Safer Global Financial System Still Under Construction, Says IMF

  • Five years after start of crisis, global financial system still not well
  • More to do to implement reform agenda, make sector more transparent, less complex
  • Yet to tackle "shadow banks" and "too important to fail" institutions
  • Five years after the start of the global financial crisis, the IMF says that the reforms—although aiming in the right direction—have yet to create a safer set of financial structures and that there are still some difficult issues left to tackle.

    “Although the intentions of policymakers are clear and positive, the reforms have yet to effect a safer set of financial structures, in part because, in some economies and regions, the intervention measures needed to deal with the prolonged crisis are delaying a ‘reboot’ of the system onto a safer path,” said the IMF in an analytical chapter of its Global Financial Stability Report.

    The global financial crisis, which started in the subprime mortgage market in the United States and later spread around the world, triggered the worst global downturn since the Great Depression, throwing millions out of work and forcing public bailouts of a number of prominent financial institutions.

    Aiming in right direction

    The analysis, titled “An Interim Report on Progress Toward a Safer Financial System,” says reforms are aimed in the right direction, “to make markets and institutions more transparent, less complex, and less leveraged.”

    But it argues that reforms in some areas still need to be further refined, far more work needs to be done to implement them, and that the system, in many cases, remains vulnerable, overly complex, and activities are too concentrated in large institutions. Reliance on non-deposit funding is very high, linkages across domestic financial institutions are very strong and complex financial products are taking on new forms.

    “The good news is that there do not appear to have been serious setbacks to financial globalization (despite reversals from some crisis-hit economies); however, this also means that in the absence of appropriate policies, highly integrated economies are still susceptible to harmful cross-border spillovers,” the report said.

    Focus on banking reform

    The report said that so far most reforms have been in the banking sector, with the aim of imposing higher costs on certain risky activities.

    Higher capital and liquidity buffers under Basel III requirements should enable institutions to better withstand distress. Reform of regulation of...

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