## The Role of Law in Preserving Financial Stability _IMF Blog, July 1, 2016_ ## Source details **Canonical URL:** [The Role of Law in Preserving Financial Stability](https://www.imf.org/en/blogs/articles/2016/07/01/the-role-of-law-in-preserving-financial-stability) ## Other formats - [Markdown version](/en/blogs/articles/2016/07/01/the-role-of-law-in-preserving-financial-stability/index.md) - [Structured JSON version](/en/blogs/articles/2016/07/01/the-role-of-law-in-preserving-financial-stability/index.json) - [Bundle manifest](/en/blogs/articles/2016/07/01/the-role-of-law-in-preserving-financial-stability/bundle-manifest.json) ## Bibliographic details - Authors: Sean Hagan, Ross Leckow - Published: July 1, 2016 --- ### Overview - 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. ### Progress since the 2008 global financial crisis - Many countries have strengthened legal frameworks governing the financial sector. - Specific advances highlighted: - Bank resolution through international standards: - Many resolution authorities now have the mandate and powers needed to resolve a troubled financial institution in an orderly manner. - National authorities from key jurisdictions have established Crisis Management Groups (CMGs) and progressed on cross-border resolution planning. - Central Clearing Counterparties (CCPs) and resolution: - 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. - Reforms to implement this mandate have advanced, though CCP resolution involves complex legal and regulatory challenges. - Macroprudential policy: - Recognition of the need for dedicated macro-prudential policies to achieve financial stability. - Central banks are being given macro-prudential tasks, often alongside microprudential supervision of banks or resolution, requiring effective legal frameworks. - Corporate debt restructuring and economic recovery: - 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. - Islamic finance: - Rapid growth in Shari’ah-compliant banking activities and progress in developing international standards for Islamic banking that complement general international norms. - The Islamic Financial Standards Board (IFSB) and other standard setters have played a key role. ### Remaining gaps and weaknesses - 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: - CCP resolution, - Macro-prudential frameworks, - Corporate debt restructuring. - International standards (including those enforcing bank resolution and AML/CFT) may need modification to accommodate specific features of Islamic financial institutions. ### Emerging issues identified - Reduction in correspondent banking relationships (CBRs): - Several countries have reported a reduction in CBRs by global banks in recent years. - Pressure on CBRs has been associated with restricted access to financial services by certain categories of customers, business lines, jurisdictions or regions. - 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. - Expansion of the shadow banking system: - Estimated to account for approximately 25% of total assets of the financial sector. - Need to strengthen interaction between banks and shadow banks and to make securitization safer. - Further work required to decide whether institution-based or activity-based regulation is appropriate for shadow banking. - Rising misconduct risks: - 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. - Sharing experiences on bank regulators’ enforcement powers to address market abuse. - Recognition that regulatory measures alone may be insufficient; a shift in the ethical climate within the financial sector may be necessary. - Financial inclusion in emerging economies: - Broadening access to formal financial networks supports empowerment and inclusive growth. - Growing use of financial technology, supported by robust legal and regulatory frameworks, may play an important role. ### The road ahead — policy recommendations and priorities - 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. *Source: IMF Blog post “The Role of Law in Preserving Financial Stability” (July 1, 2016).* --- ## References - [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/) _Source: https://www.imf.org/en/blogs/articles/2016/07/01/the-role-of-law-in-preserving-financial-stability_