Stock market in Europe: IMF Managing Director Christine Lagarde urged action on the financial reform agenda (photo: Thomas Lohnes/AFP/Getty Images)
GLOBAL FINANCIAL REFORM
In a speech to the Canadian International Council on October 25 in Canada’s financial capital, Lagarde said the world’s financial system remains weak and policies in the major advanced economies have not been sufficient to rebuild confidence.
Change in the global financial structure is not visible yet, in part because policymakers and bankers have delayed implementation of reforms in some places—intentionally or unintentionally—and because some reforms are meeting resistance.
Financial instability
In setting out the challenges facing policymakers and bankers, Lagarde said banks are still weak in many countries. As a result, many borrowers still face very tight borrowing conditions. This creates a feedback loop of tight credit that stifles investment and growth.
At its recent Annual Meetings in Tokyo, the IMF released its latest Global Financial Stability Report, which said risks to financial stability have increased and financial markets remain volatile as the crisis in Europe continues.
Lagarde urged action on the financial reform agenda given the high price the crisis has taken on economic growth.
“The financial sector―the source of this crisis―is holding down the recovery in key parts of the global economy,” said Lagarde. “Considering the staggering economic and human costs over the past six years, we must do whatever it takes to make sure this does not happen again.”
The IMF recently assessed reform progress as part of the Financial Stability Report, and found that reforms are heading in the right direction, but they have not yet delivered a safer financial system.
Also, IMF staff recently conducted a study on the costs of regulatory reform and found that the likely long-term increase in borrowing costs would be about one quarter of one percentage point in the United States, and lower elsewhere.
Lagarde said Canada has one of the strongest financial sectors in the world. While it faces its own challenges, there are important lessons the country can teach the rest of the world about how to build a stronger, safer financial system.
“You can speak with credibility based on your own financial sector success, but you are also regarded as a leading multilateralist,” said Lagarde. “Abroad, Canada is identified by its values of coordination and consensus building, which have given your country influence beyond its years.”
Unfinished business
The challenge now is to proceed to the end of the reform path all together, said Lagarde, and outlined four major areas for further work.
• Concrete progress with the too-important-to-fail conundrum. We need a global level discussion of the pros and cons of direct restrictions on business models. For example, the Volcker Rule in the United States, the Vickers Commission proposals in the United Kingdom, and the Liikanen Report on the EU banking system will have important effects beyond their jurisdictions.
• More progress on recovery and resolution planning for large financial institutions, especially cross-border resolution. Much work is underway to develop the tools to intervene in distressed institutions, but compliance and assessment on an international scale are needed.
• Activity by nonbank financial institutions operating outside the regulatory perimeter, known as “shadow banking”. The Financial Stability Board is looking into this and the IMF looks forward to collaborating closely with them on follow up.
• Implementation of derivatives markets reform, so these can become truly “over the counter” and not “under the table”; implementation of the FSB’s principles for compensation; and most importantly, implementation of the Basle Committee’s principles for effective banking supervision.
