The IMF insists that a new opportunity to reshape international finance has emerged from the economic chaos from 2007-9. IMF believes the crisis has shined light on the inherent weaknesses of the way the big lads play with money. It blames the lack of quality regulation which is ironic considering IMF plays a significant role in regulation. In any case here is the new direction for the world .
Policymakers need to make progress in the following five areas:
- 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. Better supervision is necessary to prevent a new cycle of leveraging and excessive risk taking. Supervision needs to be intensive, intrusive, and more focused on cross-border exposures.
- 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, we have proposed a “pragmatic” cross-border coordination framework. As a first step, we suggest making this pragmatic approach operational among a subset of countries that are home to most cross-border financial institutions. This is critical for addressing the problem of “too important to fail.”
- Establishing a comprehensive macroprudential framework. Microprudential regulations, which aim to improve the resilience of individual institutions, must be accompanied by macroprudential regulations that strengthen the resilience of the system as a whole. This means 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. Absent a broader perspective, riskier activities and products will surely migrate to the less (or un-) regulated segments of the system.