Even after host of reforms, global financial system still unwell: IMF

Wednesday, September 26, 2012
Laura Kodres, Assistant Director of IMF's Monetary and
Capital Markets Department, while briefing reporters in Washington
[PHOTO: UNifeed] 
Washington: A host of regulatory reforms are under way around the world to make the financial system safer, but a study by the International Monetary Fund (IMF) shows that there is still a lot of work to do by regulators, supervisors, and the private sector to put the system on a firmer footing.

Five years after the start of the global financial crisis, the IMF says that the reforms—although aiming in the right direction—have yet to create a safer set of financial structures and that there are still some difficult issues left to tackle.

"The basic financial structures that we found problematic before the crisis are still with us: financial systems are still overly complex, banking assets are highly concentrated, with strong domestic interlinkages, and the too-important-to-fail issues are unresolved," Laura Kodres, Assistant Director of the IMF's Monetary and Capital Markets Department said.

The global financial crisis, which started in the subprime mortgage market in the United States and later spread around the world, triggered the worst global downturn since the Great Depression, throwing millions out of work and forcing public bailouts of a number of prominent financial institutions.

The analysis, titled "An Interim Report on Progress Toward a Safer Financial System," says reforms are aimed in the right direction to make markets and institutions more transparent, less complex, and less leveraged.

But it argues that reforms in some areas still need to be further refined, far more work needs to be done to implement them, and that the system, in many cases, remains vulnerable, overly complex, and activities are too concentrated in large institutions.

"All this means that even though progress on the reform agenda appears slow and uneven policymakers need to press ahead. We are not encouraging a sprint, but simply a brisk, purposeful walk toward the goal of a safer financial system—most reform items are well in train but some others need some attention. The current environment of sub-par growth and ongoing financial distress means some unconventional interventions are still needed, but the sooner the financial system can move to its new path the better," Kodres said.

In addition, the report says that the success of the current and prospective reforms depends on enhanced supervision, incentives for the private sector to adhere to the reforms, the political will to implement regulations, and the resources necessary for the task of making the financial system simpler and safer.
In a second report released Tuesday, the IMF examined to what extent safer financial systems are linked with strong economic growth, and found that no one financial structure is best under all circumstances.

Even good policies can have negative effects when taken to extremes.

The IMF found that higher ratios of capital to assets within banks are associated with better results for the economy. Many emerging market economies had these large buffers in place before the crisis, and as a result, their banking systems weathered the financial turmoil far better than many of their counterparts in advanced economies.

However, beyond a certain point, a large storage of capital may actually start to be a drag on growth.
"We find evidence that at some point there may be a trade-off between growth and financial stability. We observe that buffers beyond extremely high levels can be associated with lower growth, higher growth volatility, and higher financial stress. In essence, a system that is too safe may limit the funds available for lending, and hinder growth," Kodres said. -UNifeed
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