IMF urges post-crisis reforms in all countries

Reforms in the global financial sector spawned by the economic distress must cover all countries including those that have been least affected, the International Monetary Fund (IMF) has said.

Besides banks, the reforms must cover non-bank institutions in the financial sector as they had played a key role in precipitating the fiscal crisis, an IMF official said in a lecture in Berlin.

Jos Vinals, IMF Financial Counsellor and Director, Monetary and Capital Markets Department, said failure by some countries to join major economic powers in carrying out those reforms could endanger their financial systems by attracting risky investment activity.

"We must strike the right balance between the regulations being both nationally appropriate and internationally consistent," he said in the lecture, entitled 'Reform in Difficult Times – A Tough Balancing Act'.

"Some countries that were less affected by the crisis may not see the need for implementing some of the new reforms. In a financially globalised world, however, having uneven regulations across borders may lead to a migration of risky activities to those countries with the lowest regulatory requirements. This would put their financial systems at risk and ultimately endanger the global financial system."

Vinals said certain critical minimum standards would have to be established in a uniform way across countries. "Other standards may be dealt with at the national discretion, at least initially, to take into account local conditions but with compatible processes," he added. Vinals said global financial reforms should cover five main domains and stressed these should ensure a balance between macro-prudential and micro-prudential dimensions, supervision and regulation and safety and efficiency. He urged monetary authorities worldwide to ensure reforms involve non-bank institutions in the financial sector along with banks.

"We must strike the right balance between banks and non-banks. Reforms need to not only make banks safer but also the entire financial system. In the area of non-banks and shadow banking system, there is a risk of not acting soon enough," he warned. "So far, policymakers have focused most of their attention on banks. Yet, the shadow banking sector played a significant role in the crisis – both in supporting the build-up of excessive leverage and maturity mismatches in the financial system before the crisis, and in the rapid and distressed deleveraging of the system in the early days of the crisis in 2007. More needs to be done regarding non-bank financial intermediation, at the very least to ensure that our focus on banks does not simply push systemic risk further into the shadows."

Vinals said that reformists must strike the right balance between the macro-prudential and micro-prudential dimensions. "Its successful implementation will critically depend on addressing the flaws in the micro-prudential regime," he said.

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