Possible Trade-off Between Growth, Safety in Financial Sector

SUMMARY

With policymakers aiming for safer financial systems in the wake of the global crisis, the International Monetary Fund examines in a new study the extent to which safer financial structures are tied to good economic growth outcomes. With policymakers aiming for safer financial systems, the International Monetary Fund (IMF) examines in a new study the extent to which safer financial structures are ... (see full summary)

 
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  • First look at how financial structures are associated with economic growth and stability
  • No financial structure model fits all circumstances
  • Well-managed, regulated, and supervised banks with strong financial buffers deliver better results
  • Responding to the global financial crisis, policymakers around the world have adopted ways to deal with the crisis, which have in turn started to change the structure of their financial systems. Banks and other financial institutions also are adapting how they do business.

    The new analysis from the IMF looks at whether such changes are associated with countries’ financial stability and growth. The preliminary findings shed some light on the impact of the global crisis and other factors on the relationship between a country’s financial structure and the economic results it produces.

    Variety of models

    The analysis in a chapter of the IMF’s Global Financial Stability Report says that no one financial structure is best under all circumstances. What is good for China may not be good for Germany, and what works in Japan may not work in the United States.

    “Our analysis reinforces the lesson from the crisis that high quality regulation and supervision should be at the forefront of reform efforts,” said Laura Kodres, chief of global stability analysis in the IMF’s Monetary and Capital Markets Department, at a Washington press conference to launch the study.

    The IMF’s preliminary findings examined data from 58 economies between 1998 and 2010.

    The IMF’s researchers focused on the financial system’s structural features such as the extent of financial buffers, the dependence on nontraditional intermediation by banks and use of other financial institutions in intermediation, as well as the connections among banks, both at the national level and globally.

    Too much of a good thing

    They 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.

    “A system that is too safe may limit the...

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