players are also increasingly taking on the role of financial intermediary, acting as a link between the supply and demand of credit. These entities are frequently subsumed under the term “shadow banks”. The term “non-bank financial intermediaries” has since come into common parlance at the international level. These include, for example, investment funds (including hedge funds and exchange-traded funds (ETFs)) as well as money market funds. Digitalisation, too, is helping to bring about sweeping change in the financial system. Technology-driven financial innovations (fintech sector) are creating new financial instruments, services and intermediaries in all areas of the financial sector. Mobile payments and internet payment methods, for instance, provide additional ways to pay, and robo-advisors offer automated investment services. These new products and providers may entail risks to financial stability in some sub-sectors, such as herding behaviour stemming from a greater degree of automation in investment decisions made by robo-advisors. To date, however, the fintech sector in Germany has remained relatively small, meaning that potential risks are limited.

Securitisations also play a significant role. The fundamental idea is to make credit claims tradeable, including their future interest and principal payments. To this end, banks bundle credit claims and sell them to special-purpose vehicles. The special-purpose vehicle acquires the funds for the purchase by securitising claims in the form of a security, and selling this security, split into small portions, to investors. Through such transactions, banks sell credit claims to third parties, thus removing them from their balance sheet. This gives them scope for new lending.

The buyers of these asset-backed securities (ABSs) are generally found in the financial sector. They receive interest and principal payments that are drawn from the underlying loans. If a bank knows when it issues a loan that it will be able to quickly sell it on to a special-purpose vehicle, it may not pay the necessary attention to the credit assessment. This increases the risk of credit defaults.

In order to limit this risk, the issuers of asset-backed securities generally commission a rating agency to carry out a credit assessment. Particularly on account of the new and often highly complex financial instruments as well as the ever-growing number of issuers, most investors are hardly in a position to assess the risks entailed in the purchase of a complex financial instrument. By contrast, rating agencies specialise in analysing the creditworthiness of borrowers such as enterprises, banks and governments. They estimate how likely it is that the borrower will be able to pay interest fees and make repayments in full and on time. The credit rating awarded by the rating agency significantly influences the amount of interest the issuer is required to pay on the securities it issues. However, the global financial crisis revealed that even rating agencies are not immune to making inaccurate assessments. Investors are therefore well advised to acquaint themselves with the risks and opportunities offered by their planned investments, using various different sources.

The increasing interconnectedness of the global financial system and the growing complexity of many financial products gives rise to economic risks as well as rewards. Problems that arise in one part of the world can soon spread to other geographical regions. This became particularly apparent during the global financial crisis starting in 2007.

The financial crisis showed that the international financial system needed an improved regulatory framework. For this reason, policymakers decided to improve and expand both “microprudential” supervision, which is geared towards the stability of individual institutions, and “macroprudential” oversight, which focuses on the stability of the financial system as a whole.

In 2011, three existing European supervisory committees were restructured and granted further powers: the European Banking Authority (EBA), responsible for banks, the European Securities and Markets Authority (ESMA), responsible for financial and securities markets, and the European Insurance and Occupational Pensions Authority (EIOPA), responsible for insurers and occupational pension funds.

They are consolidated under the umbrella term European Supervisory Authorities (ESAs). They are primarily committed to the task of developing EU-wide common regulatory and supervisory standards for banks, securities markets, insurers and pension funds.

Geared towards preparing general rules for individual institutions, these authorities are part of microprudential supervision. The three ESAs (focusing on regulatory tasks) and the European Systemic Risk Board (focusing on oversight of the EU financial system), together with the national supervisory authorities and the Joint Committee of the European Supervisory Authorities, form the European System of Financial Supervision (ESFS). This system of regulatory and supervisory authorities aims to coordinate and support the work of national authorities.

The European Systemic Risk Board (ESRB), which is based in Frankfurt am Main, comprises central banks and supervisory authorities from all EU countries as well as representatives from the ECB, the European Commission, the Economic and Financial Committee of the European Union (EFC) and the ESAs. The ESRB is responsible for the oversight of the financial system in the EU in order to help avert or mitigate systemic risks to financial stability. With its focus on the financial system as a whole, the ESRB plays a key role in macroprudential supervision.

On the recommendation of the ESRB, EU Member States have set up national authorities which are responsible for macroprudential oversight in their respective countries. This is for good reason: national supervisory authorities and central banks possess specific knowledge of their own financial systems and can offer targeted responses to misalignments in their own country. In addition, as the effects of a systemic crisis are first felt at the national level, responsibility for macroprudential policy should also rest squarely there.

The German Financial Stability Committee has been responsible for macroprudential oversight in Germany since 2013. It comprises the Federal Ministry of Finance (chair), the Federal Financial Supervisory Authority (BaFin) and the Bundesbank. The Bundesbank assumes key functions within the German Financial Stability Committee and is responsible for analysing all risks that could threaten the stability of the German financial system. The Bundesbank makes proposals to the Committee regarding the issuing of warnings and recommendations and evaluates their implementation. Furthermore, based on the Bundesbank’s analyses, the German Financial Stability Committee can recommend the use of hard (binding) macroprudential tools in order to avert the threats to financial stability. BaFin is responsible for the deployment of these tools in Germany.

With the launch of the Single Supervisory Mechanism as part of the “banking union” in November 2014, the ECB was also given additional powers in macroprudential oversight.

Although it is still primarily the respective national authorities which decide on macroprudential measures, the ECB can tighten these measures and require the application of certain measures. Unlike the ESRB, which has non-binding tools at its disposal in the form of warnings and recommendations, the ECB is thus able to employ binding tools. Its instructions must therefore be followed by banks. The ECB’s macroprudential powers are limited to the banking sector of the countries participating in the SSM. It has no power to influence developments in the insurance sector, for instance.

Macroprudential tools can be broken down into soft, medium and hard tools depending on the legal depth of intervention and strength of binding capacity. Soft instruments comprise communication from macroprudential authorities on developments relating to financial stability and emerging risks. This is accomplished in particular via regular publications, such as annual reports, but also via speeches and interviews.

Macroprudential tools with medium depth of intervention are “warnings” and “recommendations”. The main difference between recommendations and warnings is that recommendations put forward specific proposals for action to the recipients. Recipients of ESRB warnings and recommendations can be, in particular, the European Union as a whole, the European Commission, the governments and financial supervisors of the EU Member States and European Supervisory Authorities. The German Financial Stability Committee can issue warnings and recommendations to all public authorities in Germany, such as BaFin or the Federal Government. The ESRB and/or the Bundesbank then evaluate how the recipients have dealt with the recommendation.

Recommendations can provide for the deployment of hard (binding) macroprudential tools which intervene directly in the business activities of financial market players. However, these tools can also be used without a prior recommendation. European and German laws currently make it possible to deploy hard macroprudential regulatory instruments, especially in relation to the banking industry. The majority of these instruments are designed to strengthen banks’ capital base. They include, for example, the capital buffer for global systemically important banks. This is intended to help increase the resilience of particularly large and interconnected institutions to losses.

The countercyclical capital buffer allows supervisors to impose higher capital requirements on banks during periods in which cyclical risks to financial stability build up. This can strengthen banks’ resilience. During periods of stress, the buffer can then be used to absorb losses and stabilise lending. In Germany, BaFin raised the countercyclical capital buffer for the first time in mid-2019 on the basis of a recommendation by the German Financial Stability Committee. In the light of the coronavirus pandemic, it lowered this buffer again in the second quarter of 2020.

Financial stability risks that build up specifically in the residential real estate market can be countered using borrower-based instruments. These can reduce potential losses from new residential real estate loans or limit the risk of default. They are integrated into the lending process and are aimed at setting minimum standards for the granting of residential real estate loans (e.g. a minimum share of own funds).

As a result of globalisation, worldwide political cooperation in monetary and financial matters has continued to gain in importance. International institutions and bodies have addressed these issues and developed a framework for international cooperation.

The IMF is of particular importance in promoting the economic stability and cooperation of countries in the international monetary system. The IMF constantly monitors its member countries’ economic and monetary policies. In its annual consultations with these countries, it examines their economic and monetary developments and recommends specific stability-inducing economic policy measures. In addition, the IMF analyses the global economic outlook and cross-border risks in the international financial system on a semi-annual basis, with special emphasis on strengthening the resilience of economies to crises.

Member countries can access financial assistance from the IMF to help overcome balance of payments difficulties. For example, they can obtain internationally accepted currencies (e.g. US dollar, euro) from it for a limited period of time in exchange for their own currency to use to make payments if their own currency is not accepted abroad. For this purpose, the IMF has considerable financial resources at its disposal consisting of contributions from member countries.

These contributions are determined according to the relative economic strength of each member country, regularly reviewed to ensure that they are appropriate and adjusted as needed. The voting rights of the member countries in the IMF are also determined by the shares in total contributions, known as “quotas”.

The IMF generally makes the granting of financial assistance to a member country conditional on the conclusion of an economic policy adjustment programme and the implementation of pre-agreed measures aimed at overcoming balance of payments problems (conditionality). These could include, for example, the consolidation of the government budget, monetary and exchange rate policy measures or market economy reforms.

However, since 2009, the IMF has been able to provide countries with sound fundamentals and strong economic policies with financial resources as a precautionary measure, even in the absence of an acute balance of payments need and without conditionality. In this vein, it is currently providing precautionary credit lines to Mexico, Colombia, Chile and Peru under the Flexible Credit Line (FCL).

From 2010 onwards, it granted large loans as part of the “rescue packages” for Greece, Ireland, Portugal and Cyprus. In recent years, the IMF has granted large-volume loans to Argentina, Egypt, Pakistan and Ukraine, amongst other countries. During the global crisis triggered by the COVID-19 pandemic, the IMF was quick to support many of its members with extensive financial assistance. The IMF mainly provides low-income countries with financial assistance at low interest rates from a special trust fund.

Moreover, the IMF supports its member countries, if necessary, with consultancy services on technical issues relating to policy implementation, such as the compilation of statistics or the structuring of economic policy instruments and institutions, in order to strengthen the technical and administrative capacity of governments to successfully implement their economic policies.

The Federal Republic of Germany has been a member of the IMF since 1952. The Deutsche Bundesbank discharges Germany’s financial rights and obligations in the IMF. It provides the IMF with Germany’s quota resources (currently around €31.5 billion, or roughly 5.6% of the IMF’s total funds). This means that the Federal Republic of Germany has the fourth largest share in the IMF. In the event of increased financing needs, such as during a period of global critical developments, the IMF may, under certain conditions, temporarily borrow additional funds from the Bundesbank and other countries or central banks by drawing on agreed credit lines.

The IMF’s highest decision-making body is the Board of Governors, on which all 190 member countries are represented. The Governor of the IMF for Germany is the Bundesbank President and his alternate is the Federal Minister of Finance. The Board of Governors is advised by the International Monetary and Financial Committee (IMFC), which comprises 24 members (finance ministers or central bank governors) and meets twice a year. The 24-person Executive Board is responsible for conducting the day-to-day business. Germany is represented on the Executive Board and on the IMFC with its own member because of its large voting rights and financing share in the IWF.

Since 1969, the IMF has been able to allocate special drawing rights (SDRs) to the member countries. If, in its quinquennial reviews, the IMF identifies a global shortage of reserve assets, it can allocate SDRs to member countries in proportion to their quotas. SDRs are a type of currency reserve medium rather than freely usable currency. All members have the right, if necessary, to exchange their allocated SDRs with other members for internationally accepted currency (e.g. US dollar, euro). SDRs can only be held by the IMF, the monetary authorities of the IMF member countries, and other authorised official agencies and used for financial transactions amongst each other. The IMF also uses SDRs as an internal unit of account in which all credit balances and loans are held. The value of SDRs is calculated daily based on a basket of the world’s most important currencies. Its weighting is reviewed every five years and adjusted if necessary.

At the 1944 Bretton Woods Conference, the International Bank for Reconstruction and Development (IBRD) was established alongside the IMF. It commenced its tasks in Washington DC in 1946. While it initially used its funds to rebuild Europe, it has been focusing mainly on supporting developing countries since the late 1940s.

Four other organisations (IDA, IFC, MIGA, ICSID) have emerged from this development policy task, which, together with IBRD, are referred to as the World Bank Group. Their aim is to promote the economic development of less developed economies by providing financial and technical assistance and sharing knowledge. In common parlance, the term “World Bank” is used to denote IBRD and IDA only.

IBRD grants long-term economic development loans to developing countries and emerging market economies and refinances these loans in the international capital markets. Owing to its very good credit quality, it can pass on funds to these countries at good conditions.

IDA grants loans specifically to the poorest developing countries at much more favourable terms: the maturities are longer, repayment can be suspended and loans are, in principle, interest-free. Parts of the loans can also be gifted in order to avoid overindebtedness. IDA is financed mainly by contributions from the advanced economies, which make regular deposits.

IFC fosters private sector initiatives in developing countries, for example by financing the establishment, modernisation and expansion of productive private enterprises.

MIGA has the task of promoting foreign direct investment in developing countries by offering guarantees against political or legal risks.

ICSID supports the implementation of arbitration proceedings for cross-border investment.

International economic and monetary policy cooperation takes place not only within the framework of international institutions but also in various informal bodies. The composition and activities of the bodies have largely evolved over time. They are named according to the number of participating countries (e.g. G20 = Group of Twenty).

The underlying idea behind these informal bodies is that a group of countries – some with similar economic interests – search for solutions to global economic problems before these issues are addressed in formal intergovernmental institutions. The informal meetings often produce outcomes which international organisations are then responsible for implementing.

The G7 has been in existence since 1976 and comprises seven major industrial economies. The finance ministers and central bank governors of the G7 regularly discuss current economic and monetary policy topics. These countries’ heads of state and government meet once a year.

Alongside the G7 countries, the G20 comprises 12 other major countries as well as the European Union, represented by the presidency of the Council of the European Union, the European Commission and the European Central Bank. The G20 was established in 1999 in response to the Asian financial crisis and was originally tasked first and foremost with improving dialogue between industrial nations and emerging market economies. It represents around 60% of the world's population and more than 80% of global gross domestic product.

The G20 meetings have gained considerably in importance since the global financial crisis of 2008. This is because crises can only be effectively prevented if as many major countries as possible agree on – and then also implement – rules for the financial markets. Moreover, economic policy dialogue has been intensified. The G20 was therefore established by the member countries as a central forum for their international economic cooperation. In this role, the G20 also proved its worth as part of the global efforts to address the 2020 COVID-19 crisis. In addition to the meetings at the ministerial level, the heads of state and government meet once a year.

The Financial Stability Board (FSB) was established in 2009 in response to the global financial crisis of 2007-08 by the G20 as a central coordination committee. Its task is to enhance the stability of the international financial system and the international financial markets. The plenary is its sole decision-making body. A steering committee provides guidance on the focus of its work. Four standing committees and various working groups are each responsible for specific tasks.

Its membership comprises the national authorities responsible for financial stability of the member countries as well as relevant international institutions. A country may be represented by several member authorities (up to a maximum of three) depending on the size and importance of its financial market. In Germany, these are the Deutsche Bundesbank, the Federal Ministry of Finance and the Federal Financial Supervisory Authority (BaFin). Non-member countries are involved in the FSB’s work through six regional consultative groups.

• • Central banks, finance ministries and supervisory authorities from the G20 countries as well as from Hong Kong, the Netherlands, Singapore, Spain and Switzerland
• European Central Bank (ECB)
• European Commission
• International Monetary Fund (IMF)
• International Bank for Reconstruction and Development (IBRD, World Bank Group)
• Bank for International Settlements (BIS) and the committees anchored therein (including the Basel Committee on Banking Supervision)
• Organisation for Economic Co-operation and Development (OECD)
• International Organization of Securities Commissions (IOSCO)
• International Association of Insurance Supervisors (IAIS)
• International Accounting Standards Board (IASB)

The FSB is tasked with identifying any vulnerabilities in the international financial system and proposing and monitoring implementation of any action needed to address them. Key topics include dealing with systemically important financial institutions, monitoring and regulating financial intermediaries outside the banking system, and working to reduce risks arising from derivatives markets. The FSB also addresses risks to financial stability stemming from climate change, the impact of digitalisation on the international financial system and cross-border payments. Another of its key tasks is promoting the internationally consistent application of standards and codes to safeguard the stability of the financial system. Furthermore, the FSB aims to coordinate regulatory and supervisory policy in financial sector issues at an international level and foster cooperation and the exchange of information among the institutions responsible for these areas.

Moreover, the members of the FSB have committed to undergo regular international peer reviews of their financial sectors and participate in the Financial Sector Assessment Program (FSAP) run by the IMF and the World Bank. Given that the FSB’s recommendations are not legally binding, political support from the G20 is crucial to the body’s success.

The BIS is based in Basel and was established in 1930, making it the world’s oldest international financial institution. Membership is restricted to central banks. There are currently 63 members. The BIS promotes cooperation between central banks and provides a wide range of services to central banks, in particular with regard to the management of reserve assets.

It plays a key role in cooperation among central banks and other bodies working in the area of finance. The BIS works closely with various entities for which it hosts a secretariat and which, depending on their mandate, are extensively involved in formulating regulatory and supervisory responses to the financial crisis. These include, in particular, the standing committees of the Financial Stability Board (FSB). Furthermore, new developments in the financial markets – such as the use of innovative technologies and instruments and the emergence of new players – are monitored and assessed with a view to the financial system.

The Committee on the Global Financial System is tasked with monitoring developments in the financial markets and financial systems and analysing their impact on financial stability. It identifies and evaluates the potential root causes of problems in the global financial markets. It also promotes understanding of the structural foundations of the financial markets and financial systems and supports improvements in their functioning and stability.

The “Basel Committee on Banking Supervision” is committed to improving the quality of banking supervision worldwide. It is the central global standard-setter for the regulation and supervision of banks and has developed the “Basel framework”, which sets minimum standards for banks’ capital and liquidity, amongst other things. It is continuously working on further measures designed to strengthen the resilience of the banking system.

The Committee on Payments and Market Infrastructures is concerned with national and international payments and securities settlement and clearing systems. The Committee on Payments and Market Infrastructures is committed to promoting safe and efficient payment, clearing and settlement systems and, as a global standard-setter, makes recommendations in these areas.

The Markets Committee deals with current market developments and their impact on the functioning of markets and central bank operations.