Three years after the onset of the financial crisis, analysis by the International Monetary Fund finds that there is much left to be done to build a global financial system that can provide a lasting foundation for stable and sustainable economic growth. While current reforms are moving in the right direction, the Fund’s latest Staff Position Note, “Shaping the New Financial System,” finds that many difficult decisions lie aheadâ€•both at the national and international levelsâ€•which are both urgent and challenging.
While the crisis has provided the impetus for a major overhaul of the financial regulatory system, the IMF paper warns that “prompt progress by the international community is essential to reduce the likelihood and impact of another crisis, and to alleviate regulatory uncertainty.” Just as the international community came together at the start of the crisis, so there needs to be a global effort to design reforms that are “nationally relevant and internationally consistent.”
The paper notes that policies need to address more than just the risks posed by individual banks, but also the risks from non-banks and the financial system as a whole. "The recent proposals of the Basel Committee on Banking Supervision represent a substantial improvement in the quality and quantity of bank capital, but these tougher standards apply only to banks and not to nonbank financial institutions," says IMF. "There is a danger that riskier activities and products will migrate to less regulated or un-regulated segments of the system."
A fundamental principle underlying the analysis is that the private sector and the corrective influence of market discipline plays an important role: “It is not up to the regulators to ‘build’ the financial system, but to influence its direction by providing appropriate rules and incentives,” IMF experts emphasize.
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