Financial reform short of what's needed, says IMF

REFORM OF the financial sector globally has not gone far enough and the system is no safer now than it was when it crashed in 2007-08, according to the International Monetary Fund.

More needed to be done to restructure the industry so that it was at a lower risk of failure, and more high-quality regulation was also needed, the IMF said yesterday.

The fund warned that “the intervention measures needed to deal with the prolonged crisis are delaying a ‘reboot’ of the system onto a safer path”.

The IMF, in its biannual Global Financial Stability Report, acknowledged considerable changes had occurred since the international financial crisis began more than five years ago, but warned products were already being developed to circumvent some new regulations.

Most of the reforms in structures and regulation had taken place in the banking system, the report notes. There was a risk that “new banking standards may encourage certain activities to move to the non-bank sector, where those standards do not apply”, the IMF stated. Institutions in the “non-bank sector”, sometimes called the shadow banking system, were less regulated than traditional banks, even though their failure could also threaten financial stability.

A further unaddressed risk came from excessively large banks. The IMF said the problem of banks being too big to be allowed to fail without putting the wider financial system at risk was unresolved.

The report added new regulation could have unintended consequences. “Big banking groups with advantages of scale may be better able to absorb the costs of the regulations; as a result, they may become even more prominent in certain markets, making these markets more concentrated,” it said.

Innovation in financial products and services had at times led to increased “concentration, interconnectedness, complexity and opacity”, the report noted.

On reform of the insurance sector, the report states “the key objectives are to minimise regulatory arbitrage, reduce contagion risks and address complex group structures that hinder effective supervision”. The bailout by US authorities of American International Group in 2008 was among the most costly rescues of the crisis.

The insurance sector has a large presence at Dublin’s international financial services sector.

The report makes a series of radical recommendations including new legal frameworks to deal with bankrupt banks operating in multiple jurisdictions, possible bans on certain business models, new regulations on systemically important non-bank financial institutions and methods of encouraging “the use of simpler products and simpler organisational structures”.

The IMF concludes by noting “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”.