Arab countries and other emerging economies in Central Asia should play a more active role in the current debate to forge a new world financial order in the aftermath of the global fiscal crisis, the International Monetary Fund has said.
José Vinals, Financial Counsellor and Director of the Monetary and Capital Markets Department at the IMF, also urged the Middle East and Central Asia (MECA) to embark on reforms to upgrade their financial systems.
Vinals made the comments at a seminar in Beirut Monday, attended by representatives from the Washington-based IMF and senior officials from central banks and regulatory authorities from the MECA countries.
“As the international community advances in designing the measures to tackle the imbalances and vulnerabilities of the global financial system, it is very important for the region’s regulators to be heard in the ongoing international debate, as many of the measures will impact the way their financial markets will work in the future,” Vinals said in a speech.
“It will be particularly important for emerging markets, such as in the MECA region, to ensure that the reform strikes the right balance between safety and efficiency so as to avoid stifling financial market development.”
He also stressed the importance of discouraging regulatory arbitrage by making sure that regulations designed at national level are internationally consistent.
He noted that MECA banks were less affected by the global crisis given their more limited exposure to international financial markets and focus on traditional lending and savings mobilisation.
Speaking at the seminar, another IMF official noted that the global distress had revealed a number of vulnerabilities in the region, highlighting the need for further reforms and continued supervisory vigilance.
“The recent crisis has brought to light some old shortcomings in the region’s financial sectors and regulatory framework, including excessive dependence by banks on name lending and inadequate supervisory powers to take early remedial action. But the crisis has also prompted a number of global regulatory initiatives, which are particularly relevant to the region,” said Adnan Mazarei, Assistant Director at the IMF’s Middle East and Central Asia Department.
“Amongst these initiatives, ensuring an adequate level of high-quality capital and reducing cyclicality—including by the use of countercyclical capitalisation and provisioning requirements—will be particularly pertinent for the financial sectors that are vulnerable to swings in capital inflows and the oil price cycle. We have seen in the past that the absence of such a framework has resulted in important vulnerabilities for banks that became too exposed once the boom was over.”
In this context it will also be important for regional regulatory authorities to ensure that liquidity management practices and buffers are strengthened.
“Episodes of rapid credit growth in the region have not been accompanied, in some countries, by rising stable retail funding, forcing banks to turn to foreign financing sources. The ongoing discussions on liquidity standards are pertinent in this regard,” the IMF official said.
“Finally, efforts to strengthen crisis preparedness, resolution frameworks, and cross-border cooperation will be very relevant to the financial sectors of the region: cross-border banking activity is of growing importance, large international banks are active in the region, and several countries license banks that appear large relative to the ability of authorities to provide support,” he added.
He said that an important step in this context would be to put in place a more comprehensive legal framework for financial institutions that provides for early preemptive measures and, when needed, “speedy restructuring options, both locally and across borders.”