June 5, 2014
| Public Affairs | Media Relations | |||
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As Prepared for Delivery
Good morning.
Let me start by welcoming all of you to the 14th Annual International Conference on Policy Challenges for the Financial Sector. I am very pleased that the IMF is hosting this conference and welcome you to our premises.
Let me also emphasize how important this partnership between ourselves, the World Bank and the Federal Reserve Board is, and how much we value this annual opportunity to discuss such important and pressing concerns.
I trust today will be an opportunity to give continuity to some of the discussions held yesterday at the Federal Reserve Board, and also an opportunity for us to renew our commitment to advance financial sector reform going forward.
The title of this year’s conference [Global Financial Sector Reform: Five Years on—Are we treating the symptoms or curing the disease?] inspires us to take a good look at where we are, to consider what has emerged since the crisis, and to further consider where to go next.
To me, the test of our success in curing the disease is the restoration of public trust. The right course of treatment should bring back a broad public trust in the financial sector as an engine of growth, benefiting all. I know all of you are as committed as we are to these important topics.
Let me begin with a review of where we are in the big picture. It is important to remind ourselves that the critical issue in the financial crisis for most of the world’s citizens was the impact on the real economy. What began with banks in trouble ended with increased unemployment, a rise in bankruptcies and a weakening of economic growth.
And where are we now? Economic activity in the advanced economies is improving, albeit at varying speeds. Activity in emerging market economies, which has been slowing, picked up slightly in the latter part of 2013—driven by stronger demand from advanced economies. Many low-income countries too have been a bright spot. After Asia, Sub-Saharan Africa has been the most dynamic region in the world during the crisis, growing at around 5 percent per year on average.
In short, a modest and fragile recovery is underway. We now need to focus on sustainable growth and for that we need to look at what the obstacles to that growth currently are. We see three main risks before us:
Firstly, a potentially prolonged period of low inflation in the advanced economies can suppress demand and output—and suppress growth and jobs. Hence, more monetary easing is needed in some key jurisdictions. In this context, we strongly welcome the proactive stance taken by the ECB. We are encouraged that President Draghi has indicated that they are willing to do more if necessary.
Secondly, emerging economies are facing heightened market volatility associated with the tapering of quantitative easing in the U.S., combined with a generally less benign external financial climate. Effective communication of the unwinding of unconventional monetary support is needed. But strong policy responses by emerging economies are likely to be the best safeguard against turbulence.
Finally, the rise of geopolitical tensions could cloud the global economic outlook. The situation in Ukraine is one which, if not well managed, could have broader spillover implications. Resolving them requires not only good policies, but good politics. Both are essential to enable the global economy to move into a higher gear.
But now that a modest and fragile recovery is underway how do we reach our goal of returned growth over the medium-term; growth that is both sustainable and broadly shared? Or to borrow the analogy of this seminar: how do we make sure the patient is returned to optimal health?
At the Fund we have been very focused on this task—using economic policy choices to return growth. While there are no miracle cures, we have recommended calibrating fiscal and structural reforms and monetary policy to aid growth.
We are also focused on the financial sector and its role in restoring growth, through a restoration in investment and credit. Just a few examples: in addition to actively participating in the global regulatory reform discussions, the stability of the financial sector is an integral part of our annual bilateral surveillance. We also look closely at the stability of the financial sector under the Financial Sector Assessment Programs, and we are providing extensive technical assistance and capacity building to our members on financial sector topics. And we will continue to do so.
And that brings me now to our gathering today.
What is our collective role to bring the patient back to optimal health? In the five years since the London and Pittsburgh G20 summits, the global regulatory community has made considerable progress in completing the reform agenda. Many policy recommendations are now in the rule making or implementation stages. For instance most of the elements of the Basel III have been agreed. The implementation of new Basel capital standards is underway in all major jurisdictions and most global banks already comply. A framework to identify and then apply higher standards to Global Systemically Important Banks (G-SIBs) has been completed. This increase in standards is a factor in bringing trust back to the financial sector as banks are recognized as more resilient. The implementation of international standards for capital, and liquidity, has also helped level the playing field and reduce differences across borders.
But the regulatory agenda is not complete and the finish line, unfortunately is still too far off.
Ending too-big-to-fail must be a priority. In this area, for instance it is clear that the behaviour of the financial industry has not changed much since the 2008 crisis. Our studies and those at the BIS in Basel show that large global banks still enjoy a too-big-to-fail premium as markets assume they will be bailed out by taxpayers. We need to complete our remaining work on resolution frameworks to reverse the too big to fail perception.
We also have work to do on data gathering, the supervision of non-banks, and on derivatives markets. Shadow banking supervision needs to be pursued with more vigor, particularly in markets where it is so important, like the United States.
Similarly, we have seen some recent examples of reckless behavior of financial institutions coming to light, whether through promoting tax evasion or manipulating foreign exchange or reference rate markets, such as TIBOR or LIBOR. This misconduct by financial institutions further undermines the public confidence in the sector and takes us a step back.
And we are still struggling with inconsistent cross border approaches in many areas of financial sector reform. In this vein, we very much welcome the establishment of the banking union in the Eurozone and we strongly urge European policymakers to fully implement banking supervision and to finalize arrangements for the resolution and financial safety net elements of the union.
Now let’s be realistic: The reform agenda was ambitious; it was unprecedented in its scale. But the financial crisis was also unprecedented.
One of the most remarkable aspects of the agenda was the willingness of countries to work together cooperatively, to agree to international standards in a way not seen before the crisis.
But there is a risk that the same resolve to harmonize, to work together, is waning.
I would urge all of you to resist that.
While we have agreed on the prescription for financial health in 2009, we must ensure that the patient finishes out his or her course of treatment. We cannot leave parts of the reform undone.
And then, even once the patient has finished its current course of treatment, it may face other ills in future and we will need to work together to address these as they arise.
To come back to the theme, or question, of the seminar: we are like a team of doctors and the patient has many, on-going issues. In order to avoid future complications and in order to achieve optimal health, we must work as a team and not as individual physicians. To work together holistically and to continue to find multilateral solutions to what are, indeed, multilateral problems.
You as regulators and supervisors are called upon to work in the public interest to build and repair the financial system so that the public can trust it again. As you know, a financial sector without the trust of the public is not viable. Without public support and trust the financial sector cannot function as an engine of economic growth.
We need to finish what we started when the crisis hit home. We need to complete the task, seeing through the reform agenda that we set for ourselves and to ensure its consistent and effective implementation.
The IMF will continue to support the global effort to complete reforms, to react swiftly and constructively to new challenges and to restore public confidence.
I thank you for joining us today at the IMF and for attending this 14th annual seminar. I thank our partners at the Federal Reserve Board and the World Bank for working with us to put together an excellent program.
And to conclude I’d like to quote the Managing Director who just last week in London spoke about these same issues and said that “to restore trust, we need a shift toward greater integrity and accountability.” That is our role. I wish you all a thought-provoking and productive day.
