Not Making the Grade: Report Card on Global Financial Reform

IMF Blog, September 28, 2012

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Not Making the Grade: Report Card on Global Financial Reform

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Bibliographic details

• Authors: Laura Kodres
• Published: September 28, 2012

Overview and main conclusion

• Author: Laura Kodres
• Date: September 28, 2012
• Core judgment: "somewhat, but not enough." Reforms are in the right direction but the basic problematic financial structures in place before the global crisis "have not actually changed that much," and there is "still a long way to go."
• Systemic status: "Although the intentions of policymakers are clear and positive, the system remains precarious."

How progress is measured

• Focus on features related to the crisis:
  • Large, dominant, highly interconnected institutions.
  • The heavy role of nonbanks and the development of complex financial products.
• Three types of structural measures constructed to gauge reform impact:
  • The extent to which financial intermediation is market based—"the hallmark trait of the United States, with a big nonbank financial sector, active capital markets and banks conducting activities other than borrowing and lending."
  • Features related to the size and scope of different financial activities within a country—"the size and concentration of its banking system and how connected certain parts of the financial system are, through say, interbank markets."
  • Measures about how connected the financial system is to the rest of the world through banking systems and the importance of the country in global markets.
• Approach: tie the reform agenda to how it could reasonably be expected to alter these chosen financial structures.

Findings on reform impact

• Positive signs:
  • New international banking rules Basel 2.5 and anticipation of Basel III implementation are "promising."
  • "Many banks hold more capital and have begun to divest themselves of activities they view as less profitable."
• Persistent problems:
  • Financial systems remain "overly complex."
  • "Banking assets are highly concentrated, with strong domestic interlinkages."
  • "Too-important-to-fail issues are unresolved."
• Concentration dynamics:
  • As certain activities become more costly, some banks will exit while "others with enough scale economies will stay in, making these activities even more concentrated."
  • Example of concentrated activity: "the fixed income, currency, and commodities trading business line."
• Globalization:
  • "Globalization has not been seriously harmed, except for in crisis-hit economies in Europe."
  • Implication: without proper policies, "bad outcomes from one country can easily affect the financial system in another."
• Timing and implementation lags:
  • Reforms have "long implementation lags and the crisis is ongoing."
  • Financial structures "tend to move slowly" and the reform agenda has "built in rather generous implementation schedules, in part to allow the economy to recover."
  • Consequence: cannot definitively say "financial systems are safer than four years ago," but emphasize the "somewhat" improvement.

Policy gaps and priorities

• Areas needing further attention:
  • "More discussion on what it takes to break the 'too-important-to-fail' conundrum, including a global level discussion of the pros and cons of direct restrictions on business models."
  • Noted cross-border implications: the Volcker Rule (United States) and the Vickers commission proposals (United Kingdom) "will have effects beyond their respective jurisdictions and a global perspective is sorely needed."
  • "Further progress on recovery and resolution planning for large institutions, especially cross-border resolution."
  • "Better monitoring and, if needed, a set of prudential standards for nonbank financial institutions posing systemic risks within the so-called shadow-banking sector."
  • "Careful thought about how to encourage simpler financial products and simpler organizational structures."

Conditions for reform success

• Key enablers:
  • Enhanced supervision.
  • Political will to implement regulations.
  • Incentives for the private sector to adhere to the reforms.
  • Adequate resources "for the task of making the financial system simpler and safer."
• Recommended pace: "not encouraging a sprint, but simply a brisk, purposeful walk toward the goal of a safer financial system."

IMF blog post: Not Making the Grade: Report Card on Global Financial Reform (Laura Kodres, September 28, 2012).

Content in this bundle

• Chapter 3: The Reform Agenda: An Interim Report on Progress T Oward A Safer Financial System
  • Chapter 3: The Reform Agenda: An Interim Report on Progress T Oward A Safer Financial System (Markdown version)
  • Chapter 3: The Reform Agenda: An Interim Report on Progress T Oward A Safer Financial System (PDF)

References

• study
• basic financial structures
• globalization
• Europe
• areas