{ "title": "Don’t Forget Financial Sector Reform", "publication": "IMF Blog, January 7, 2010", "sourceUrl": "https://www.imf.org/en/blogs/articles/2010/01/07/financial-sector-reform", "canonical": "https://www.imf.org/en/blogs/articles/2010/01/07/financial-sector-reform", "overlayPath": "/en/blogs/articles/2010/01/07/financial-sector-reform/index.md", "summary": "There is a broad consensus that \"Fundamental changes are needed in the global financial sector.\"", "sections": [ { "heading": "Major conclusions and context", "content": "- There is a broad consensus that \"Fundamental changes are needed in the global financial sector.\"\n- Publication and author: John Lipsky, January 7, 2010.\n- Reform urgency arises from the turmoil of the past few years; needed changes are both technical (risk management, capital) and institutional (regulation, supervision, resolution regimes).\n- Political hurdles and tradeoffs: restoring economic growth requires renewed credit flows, while some reforms \"may limit the ability of financial institutions to meet this need, at least in the near term.\"" }, { "heading": "Clear reform priorities", "content": "- Risk management of many financial firms needs strengthening.\n- Compensation schemes need to be re-evaluated.\n- Capital standards need to be bolstered.\n- Regulation needs fundamental reform.\n- Supervision needs to be improved.\n- Financial institutions’ balance sheets need to be freed of the burden of impaired assets." }, { "heading": "Risks to reform momentum", "content": "- Risk of slippage: reforming financial regulation \"will slip down the list of priorities\" as growth and financial conditions improve.\n- Political difficulty: reform is politically difficult and could complicate efforts to get credit flowing again.\n- Public anger: \"there is still a lot of anger directed against those institutions viewed as responsible for the crisis,\" especially where taxpayer funding was used.\n- One-off measures: some countries are enacting one-off taxes on financial sector bonuses, but these are not substitutes for fundamental reforms." }, { "heading": "Key principles for reform", "content": "- Widen the perimeter of regulation to encompass all systemically important institutions.\n- Add macro-prudential elements to existing regulation that currently focuses \"almost exclusively on individual instruments and institutions.\"\n- Strengthen regulatory standards on capital and liquidity to better reflect firm risk exposures and risk profiles; \"Almost certainly, this will imply increased capital buffers and new limits on risk-taking.\"\n- Establish a robust resolution regime for large, complex financial institutions that operate in multiple jurisdictions.\n- Institutional roles:\n - The Financial Stability Board (FSB) will take the leading role in coordinating development of new global standards for regulation and supervision.\n - These standards \"subsequently will be adopted and implemented at the national level.\"\n - The IMF’s unique role is \"to conduct independent monitoring of the implementation of the agreed standards.\"" }, { "heading": "Strengthened supervision", "content": "- Bolstering supervision is critical in addition to enhancing regulation.\n- Notable risk management deficiencies persist in many important financial institutions.\n- Improving supervisory performance requires:\n - Increasing the resources devoted to supervision.\n - Providing the backing needed to ensure supervisory recommendations are taken seriously.\n- Bank boards need sharper oversight in setting and monitoring risk management standards.\n- Compensation design is relevant; the FSB has promulgated standards to help reduce concerns that compensation schemes promote excessive risk-taking." }, { "heading": "Burden sharing and fiscal questions", "content": "- Core question: \"Who should bear the cost of crisis mitigation?\"\n- The G-20 Leaders in their Pittsburgh Summit Communiqué asked the IMF to investigate how the financial sector could make \"a fair and substantial\" contribution to paying for government interventions; an options paper is anticipated \"at their June Summit.\"\n- Observations:\n - The issue of burden sharing is \"complex and contentious.\"\n - Despite widespread practice of paying for deposit insurance through a banking levy, systematic attention to broader burden sharing has been limited.\n - Debates have not focused enough on tradeoffs involved in designing a sound regulatory system.\n- Policy tradeoff: balancing \"more constraining regulation that limits the cost of future crises\" against \"the need to promote effective financial intermediation.\"\n- Consideration of taxes:\n - Taxes applied to more risky financial activities—either directly or indirectly—could be designed to reinforce or possibly substitute, to some extent, for stricter regulation.\n - The public debate is divided about the purpose of a new financial sector charge or tax: recouping costs of net support already provided versus creating a mechanism to cope with potential future costs. Both need independent analysis.\n - Financial transactions tax discussion: sometimes referred to as a \"Tobin tax,\" noting Tobin’s original proposal was restricted to foreign exchange transactions and intended to suppress transactions, not raise revenue. Current supporters have differing intentions; some view it as a source of earmarked revenues." }, { "heading": "IMF analysis scope and upcoming work", "content": "- The IMF’s analysis will cover issues and options broadly, including—but not limited to—a financial transactions tax.\n- Evaluation criteria: potential to reduce distortions and improve systemic efficiency and effectiveness.\n- Analysis will address pros and cons of creating a fund in advance of future crises.\n- Technical issues to be evaluated include:\n - Definition of systemically important institutions.\n - The perimeter for the supervised financial sector.\n - Implementation of any regulatory changes needed to support financial stability.\n- Reference to related content: \"See also my interview with IMF Survey online.\"" }, { "heading": "Implementation outlook and governance", "content": "- The reform effort \"won’t be either quick or easy,\" but potential payoff is significant for underpinning long-term growth and enhancing systemic stability.\n- Actual implementation will require sustained cooperation and focus.\n- Improved global governance—including of the IMF—will aid the reform effort; this will be addressed in the next piece in the series.\n\nIMF blog post: Don’t Forget Financial Sector Reform — John Lipsky, January 7, 2010.\n\n---\n\n\n References\n\n- Jackson Hole blogs\n- financial sector regulation\n- interview\n- global governance—including of the IMF\n\nSource: https://www.imf.org/en/blogs/articles/2010/01/07/financial-sector-reform" } ], "bullets": [ "[Markdown version](/en/blogs/articles/2010/01/07/financial-sector-reform/index.md)", "[Structured JSON version](/en/blogs/articles/2010/01/07/financial-sector-reform/index.json)", "[Bundle manifest](/en/blogs/articles/2010/01/07/financial-sector-reform/bundle-manifest.json)", "Authors: John Lipsky", "Published: January 7, 2010", "There is a broad consensus that \"Fundamental changes are needed in the global financial sector.\"", "Publication and author: John Lipsky, January 7, 2010.", "Reform urgency arises from the turmoil of the past few years; needed changes are both technical (risk management, capital) and institutional (regulation, supervision, resolution regimes).", "Political hurdles and tradeoffs: restoring economic growth requires renewed credit flows, while some reforms \"may limit the ability of financial institutions to meet this need, at least in the near term.\"", "Risk management of many financial firms needs strengthening.", "Compensation schemes need to be re-evaluated.", "Capital standards need to be bolstered.", "Regulation needs fundamental reform.", "Supervision needs to be improved.", "Financial institutions’ balance sheets need to be freed of the burden of impaired assets.", "Risk of slippage: reforming financial regulation \"will slip down the list of priorities\" as growth and financial conditions improve.", "Political difficulty: reform is politically difficult and could complicate efforts to get credit flowing again.", "Public anger: \"there is still a lot of anger directed against those institutions viewed as responsible for the crisis,\" especially where taxpayer funding was used.", "One-off measures: some countries are enacting one-off taxes on financial sector bonuses, but these are not substitutes for fundamental reforms.", "Widen the perimeter of regulation to encompass all systemically important institutions.", "Add macro-prudential elements to existing regulation that currently focuses \"almost exclusively on individual instruments and institutions.\"", "Strengthen regulatory standards on capital and liquidity to better reflect firm risk exposures and risk profiles; \"Almost certainly, this will imply increased capital buffers and new limits on risk-taking.\"", "Establish a robust resolution regime for large, complex financial institutions that operate in multiple jurisdictions.", "Institutional roles:", "Bolstering supervision is critical in addition to enhancing regulation.", "Notable risk management deficiencies persist in many important financial institutions.", "Improving supervisory performance requires:", "Bank boards need sharper oversight in setting and monitoring risk management standards.", "Compensation design is relevant; the FSB has promulgated standards to help reduce concerns that compensation schemes promote excessive risk-taking.", "Core question: \"Who should bear the cost of crisis mitigation?\"", "The G-20 Leaders in their Pittsburgh Summit Communiqué asked the IMF to investigate how the financial sector could make \"a fair and substantial\" contribution to paying for government interventions; an options paper is anticipated \"at their June Summit.\"", "Observations:", "Policy tradeoff: balancing \"more constraining regulation that limits the cost of future crises\" against \"the need to promote effective financial intermediation.\"", "Consideration of taxes:", "The IMF’s analysis will cover issues and options broadly, including—but not limited to—a financial transactions tax.", "Evaluation criteria: potential to reduce distortions and improve systemic efficiency and effectiveness.", "Analysis will address pros and cons of creating a fund in advance of future crises.", "Technical issues to be evaluated include:", "Reference to related content: \"See also my interview with IMF Survey online.\"", "The reform effort \"won’t be either quick or easy,\" but potential payoff is significant for underpinning long-term growth and enhancing systemic stability.", "Actual implementation will require sustained cooperation and focus.", "Improved global governance—including of the IMF—will aid the reform effort; this will be addressed in the next piece in the series.", "[Jackson Hole blogs](http://blogs.imf.org/2009/08/24/a-grand-teton-perspective/)", "[financial sector regulation](http://blogs.imf.org/2009/08/25/fixing-the-financial-system/)", "[interview](http://www.imf.org/external/pubs/ft/survey/so/2010/INT011110A.htm)", "[global governance—including of the IMF](http://blogs.imf.org/2010/01/11/changing-times-global-governance-reform-and-the-imf/)" ], "alternates": { "markdown": "/en/blogs/articles/2010/01/07/financial-sector-reform/index.md", "json": "/en/blogs/articles/2010/01/07/financial-sector-reform/index.json", "bundleManifest": "/en/blogs/articles/2010/01/07/financial-sector-reform/bundle-manifest.json" }, "generatedAtUtc": "2026-08-28T14:21:06.606Z" }