Lessons and Policy Implications from the Global Financial Crisis

IMF Working Papers, February 1, 2010

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The ongoing global financial crisis is rooted in a combination of factors common to previous financial crises and some new factors.
The crisis revealed deficiencies in financial regulation and architecture, particularly in:
- the treatment of systemically important financial institutions,
- the assessments of systemic risks and vulnerabilities,
- the resolution of financial institutions.
The global nature of the financial crisis highlighted that financially integrated markets, while offering many benefits, can also pose significant risks with large real economic consequences.
Deep reforms are therefore needed to the international financial architecture to safeguard the stability of an increasingly financially integrated world.

The crisis combines familiar drivers from past crises with novel elements specific to the recent episode.
Key areas of deficiency identified:
- Treatment of systemically important financial institutions.
- Assessments of systemic risks and vulnerabilities.
- Frameworks for resolution of financial institutions.
Financial integration, despite its benefits, can amplify risks and transmit shocks globally, producing significant real economic effects.

Deep reforms to the international financial architecture are necessary to address vulnerabilities arising from financial integration.
Reforms should focus on:
- Strengthening the regulatory treatment and oversight of systemically important financial institutions.
- Improving methodologies and practices for assessing systemic risks and vulnerabilities.
- Enhancing resolution frameworks for financial institutions to manage failures without severe spillovers.