Chapter one

Introduction

1
1.1 Introduction
In the current world, there are many international economic organizations, but there are
three major international economic organizations that helping world by promoting
development, providing financial and technical assistances, providing loan, settling
dispute, facilitate agreement and so on. Those three are World Trade Organization
(WTO), International Monetary Fund (IMF) and World Bank (WB). Those three
international organization help every country either poor countries or rich countries. And
they were conceived under the same institution and conference-Bretton Woods’s
conference in July 1944 called Bretton Wood institution (Weiss, 2013). This institution
has function for monetary management and established the rules for commercial and
financial relation among the world’s major industrial stated in the mid-20 century. At the
first mission it helps state to fully negotiated monetary order to govern monetary relations
among nation-states. Those three international organizations help countries to recover
their economy and financial system after World War II. They have play in different role
to help the world. IMF’s function is to help countries to manage their monetary policies,
to maintain exchange rate, to stable balance of payment by providing technical and
financial assistances. Otherwise, WB has functions to help countries developed theirs
economic structure by providing loan with low interest rate and technical assistance as
well. Last, WTO that knew before as GATT (General Agreement on Tariff and Trade)
has functions to facilitate trade agreement between its members, settle trade disputes and
so on. These three international organizations play very significant roles in world today.
And they also help all countries either poor countries or rich countries. But there are some
arguments that they provide unfair treatment and act as agents of rich countries. From my
perspective, these three international organizations (IMF, WB, and WTO) don’t represent
the interest of rich and poor countries alike.

The International Monetary Fund (IMF) was born in July 1944 out of the Bretton Woods
Conference in New Hampshire, U.S.A It began its operations on the 1st of March 1947 in
Washington D.C. Its purpose was to rebuild the international economy and prevent the
economic crisis such as the Great Depression. The ideas of Harry Dexter White of United
States and the British economist John Maynard Keynes were pivotal in the establishment
of the IMF. They suggested the need for a co-operative organisation that would oversee
the international monetary system and also be responsible for promoting a balanced
global economic trade. Membership to the IMF is voluntary and a country has to deposit a
"quota subscription" which determines the voting power of that country and also how

2
much that country could borrow from the fund in terms of financial crisis. The highest
decision-making body in the fund is the Board of Governors who are not involved in the
day to day running of the Fund and they meet once yearly. Currently with a membership
of 187 countries the IMF provides systematic mechanisms for foreign exchange
transactions in order to promote balanced global economic trade. The IMF advises and
focuses on member countries' macroeconomic policies to ensure its own wealth and that
of its members are safeguarded. It does surveillance of the member countries policies to
ensure they do not have a negative effect on the exchange rates and trade markets. The
IMF also does periodic consultations to check member countries overall economic
positions and advises them on how to improve their economy. The IMF also provides
loans to countries that have problems with their balance of payments. The loans have
conditions attached to them and the borrower countries must implement the economic
reforms as determined by the IMF. These structural adjustment programmes are meant to
help the countries to overcome the problems of their balance of payments.

1.2 Origin of the term paper.

I am lucky to say that our honorable Supervisor, Department of management, Chandpur
Govt. College, assigned me the term paper on Organization Structure and Functioning of
WTO, IMF, IBRD, IFC, ADB and their role of managing International Liquidity Problem
The data required for preparing this report has been collected from the annual reports of
most recent years.

1.3 Purpose of the Report

The main objectives are Organization Structure and Functioning of WTO, IMF, IBRD,
IFC, ADB and their role of managing International Liquidity Problem.

Specific Objectives:
 To fulfill academic requirement.
 To offer humble suggestions based on the above study.

3
1.4 Limitations of the Report
 The main limitation while preparing this report was time. So it was not possible to
focus everything deeply.
 Lack of Information’s source.
 Lack of sufficient privileges.

This is my truthful declaration that the report is prepared only on secondary data. But in
some cases, I found the problem of shortage of necessary data and in that cases I took
hypothetical data, so there is a little chance of misappropriation.

1.5 Methodology of the Study

Methodology of the study is an essential part of the study. It is designed in a way so that it
correspondent to achieve the objectives of the study. It includes designing samples,
sources of data, collection procedure of data, analysis techniques data, etc. It was an
exploratory study. So the methodology of this study the project has used was observation
and sometimes discussion with the executives of the organization.
Sources of Data:
The sources of data were of two types- Primary and Secondary Sources.

4
 Chapter Two
Conceptual Issues

5
2.1 Historical Background of WTO, IMF and World Bank
1. WTO
World Trade Organization that located on the shore of the beautiful Lac Leman in
Geneva, Switzerland is the hub of an international political system under which
governments negotiate, enforce, and revise rules to govern their trade policy (Oatley,
2012). After establishment under Bretton Woods’s conference in 1944, it was named
GATT. There are 23 countries become Contracting Parties (CPs to the original GATT in
1948). The CPs met every six months to discuss a range of trade problems and settle trade
disputes. GATT increased it influence in the world trade likewise it covered $4.9 billion
worth of trade involving 45 countries at the 1960 Dillon Round. Worth of trade continue
to $3.7 trillion involving over 120 countries by the beginning of the Uruguay Round in
1986, and tariffs also dropped 35% in every round. The Uruguay Round negotiations
were formally signed in Marrakesh, Morocco on 15 April 1994 ,and then on l January 1,
1995, government folded the GATT into the newly established WTO where it continues
to provide many of rules governing international trade relations (Oatley, 2012).

2. IMF
International Monetary Fund was conceived in July 1944 when representatives of 45
countries meeting in the town of Bretton Wood, New Hampshire, in the northeastern in
United States, agreed on a framework for international economic cooperation. IMF came
to existence in December 1945 when 29 countries agreed to sign an article of agreement.
IMF’s member began to expand, and many African countries that got independence have
applied for membership. Because of cold war, the member was limited (IMF, 2007).
During the 1930s, many countries pursued economic policies by restricting purchase from
abroad in order to save scarce foreign exchange, cutting the value of their currencies, and
hampering international financial flow (Sanford, 2004). This led to world depression.
IMF was created to limit or prevent this kind of economic behavior. IMF is a specialized
agency of United Nation but It functions independently from UN control. But it must
obey directive of UN. Security Council and didn’t need to comply with directives from
other UN agencies (Sanford, 2004).

6
3. World Bank
World Bank is an institution that established in Bretton Wood conferment in 1944.
Traditionally, the World Bank has been headed by a citizen of the United States Before
1968, the reconstruction and development loans provided by the World Bank were
relatively small. The Bank's staff was aware of the need to instill confidence in the bank.
Fiscal conservatism ruled, and loan applications had to meet strict criteria. From 1968 to
1980, the bank concentrated on meeting the basic needs of people in the developing
world. The size and number of loans to borrowers was greatly increased as loan targets
expanded from infrastructure into social services and other sectors.[9] In 1980, the World
Bank Administrative Tribunal was established to decide on disputes between the World
Bank Group and its staff where allegation of non-observance of contracts of employment
or terms of appointment had not been honored.[13] Beginning in 1989, in response to
harsh criticism from many groups, the bank began including environmental groups and
NGOs in its loans to mitigate the past effects of its development policies that had
prompted the criticism.[7] Traditionally, based on a tacit understanding between the
United States and Europe, the president of the World Bank has always been selected from
candidates nominated by the United States.
IBRD
The International Bank for Reconstruction and Development (IBRD) is an international
financial institution that offers loans to middle-income developing countries. The IBRD is
the first of five member institutions that compose the World Bank Group and is
headquartered in Washington, D.C., United States. It was established in 1944 with the
mission of financing the reconstruction of European nations devastated by World War II.
The IBRD and its concessional lending arm, the International Development Association,
are collectively known as the World Bank as they share the same leadership and
staff. Following the reconstruction of Europe, the Bank's mandate expanded to advancing
worldwide economic development and eradicating poverty. The IBRD provides
commercial-grade or concessional financing to sovereign states to fund projects that seek
to improve transportation and infrastructure, education, domestic policy, environmental
consciousness, energy investments, healthcare, access to food and potable water, and
access to improved sanitation.
The IBRD is owned and governed by its member states, but has its own executive
leadership and staff which conduct its normal business operations. The Bank's member

7
governments are shareholders which contribute paid-in capital and have the right to vote
on its matters. In addition to contributions from its member nations, the IBRD acquires
most of its capital by borrowing on international capital markets through bond issues. In
2011, it raised $29 billion USD in capital from bond issues made in 26 different
currencies. The Bank offers a number of financial services and products, including
flexible loans, grants, risk guarantees, financial derivatives, and catastrophic risk
financing. It reported lending commitments of $26.7 billion made to 132 projects in 2011.

IFC
The International Finance Corporation (IFC) is an international financial
institution that offers investment, advisory, and asset-management services to
encourage private-sector development in developing countries. The IFC is a
member of the World Bank Group and is headquartered in Washington, D.C.. It
was established in 1956, as the private-sector arm of the World Bank Group, to
advance economic development by investing in for-profit and commercial projects
for poverty reduction and promoting development. The IFC's stated aim is to
create opportunities for people to escape poverty and achieve better living
standards by mobilizing financial resources for private enterprise, promoting
accessible and competitive markets, supporting businesses and other private-sector
entities, and creating jobs and delivering necessary services to those who are
poverty stricken or otherwise vulnerable.
Since 2009, the IFC has focused on a set of development goals that its projects are
expected to target. Its goals are to increase sustainable agriculture opportunities,
improve healthcare and education, increase access to financing
for microfinance and business clients, advance infrastructure, help small
businesses grow revenues, and invest in climate health.
The IFC is owned and governed by its member countries but has its own executive
leadership and staff that conduct its normal business operations. It is
a corporation whose shareholders are member governments that provide paid-in
capital and have the right to vote on its matters. Originally, it was more financially
integrated with the World Bank Group, but later, the IFC was established
separately and eventually became authorized to operate as a financially-
autonomous entity and make independent investment decisions. It offers an array

8
of debt and equity financing services and helps companies face their risk exposures
while refraining from participating in a management capacity. The corporation
also offers advice to companies on making decisions, evaluating their impact on
the environment and society, and being responsible. It advises governments on
building infrastructure and partnerships to further support private sector
development.
The corporation is assessed by an independent evaluator each year. In 2011, its
evaluation report recognized that its investments performed well and reduced
poverty, but recommended that the corporation define poverty and expected
outcomes more explicitly to better-understand its effectiveness and approach
poverty reduction more strategically. The corporation's total investments in 2011
amounted to $18.66 billion. It committed $820 million to advisory services for 642
projects in 2011, and held $24.5 billion worth of liquid assets. The IFC is in good
financial standing and received the highest ratings from two independent credit
rating agencies in 2010 and 2011.

9
 Chapter Three
Function of WTO, IMF and World Bank

10
3.1 Function of WTO, IMF and World Bank
1. WTO
The role of World Trade Organization itself is found in Article III of the WTO agreement
which defines five functions such as implementing agreement, provide forum for trade
negotiation, disputed and policy review, and cooperate with IMF and WB. First function
is to facilitate the implementation, administration and operation and further the objectives
of agreement and Multilateral Trade agreements (WTO, 2007). And it also provides the
framework for the implementation, administration and operation of the Plurilateral Trade
agreements. The second function is to provide a negotiating forum. And there are two
categories that WTO shall provide the forum form (Article III: 2)-first, consist of
multilateral negotiations on matters dealt with in the annexes to the agreement like
already covered by the GATT and the Uruguay Round. Second, negotiations concerned
on multilateral trade relation which decide by the WTO’s Ministerial Conference: should
such negotiation take place, the WTO can also provide the framework of negotiation
(WTO, 2007). And the third and fourth functions are to administer the arrangement for
settlement of dispute that may arise among member and for review of trade policies. And
the last function is to cooperate with IMF and World Bank to achieve greater coherence
in global economic policymaking (WTO, 2007).

2. IMF
IMF has three principal functions and activities: surveillance of financial and monetary
condition in its member countries and of the world economy, provide financial assistance
to help countries overcome major balance of payment problems and provides technical
assistance and advisory services to member countries (Sanford, 2004). First, in
surveillance, IMF members agree to collaborate with the Fund and other members to
assure orderly exchange arrangements and to promote a stable system of exchange rates.
Moreover, they agree to pursue economics growth with reasonable price stability and to
avoid erratic disruptions in the international monetary system by not to manipulate their
exchange rate in order to attain unfair competitive advantage or shift economic burdens to
other countries (Sanford, 2004). Second, IMF provides the financial assistance to its
member countries that experience imbalance of payment either through capital account or
current account crises. It provide loan to help them to stabilize their international payment
and adopting policy changes to reverse the bad situation and overcome the problem

11
(Sanford, 2004). Last but not least, IMF also provides the technical assistance and
advisory program. It’s the most important function of IMF. While doing reform of faced
country, IMF’s technical assistance operation has focused on its core area of expertise
(financial and macroeconomic policy management).

3. World Bank
World Bank plays a qualitatively different role than IMF, but works tightly within the
stringent SAP (Structural Adjustment Program) framework imposed by IMF. According
to Nehru (2012), now it has 5 agents- international Bank of Reconstruction and
Development (IBRD), International Development Association (IDA), International
Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and
International Center for settlement of Investment Disputes (ICSID).Its function is to
provide financial and technical assistance for development in low and middle income
countries through a suit of loans including health, education, infrastructure, agriculture,
public administration, macroeconomic management, institutional development,
governance, financial and private sector development, environmental protection and
natural resource management (Nehru, 2012). It is actively involved in every low and
middle income country in Asia and the Pacific, except North Korea and Myanmar.

12
 Chapter Four
Analysis and Findings

13
4.1 Unfair of IMF, World Bank, WTO’s representing the interest
between the rich and poor countries
As we know that IMF, World Bank ant WTO play important role in the world affair since
the end of World War II, especially in the Great Depression. These international
organizations claim that they constrain the behavior of the most powerful countries and
provide information and monitoring capacities that enable states to cooperate (). Hence,
all states that involved with these institutions are better off. In reality, this claim is fact;
those international institutions don’t present the interest of rich and poor countries alike.
These institutions are captured and used by rich countries to achieve their own interest, so
they don’t represent the interest of the poor countries. Moreover, they are usurping the
role of the market and easing pressures on developing states to adopt efficient, market-
promoting policies. Likewise, Stigliz, a Nobel Prize winner and former chief economist
for the World Bank, claimed that institution like IMF driven by an ideology and special
interests in rich countries (Milner, 2005). Moreover, IMF officials have imposed the
wrong policies on the poor countries and worsened their economic and political
situations. Furthermore, we see that the poor or developing countries have been
increasingly capacity to engage in world economy because of technological advancement,
reduced barrier of trade, reduced communication and transportation cost and policy
change. But the capacity of the IMF and World Bank has not grown proportionately, thus
they are less able to help those countries, especially at the times of crisis (Milner, 2005).
More importantly, we know that rich countries consist of high GDP, economic strength
that can shape the global governance. So they become the interest of powerful player by
establishing these international institutions to serve their interest. In this view, we can see
that these institutions have not helped much since they are oriented to promote the interest
of the rich or developed countries. In other word, bias in some operations of these
institutions is also appeared. For instance, World Bank aid has been heavily used in sub-
Saharan Africa, but this region done least well (Milner, 2005). Maybe this aids were used
to support authoritarian government that bring those countries remain poor and easy to
control. On the other hand, Trade liberalization promoted by the WTO and IMF occurred
too quickly and without (enough) concern for finding alternative means for the poor
countries to fund their budgets and develop social safety nets (Milner, 2005). So we see
that the policy created only for interest of the rich countries because they are rich of
financial and human capital ; and they are ready to get benefit from it- no matter what
difficult happen to the poor countries.

14
In the WTO, most of Director-General and senior staff was from rich countries like
Canada, European states, or the United states; so official actions have usually been
heavily influenced by representatives of the rich countries (Milner, 2005). For instance, in
the proposal for the final stages of negotiation in Uruguay Round was largely a collection
of proposal prepared by rich countries like EU and US. For IMF and World Bank,
sometimes they adopt policy that poor countries didn’t have the financial or legal
institutions to support such policies; these policies might work in the context of rich
countries like mandating capital market liberalization, privatization and governmental
austerity programs (Milner, 2005). In accordance to Milner (2005), in the example of
providing loan by IMF to Russian reform, IMF made some mistake in advising capital
market liberalization in 1996 which was pushed by US, but the problem come from
Russia’s failure to listen to the IMF. Moreover, United States exerts a great deal of
influence over which countries get IMF loans. So we can consider that the loans, aid, and
advice may respond to the pressures of the most powerful developed countries, while
trade agreements may promote the agendas and interests of these rich countries.

4.2 IMF, WTO and World Bank: Role and Objectives

This essay aims to analyse and evaluate the roles of three international institutes namely
the International Monetary Fund (IMF), the World Bank and the World Trade
Organisation (WTO). These organisations play a pivotal role in global health and their
legitimacy and accountability have attracted a lot of debate and criticism. In the essay, the
roles, functions and organisation of these three institutes would be discussed followed by
critique relating to presentation, influence and impact on global health/wellbeing and
finally concluding with a critical evaluation and considerations of possible alternatives
and improvements.
The International Monetary Fund (IMF) was born in July 1944 out of the Bretton Woods
Conference in New Hampshire, U.S.A It began its operations on the 1st of March 1947 in
Washington D.C. Its purpose was to rebuild the international economy and prevent the
economic crisis such as the Great Depression. The ideas of Harry Dexter White of United
States and the British economist John Maynard Keynes were pivotal in the establishment
of the IMF. They suggested the need for a co-operative organisation that would oversee
the international monetary system and also be responsible for promoting a balanced
global economic trade. Membership to the IMF is voluntary and a country has to deposit a
"quota subscription" which determines the voting power of that country and also how

15
much that country could borrow from the fund in terms of financial crisis. The highest
decision-making body in the fund is the Board of Governors who are not involved in the
day to day running of the Fund and they meet once yearly. Currently with a membership
of 187 countries the IMF provides systematic mechanisms for foreign exchange
transactions in order to promote balanced global economic trade. The IMF advises and
focuses on member countries' macroeconomic policies to ensure its own wealth and that
of its members are safeguarded. It does surveillance of the member countries policies to
ensure they do not have a negative effect on the exchange rates and trade markets. The
IMF also does periodic consultations to check member countries overall economic
positions and advises them on how to improve their economy. The IMF also provides
loans to countries that have problems with their balance of payments. The loans have
conditions attached to them and the borrower countries must implement the economic
reforms as determined by the IMF. These structural adjustment programmes are meant to
help the countries to overcome the problems of their balance of payments.
The World Bank, also a product of the Bretton Woods Conference was established in
1944 to play a role in the reconstruction of post-war Europe. It has a similar governance
structure as the IMF, with a board of Governors with representatives from all member
states as the highest decision-making body and the voting system is the same as that of
the IMF. America holds the largest share of votes and the president is also by tradition a
US citizen, (Peet, 2003).
The World Bank group consists of five organisations, the International Bank for
Reconstruction and Development (IBRD), the International Finance Corporation (IFC),
the International Development Association (IDA), the International Centre for the
Settlement of Investments Disputes (ICSID) and the Multilateral Investment Guarantee
Agency (MIGA). The IBDR and the IDA are the two that are usually referred to as the
World Bank and for the purpose of this essay we will restrict our attention to the two,(
http://go.worldbank.org/3QT2P1GNH0). The IBDR provides long term loans and aid for
economic development. The IBDR is financed from the sale of bonds on international
finance markets and fro interest gained from loan repayments,
(http://go.worldbank.org/LAG4BZ1VD1). IDA focuses on giving credits and grants to
poor countries. These grants are interest free but have a 0.75 percent administrative
charge per annum. These grants are aimed to assist programmes of economic growth,
reduce inequalities and improvement of living conditions. IDA is funded from
contributions from richer member countries and from income earned from IBDR
16
financing, (http://go.worldbank.org/7ARHOU1WK0) . Like the IMF, the World Bank has
conditions attached its loans.
The bank does not only provide loans but also provides technical assistance on
development issues. It provides knowledge through education and analytical services.
Since its establishment, the World Bank has become more engaged in issues of
institutional and policy change in borrowing countries. The bank defines what would be
the best development approach on different projects at a particular time. Currently the
Bank defines its mission as reducing global poverty and also taking into account the
environmental issues by helping member countries through ensuring economic growth by
"capacity building" and helping to create "infrastructure", (
http://go.worldbank.org/3QT2P1GNH0).
Although the IMF and the World Bank are two separate institutions, sometimes the two
are often confused as one or used interchangeably by many people. Both products of the
Bretton Woods conference face a lot of criticism on a variety of issues but mainly centred
on their approaches in formulating their policies. The governance of the two institutions is
dominated by the industrialised countries mainly the G8 whom due to their voting power
act without much consultation with poor /developing countries who are under represented
in the two institutes therefore they hold little voting power to be able to influence change
in the policing. Critiques of the World Bank and the IMF have accused them of
promoting the top-down approach in development which has made them to be regarded as
the experts in the field of financial regulation and economic development. Their
prescriptive rules are viewed by many as able to undermine or eliminate alternative
perceptions on development to the benefit of the two.
The IMF and the World Bank's policies have had negative economic and social impacts
on many countries that have had financial assistance from them especially the developing
countries. They impose conditions on their loans based on what is termed the
"Washington Consensus" which is criticised by many as a neoliberalist approach of trade
liberalisation and development, investment and the financial sector, deregulation and the
privatisation of nationalised industries, conditions that are not flexible to individual
countries circumstances and the prescriptive recommendations by the World Bank and
the IMF fail to address the economic problems within countries thereby promoting
massive global economic inequalities. While it is argued that each individual country is
responsible for its own social and economic policies, national policies are overridden by
the conditions of the structural adjustment programmes thereby leaving such countries
17
indirectly losing their governance to the World Bank or the IMF, ( ). The prescriptive
nature of the structural adjustments has proved to be failing to address the economic
problems within countries leaving them in serious financial and economic problems
which many fail to recover from.
The World Bank has been criticised for they types of projects it funds many of which are
said to have social and environmental implications for the affected areas, eg...... Its
emphasis on privatisation has led to states losing control of providing essential goods and
services such as health care and education resulting in the collapse of such services.
The World Trade Organisation (WTO) was established in 1995 as a development to the
previous General Agreement on Tariffs and Trade (GATT) which was established in 1947
after failed attempts to establish an International Trade Organisation that would regulate
trade. The idea of the ITO was discussed at the Bretton Woods Conference as necessary
to complement the IBDR and the IMF. Due to the nature of the policies of the ITO, the
US was not willing to commit itself to trade policies where each member state had the
same voting power hence efforts to establish the ITO failed, ( ). The WTO's function is to
promote free and fair trade between member states with a view of promoting economic
prosperity and contributing to international peace. This achieved through the
administration of trade agreements and acting a forum for trade negotiations, helping to
settle trade disputes, reviewing national trade policies, providing assistance to developing
countries in trade policy issues through technical assistance and training programmes and
cooperating with other international organisations such as the IMF and the World Bank,
(www.wto.org).
Unlike the IMF and the World Bank, the WTO is a more member driven organisation
where all major decisions are made by member states by reaching a consensus and the
Secretariat has very limited powers. The WTO operates a one country one vote system.
Members of the WTO agree to abide by the rules of the organisation.
Although the WTO appears to be a more democratic organisation, its critiques see it as a
more closed organisation where many meetings are informal. These informal meetings
are crucial before negotiations reach the more formal levels before a consensus can be
reached between member countries. This raises concerns over the transparency of the
organisation. Although all member states are formally equal, the WTO is to a large extent
controlled by certain groups of states while others have very limited influence and ability
to keep up to date with all issues.

18
 Chapter Five
Recommendations and Conclusion

19
5.1 Recommendations
Although examiners have long supervised banks' liquidity positions, numerical liquidity
requirements comparable to risk-based capital requirements have only recently been
adopted. Gazi Ishak Kara from the Federal Reserve Board of Governors and S. Mehmet
Ozsoy of Ozyegin University develop a model in which relying solely on capital
regulation leads banks to reduce their liquidity holdings. Their paper "Bank Regulation
under Fire Sale Externalities" shows conditions under which the combination of capital
and liquidity regulations produces a better outcome than capital regulations by
themselves.
Santiago Carbo-Valverde of the Bangor Business School, Eduardo Maqui from
Universidad de Granada and the European Central Bank, and Francisco Rodriguez-
Fernandez from the Universidad de Granada analyze the extent to which ex ante measures
of bank liquidity, financial system liquidity, and bank solvency explain a sample of
European banks' contribution to systemic risk before and during the crisis. Their paper
"Insolvency and Liquidity Risk: Which Is More Systemic?" finds that their bank liquidity
measure is only statistically significant during the crisis. In contrast, financial system
liquidity reduced a bank's contribution to systemic risk before the crisis but increased it
after the crisis.
Information and bank liquidity
An important determinant of a bank's liquidity position is its ability to obtain funds from
the other banks connected to it in the funding network. Network analysis has been applied
in various contexts, but it often takes the structure of the network as exogenous. Francisco
Blasquesa of VU University Amsterdam, Falk Bräuning of the Federal Reserve Bank of
Boston, and Iman van Lelyveld of De Nederlandsche Bank and Bank for International
Settlements develop a theoretical model in which the structure of the network is
endogenously driven by monitoring costs in their paper "A Dynamic Network Model of
the Unsecured Interbank Lending Market.." Their paper also simulates their model based
on parameters from the Dutch interbank market and finds simulated network to be similar
to the actual network.
A bank's decision to borrow in interbank markets or sell assets is analyzed by Michal
Kowalik of the Federal Reserve Bank of Boston in his paper "To Sell or to Borrow? A
Theory of Bank Liquidity Management." Banks in Kowalik's model prefer to borrow

20
rather than sell because there is less adverse selection risk on the bank's overall portfolio
than on some of its individual assets.
Fabio Castiglionesi of Tilburg University, Zhao Li of Universitat Pompeu Fabra, and
Kebin Ma of Warwick Business School address the problem of adverse selection in the
markets for bank assets in their paper "Bank Information Sharing and Liquidity Risk."
They argue that banks share information about loans even though that increases
competition in the loan market. The offsetting benefit is that banks are able to obtain
liquidity by selling their loans at higher prices in secondary markets.
Measuring liquidity risk
A practical problem for macroprudential supervisors is identifying periods when the
banking system is coming under increased strain. Kartik Anand from the Deutsche
Bundesbank, Céline Gauthier of Université du Québec en Outaouais, and Moez Souissi
from the International Monetary Fund develop a model in which solvency, funding
liquidity, and market risks are "intertwined" in their paper "Quantifying Contagion Risk
in Funding Markets: A Model-Based Stress-Testing Approach." They then calibrate their
model to Canadian domestically systemically important banks to show how it could be
used to analyze a banking system in a stressful scenario.

5.2 Conclusion
All in all, we can see that these three global institutions seem to have failed to live up to
the expectations of these theories in their impact on the developing countries. They have
had a difficult time constraining the large, developed countries; most of the time these
countries have bargained hard to maximize their advantage. Perhaps they have left the
developing countries better off than if they had to negotiate bilaterally for access to trade,
aid, and loans, but it seems as if these institutions could have bargained less hard with the
developing countries at little cost to themselves or the developed countries and thus
provided more benefits for the poor. Moreover, the IMF, World Bank, and WTO have
certainly helped provide monitoring and information. But the monitoring and information
provision have been asymmetric; it is the developing countries that are monitored and
provide more information than otherwise. So these three international institutions don’t
represent the interest of the poor and rich countries alike.

21
 References

 Milner, H. V. (2005). Globalization, Development, and International Institutions:

Normative and Positive Perspectives. New Jersey: Princeton University Pres.
 Michael, G. (2005). Imperial Nature: The World Bank and Struggles for Social
Justice in the Age of Globalization. New Haven, CT: Yale University Press.
 Financial Decision Making Concepts, Problems and Cases, 4th edition John J
Hampton
 An introduction to effective working capital (liquidity) management,
 Oatley, T. (2012). International Political Economy. New York: Pearson
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 www.google.com

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