Yesterday, the IMF released a Staff Position Note entitled "Shaping the New Financial System". The report “is part of the Fund’s ongoing efforts to promote a global approach to regulatory reform, spot trends in the financial system that have important implications for policy, and to examine the interaction with macroeconomic policies for more effective measures in the future” stated the agency in a press release regarding the report.

While noting that the regulatory reform agenda agreed to by the G-20 has provided an impetus for reform of the financial regulatory community and that considerable progress has been made in correcting the weaknesses that led us into the crisis, the report warned that many difficult policy choices remain. The IMF identified the following five goals as priorities for the reform agenda going forward:

  1. Ensure a level playing field in regulation. Global coordination is needed to promote the benefits of global finance; foster competition; and minimize regulatory arbitrage.
  2. Improve the effectiveness of supervision. Stronger supervision is necessary if a new cycle of leveraging and excessive risk taking is to be prevented. Supervision needs to be more intensive and intrusive, as well as more focused on cross-border exposures.
  3. Develop coherent resolution mechanisms at the national level and for cross-border financial institutions. Given the global reach of many financial institutions, an enhanced cross-border resolution framework that eliminates moral hazard while preserving financial stability is needed. The first step is to focus on making such a framework operational among a small set of countries that are home to most cross-border financial institutions, particularly to address the problem of “too important to fail.”
  4. Establish a comprehensive macro prudential framework. Micro prudential regulations, designed to improve the resilience of individual institutions, must be complemented with effective macro prudential regulations that strengthen the resilience of the financial system. This will require identifying, monitoring, and addressing systemic risks generated by individual firms and collective behavior.
  5. Cast a wide net. Reforms must address emerging exposures and risks in the entire financial system, not just banks. There is a danger that riskier activities and products will migrate to less regulated or unregulated segments of the system.

The IMF concluded the report by noting that, while the paper focused on the response of the public sector, “[f]or reform initiatives to be successful, regulatory efforts should continue to be directed toward improving the internal operations of financial firms, including their risk management and governance.”