Financial surveillance fails when it matters most. Every major financial disruption – from the 1997 Asian crisis to the 2008 financial crisis or recent geopolitical shocks from wars, sanctions and trade realignments – has exposed how blind spots persist in national systems, regional arrangements and global oversight.
Macrofinancial surveillance – specifically monitoring the interconnections between the financial system and the broader macroeconomy (fiscal, monetary, real economy linkages) – consistently breaks down despite massive institutional investment. Most economies operate for years without systematic macrofinancial evaluation, particularly when risks are accelerating. Crucially, no country has developed a comprehensive system to monitor fiscal-financial-real economy interactions systematically – existing frameworks focus on financial stability within the financial sector, rather than on cross-sectoral linkages.
The mismatch is stark. The International Monetary Fund conducts comprehensive assessments every five to 10 years for systemically important countries, over a decade for others. Financial Stability Board peer reviews are narrower, targeting standards compliance rather than system-wide dynamics. Basel Committee assessments follow separate timelines entirely. The IMF’s 2021 review found these cycles poorly coordinated.
The problem is not technical incapacity but political economy. Fiscal fragility, bureaucratic incentives, sovereignty concerns and collective action failures make fragmentation rational, even when it is systemically disastrous.
The fiscal surveillance trap
Surveillance matters most when private losses are reflected on public balance sheets. Ireland’s 2008 blanket banking guarantee transformed manageable sectoral problems into an €85bn sovereign crisis because the government underestimated the scale of banking sector losses and their fiscal implications.
This is the ‘fiscal surveillance trap’. Governments need comprehensive assessments to manage contingent liabilities but publishing them can trigger market reactions that crystallise those existing liabilities. Türkiye’s 2018 IMF consultation showed how detailed warnings about external financing risks preceded an acceleration in portfolio outflows.
The trap hits developing economies hardest. Organisation of Economic Cooperation and Development data show that advanced economies maintain fiscal buffers averaging 15-20% of gross domestic product, while developing economies average just 3-5%. When confidence falters, richer countries absorb volatility while poorer ones slide into debt crises. This fiscal arithmetic deepens political obstacles, making fragmentation the equilibrium response.
Why surveillance fragments domestically
Three forces sustain this equilibrium. First, bureaucratic empire-building leads agencies to resist coordination that threatens autonomy. Second, regulatory capture allows financial institutions to prefer narrow regimes they can influence over system-wide transparency. Third, political myopia encourages governments to avoid disclosures that may destabilise markets during electoral cycles.
Deeper architectural problems compound these coordination failures. Existing regulatory frameworks assume clear boundaries between sectors – banking regulation for banks, fiscal policy for governments, monetary policy for central banks. Yet modern economies feature deep interconnections that cross these institutional boundaries, while surveillance remains siloed. Central bank independence, once designed to insulate monetary policy, now creates coordination gaps precisely when systemic risks span multiple mandates.
These forces create what economist Douglass North calls ‘institutional persistence’. Bad arrangements endure because incumbents bear the costs of change, while benefits are diffused. Each institution optimises locally while system-wide risks accumulate unseen.
Figure 1. How institutions fragment surveillance
Analysis from institutional incentive literature and surveillance practice observations
| Institution | Primary incentive | Surveillance preference | Systemic consequence |
| Central banks | Price/financial stability | Limited disclosure | Blind spots in systemic risks |
| Sectoral regulators | Institutional safety | Sectoral oversight only | Fragmented risk assessment |
| Finance ministries | Fiscal sustainability | Strategic timing | Delayed crisis recognition |
| Political leadership | Electoral success | Crisis avoidance | Procyclical surveillance |
Central banks adapt by embracing deliberate ambiguity. Reports use phrases like ‘elevated vulnerabilities’ to convey risks without naming institutions. While rational, this undermines effectiveness as vague warnings rarely spur policy change. Surveillance becomes ‘performative’ – outwardly demonstrating diligence while avoiding impact. The more surveillance is needed, the less transparency is possible.
The global collective action failure
The same logic plays out internationally. Everyone benefits from robust surveillance, but each country has incentives to conceal vulnerabilities while enjoying others’ transparency – creating asymmetry.
When the Federal Reserve publishes stress tests, markets view it as prudential strength because the US can absorb shocks. When Nigeria’s central bank disclosed vulnerabilities in 2019, the result was capital flight and currency depreciation. Advanced economies internalise disclosure costs while developing economies face net costs.
Where blind spots matter most
The consequences are starkest where macrofinancially significant innovations outpace regulatory frameworks. India’s United Payments Interface processed ₹139tn in 2023 – transactions that affect monetary velocity but fall outside traditional banking supervision. Brazil’s digital real pilot blurs fiscal and monetary boundaries in ways current frameworks cannot address.
Climate shocks exacerbate the problem by simultaneously affecting all three macrofinancial dimensions. Pakistan’s 2022 floods drove banking defaults, infrastructure losses and fiscal emergency spending – yet no surveillance framework monitors how environmental shocks propagate across fiscal-financial-real economy linkages.
What does an effective design look like?
Breaking the fiscal surveillance trap requires recognising that some solutions can help countries escape the trap entirely, while others must work within its constraints.
Escaping the trap becomes possible when disclosure costs are reduced or shared. Industry co-financing – making financial institutions contribute to surveillance costs proportional to systemic risks they generate – aligns private incentives with public monitoring needs. Regional compacts like the Asean+3 Macroeconomic Research Office can share surveillance capacity across neighbouring economies, pooling resources while reducing individual country exposure to market reactions.
Working within the trap requires accepting that full transparency may be impossible but systematic monitoring can still occur. The most promising structural reform involves fiscal-financial integration that embeds macrofinancial analysis within existing institutional mandates. The UK’s Office for Budget Responsibility demonstrates how combining fiscal projections with financial stability assessments creates comprehensive monitoring without requiring new disclosure frameworks that might trigger market reactions.
The path forward
No consistent global mechanism exists to judge whether surveillance is effective in practice. The costs of macrofinancial surveillance failure are mounting – the IMF projects global debt exceeding $100tn in 2024, with risks heavily tilted upward such that debt could reach 115% of GDP in adverse scenarios. High macroeconomic uncertainty now threatens to amplify downside risks by 1.2 percentage points of growth, turning modest expansion into contraction when surveillance blind spots intersect with elevated debt vulnerabilities. Without systematic monitoring, debates about the future of finance remain academic.
Economist Friedrich Hayek warned that ‘The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.’ Policy-makers imagine they can design stability by managing pieces in isolation, yet systemic risks emerge from the fiscal-financial whole. The choice is stark: build surveillance that confronts political realities or face breakdowns that will prove far costlier than systematic monitoring.
Udaibir Das is a Visiting Professor at the National Council of Applied Economic Research, Senior Non-Resident Adviser at the Bank of England, Senior Adviser of the International Forum for Sovereign Wealth Funds, and Distinguished Fellow at the Observer Research Foundation America.
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