Lagarde Urges Action to Transform Financial Sector Landscape

Financial sector reform underway, but more work needed

Regulatory reform and balance sheet repair must go hand-in-hand

Progress on European banking union, but implementation key

Addressing an audience of financiers and policymakers at the Frankfurt Finance Summit in Germany, Lagarde suggested that five years after the beginning of the global financial crisis, reform of the financial sector had advanced, but that many of the causes of that crisis had yet to be resolved.

“I believe we are making progress,” said Lagarde, but added that while some measures had been taken, for example to raise capital, “more needs to be done.”

According to Lagarde, “balance sheet repair needs to be tackled at the same time as regulatory reform, in a mutually reinforcing manner.” She said weak banks remained a drag on growth while credit to the real economy was still being hampered.

“Many banks are still shackled by the leftover effects of the crisis,” Lagarde said.

“This is the weak link in the chain of recovery,” she added. The feedback loop between weak sovereigns and future banking sector risks has to be cut; otherwise, the impact of new rules and institutions on the flow of credit and economic growth will be limited.

Regulatory reform

The IMF head also highlighted the key regulatory issues on the reform agenda, including concerns about the delay in implementation of Basel III in major jurisdictions.

“Different rates of implementation could contribute to dilution of overall minimum standards,” she warned.

She also pointed to the threat caused by large systemic banks that, given their size, complexity, and interconnectedness, are still considered “too-important-to-fail”.

The IMF chief proposed tackling the problem on three fronts: regulation, like systemic surcharges, intensive supervision, and frameworks for orderly failure and resolution.

“There is good progress in these areas, led by the Financial Stability Board,” she said.

Lagarde also raised concerns about national differences in the calculation of the riskiness of assets—the very basis for determining the capital needs of all banks, and the success of the new rules. The two main accounting bodies have not reached agreement on a common approach...