{
  "title": "The Role of Law in Preserving Financial Stability",
  "publication": "IMF Blog, July 1, 2016",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2016/07/01/the-role-of-law-in-preserving-financial-stability",
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  "summary": "Authors: Sean Hagan, Ross Leckow",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Authors: Sean Hagan, Ross Leckow\n- Date: July 1, 2016\n- Event referenced: high-level seminar on “Law and Financial Stability” held on May 16-18 in Washington, D.C., organized by the IMF’s Legal Department to mark its 70th Anniversary, which brought together more than 120 senior lawyers and policymakers from over 80 countries.\n- Core takeaway: Significant legal progress since the 2008 global financial crisis, but substantial additional implementation and development work remains to address cross-border, institutional, and emerging challenges."
    },
    {
      "heading": "Progress since the 2008 global financial crisis",
      "content": "- Many countries have strengthened legal frameworks governing the financial sector.\n- Specific advances highlighted:\n  - Bank resolution through international standards:\n    - Many resolution authorities now have the mandate and powers needed to resolve a troubled financial institution in an orderly manner.\n    - National authorities from key jurisdictions have established Crisis Management Groups (CMGs) and progressed on cross-border resolution planning.\n  - Central Clearing Counterparties (CCPs) and resolution:\n    - Following the Pittsburgh summit in September 2009, G-20 leaders agreed that all standardized over-the-counter derivatives contracts should be, where appropriate, cleared through CCPs.\n    - Reforms to implement this mandate have advanced, though CCP resolution involves complex legal and regulatory challenges.\n  - Macroprudential policy:\n    - Recognition of the need for dedicated macro-prudential policies to achieve financial stability.\n    - Central banks are being given macro-prudential tasks, often alongside microprudential supervision of banks or resolution, requiring effective legal frameworks.\n  - Corporate debt restructuring and economic recovery:\n    - Countries affected by the crisis face overleveraged corporate sectors and need comprehensive strategies for non-performing loans, including robust insolvency regimes and speedy, cost effective out-of-court debt restructuring mechanisms.\n  - Islamic finance:\n    - Rapid growth in Shari’ah-compliant banking activities and progress in developing international standards for Islamic banking that complement general international norms.\n    - The Islamic Financial Standards Board (IFSB) and other standard setters have played a key role."
    },
    {
      "heading": "Remaining gaps and weaknesses",
      "content": "- Many countries still lack effective resolution regimes.\n- Challenges in designing effective frameworks for cross-border cooperation to ensure resolution actions in one jurisdiction can be given effect in another jurisdiction’s laws.\n- Legal frameworks still need strengthening for:\n  - CCP resolution,\n  - Macro-prudential frameworks,\n  - Corporate debt restructuring.\n- International standards (including those enforcing bank resolution and AML/CFT) may need modification to accommodate specific features of Islamic financial institutions."
    },
    {
      "heading": "Emerging issues identified",
      "content": "- Reduction in correspondent banking relationships (CBRs):\n  - Several countries have reported a reduction in CBRs by global banks in recent years.\n  - Pressure on CBRs has been associated with restricted access to financial services by certain categories of customers, business lines, jurisdictions or regions.\n  - IMF staff support includes analyzing risks and policy responses in surveillance and the Financial Sector Assessment Program; assessing compliance with international standards including AML/CFT; building capacity to strengthen regulatory and supervisory frameworks; and facilitating international dialogue.\n- Expansion of the shadow banking system:\n  - Estimated to account for approximately 25% of total assets of the financial sector.\n  - Need to strengthen interaction between banks and shadow banks and to make securitization safer.\n  - Further work required to decide whether institution-based or activity-based regulation is appropriate for shadow banking.\n- Rising misconduct risks:\n  - International work continues on reducing misconduct risks through exchange of best practices on governance frameworks, development of supervisory toolkits, and examination of post-crisis compensation reforms.\n  - Sharing experiences on bank regulators’ enforcement powers to address market abuse.\n  - Recognition that regulatory measures alone may be insufficient; a shift in the ethical climate within the financial sector may be necessary.\n- Financial inclusion in emerging economies:\n  - Broadening access to formal financial networks supports empowerment and inclusive growth.\n  - Growing use of financial technology, supported by robust legal and regulatory frameworks, may play an important role."
    },
    {
      "heading": "The road ahead — policy recommendations and priorities",
      "content": "- Continue developing international standards and best practices to guide national legislation and cross-border cooperation frameworks.\n- Countries should enact national legislation and strengthen institutional capacity to implement existing international standards and best practices.\n- Legal reform is necessary across multiple areas, but cultural and ethical changes in financial market participants and public authorities are also essential to address some problems.\n- The IMF remains committed to advancing the legal reform agenda across all relevant areas.\n\nSource: IMF Blog post “The Role of Law in Preserving Financial Stability” (July 1, 2016).\n\n---\n\n\n References\n\n- seminar\n- 70th Anniversary\n- correspondent banking relationships\n\nSource: https://www.imf.org/en/blogs/articles/2016/07/01/the-role-of-law-in-preserving-financial-stability"
    }
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    "Authors: Sean Hagan, Ross Leckow",
    "Published: July 1, 2016",
    "Authors: Sean Hagan, Ross Leckow",
    "Date: July 1, 2016",
    "Event referenced: high-level seminar on “Law and Financial Stability” held on May 16-18 in Washington, D.C., organized by the IMF’s Legal Department to mark its 70th Anniversary, which brought together more than 120 senior lawyers and policymakers from over 80 countries.",
    "Core takeaway: Significant legal progress since the 2008 global financial crisis, but substantial additional implementation and development work remains to address cross-border, institutional, and emerging challenges.",
    "Many countries have strengthened legal frameworks governing the financial sector.",
    "Specific advances highlighted:",
    "Many countries still lack effective resolution regimes.",
    "Challenges in designing effective frameworks for cross-border cooperation to ensure resolution actions in one jurisdiction can be given effect in another jurisdiction’s laws.",
    "Legal frameworks still need strengthening for:",
    "International standards (including those enforcing bank resolution and AML/CFT) may need modification to accommodate specific features of Islamic financial institutions.",
    "Reduction in correspondent banking relationships (CBRs):",
    "Expansion of the shadow banking system:",
    "Rising misconduct risks:",
    "Financial inclusion in emerging economies:",
    "Continue developing international standards and best practices to guide national legislation and cross-border cooperation frameworks.",
    "Countries should enact national legislation and strengthen institutional capacity to implement existing international standards and best practices.",
    "Legal reform is necessary across multiple areas, but cultural and ethical changes in financial market participants and public authorities are also essential to address some problems.",
    "The IMF remains committed to advancing the legal reform agenda across all relevant areas.",
    "[seminar](http://www.imf.org/external/np/seminars/eng/2016/leg/)",
    "[70th Anniversary](http://www.imf.org/external/pubs/ft/survey/so/2016/int051016a.htm)",
    "[correspondent banking relationships](https://blogs.imf.org/2016/06/30/what-happens-when-banks-stop-doing-business-with-some-countries/)"
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