As the Group of 20 Finance Ministers and Central Bank Governors concluded their meetings and the International Monetary and Financial Committee (IMFC) held a series of meetings in Washington D.C., IMF First Deputy Managing Director John Lipsky opened a high-level meeting elsewhere in the city on “The Emerging Framework for Financial Regulation and Policy,” a collaboration between the Financial Stability Institute of theBank of International Settlements (BIS) and the IMF’s Institute and Monetary Capital Markets Department.
Mr. Lipsky framed the occasion by affirming a consensus among the IMF, the Financial Stability Board (FSB), and other standard-setting bodies concerning the need for a series of reforms devoted to reshaping the regulatory and supervisory environment of the global financial system. He said three challenges loom:
- The inadequacy of the existing micro-regulatory and supervisory regimes governing financial institutions worldwide. The primary source of the financial crisis was the action of local financial market participants, who, through insufficient risk management, built up unsustainable leverage that was funded through wholesale markets. Capital standards were inadequate, generating liquidity and credit pressures that proved overwhelming. Many of the institutions that were the source of the problems fell outside the authority of existing regulatory measures. A wider network must be developed to avoid future troubles. Systems within the larger network must consistently provide clear objectives and mandates, sufficient operations independence, and adequate resources, including forceful remediation measures to ensure compliance.
- Unsettled policy regarding the management of the so-called “too-important-to-fail” (TITF) institutions. Institutions achieving systematic importance because of their size and international reach still pose a threat to the global economy in cases of sudden failure. Of all the challenges highlighted by the crisis, no single approach or complex of approaches have gained uniform acceptance as opinions range from the need to create special capital and liquidity requirements related to corporate size and systemic impact to the need to create special resolution regimes and a requirement for TITF institutions to provide “living wills.” Mr. Lipsky suggested consideration for a risk-based levy in the financial sector that would both deter banks from engaging in unsound practices and “address the public policy concern that financial institutions are able to privatize gains but socialize cost arising in the financial sector.”
- The need for improved monetary policy to preserve financial stability. Before the crisis, macroeconomists and policymakers generally agreed that keeping inflation low and stable and managing public debt were fundamental to economic viability. Beginning in the late 1980s, an international emphasis on price stability led to a decline in inflation that was accompanied by decreasing macroeconomic volatility and a system seemingly invulnerable to failure. Yet, the crisis proved that durable stability does not rest solely on measures designed to address specific risks. Thus, while monetary policy should remain structured, in part, to maintain price stability, policymakers must also take into account macro-financial linkages and the potential for imbalances, such as the higher risk-taking and increased leverage encouraged by extended periods of low inflations such as the one that preceded the current crisis. Accordingly, restoring and achieving financial soundness and resiliency will be accomplished mainly through the ascension of an enhanced regulatory regime with systemic application.
In related happenings, Ministers of the Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development held their eighty-third meeting in Washington, D.C. on Thursday, echoing the IMF’s call for international regulatory reform and citing a need for “concerted and cooperative actions” between world governments to effectuate meaningful change. In similar news, World Bank Group President Robert B. Zoellick voiced like opinions in a Washington, D.C. press briefing on Thursday concerning World Bank’s ongoing effort to assist in global recovery, stating “Geopolitics as usual won’t work, and neither will international institutions working as usual.” He identified four major issues that World Bank membership would have to address this weekend:
- “whether to support the first capital increase at the World Bank in more than 20 years”;
- “whether to give developing countries a bigger say in the running of the institution”;
- “discuss the Bank's post-crisis strategy” and
- “review the most comprehensive reform program in the Bank’s history.”