On Wednesday, the IMF released chapters 2 and 3 of their biannual Global Financial Stability Report, which the IMF referred to as the “analytical chapters.” Chapter 1 of the report is scheduled to be released next Tuesday.

Chapter 2 of the report addresses systemic risk, especially the risk created by non-bank financial institutions. According to the report, a reliance on short-term funding was one of the key factors in the current global financial crisis. Moreover, the report stated that collateral valuation practices in the repurchase markets need to be improved, and that increased use of central counterparties for repurchase transactions is encouraged. The report agreed with and supported the recent Basel III proposals for increased bank capital and liquidity standards, and further stated that liquidity guidelines should be modified to include non-bank financial institutions.

Chapter 3 of the report addressed the role of sovereign credit ratings in contributing to financial instability. The press release issued in conjunction with the analytical chapters of the report explained that sovereign credit ratings are “embedded in various rules, regulations and triggers, so that downgrades can lead to destabilizing knock-on and spillover effects in financial markets.” The report proposes that the reliance on ratings in financial rules and regulations should be reduced, although it also warned that regulators will need to be wary of unintended consequences of such regulatory changes.

On Monday, the authors of the report are scheduled to issue a staff position note on assessing financial sector reform efforts to date and further reforms that are still needed.