## Just Do It—Shaping the New Financial System

_IMF Blog, October 3, 2010_

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**Canonical URL:** [Just Do It—Shaping the New Financial System](https://www.imf.org/en/blogs/articles/2010/10/03/just-do-it-shaping-the-new-financial-system)

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- [Markdown version](/en/blogs/articles/2010/10/03/just-do-it-shaping-the-new-financial-system/index.md)
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## Bibliographic details
- Authors: Jose-Vinals
- Published: October 3, 2010

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### Overview and context
- Fearful financial markets, an uncertain growth outlook, fiscal anxieties, long unemployment lines: the crisis has led to widespread dislocation in financial markets with abrupt consequences for growth, trade, and employment.
- The crisis exposed dramatic deficiencies in the regulation and supervision―nationally and internationally―of financial institutions and markets.
- The crisis has provided the impetus for a major overhaul of the financial regulatory system.
- Three years into this crisis, policymakers have made important progress in some areas, but the work is “barely half way there” and the hardest part may lie ahead.
- A new Staff Position Note, Shaping the New Financial System, examines progress and warns that unless the collective “we” make concrete progress over the next 12 months in a few key areas, we may sow the seeds of the next financial crisis.

### Guiding principles for reform
- Build a financial system that provides a solid foundation for strong and sustainable economic growth and that satisfies, first and foremost, the needs of households and firms.
- Address the risks posed by the entire financial system, not just banks.

### Assessment of recent proposals and remaining gaps
- The recent proposals of the Basel Committee on Banking Supervision represent a substantial improvement in the quality and quantity of bank capital.
- Those Basel proposals:
  - Apply only to a subset of the financial system.
  - Do not yet include macroprudential considerations (systemic issues and the impact of the business cycle on how financial institutions function).
- Regulatory uncertainty is acting as a drag on credit and economic growth; prompt action is essential to reduce the likelihood of another crisis.

### Five priority areas for progress (policy recommendations)
- Ensuring a level playing field in regulation.
  - Global coordination is needed to foster competition and minimize the scope for regulatory arbitrage.
- Improving the effectiveness of supervision.
  - Supervision must be intensive, intrusive, and more focused on cross-border exposures to prevent a new cycle of leveraging and excessive risk taking.
- Developing coherent resolution mechanisms.
  - At the national level, the IMF has proposed a “financial stability contribution” to pay for the fiscal cost of any future government support.
  - At the international level, the IMF has proposed a “pragmatic” cross-border coordination framework.
  - As a first step, make this pragmatic approach operational among a subset of countries that are home to most cross-border financial institutions to address the problem of “too important to fail.”
- Establishing a comprehensive macroprudential framework.
  - Microprudential regulations that improve the resilience of individual institutions must be accompanied by macroprudential regulations that strengthen the resilience of the system as a whole.
  - This requires identifying, monitoring, and addressing procyclicality and systemic risks generated by the individual and collective behavior of firms.
- Casting a wide net.
  - Regulation and supervision must capture the entire financial system, not just the banks, to prevent risk migration to less (or un-) regulated segments.

### Private sector role and political commitment
- Rules must encourage the industry to reduce collective risk taking through better risk measurement and risk management.
- Boards of directors must be empowered to rein in excessive risk taking and be held accountable for it.
- Because issues are complex and involve many conflicting interests, political commitment at the highest levels is required.
- Policymakers need to “just do it”.

*José Viñals, October 3, 2010*

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## Content in this bundle

- **Staff Paper**
  - [Staff Paper (Markdown version)](/external/pubs/ft/spn/2010/spn1015.pdf.md){rel="alternate" type="text/markdown"}
  - [Staff Paper (PDF)](/external/pubs/ft/spn/2010/spn1015.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/blogs/articles/2010/10/03/just-do-it-shaping-the-new-financial-system_