No financial structure model fits all circumstances: IMF
Washington: No single financial structure model fits all circumstances, the International Monetary Fund has said.
In its 'Global Financial Stability Report', the IMF said no one financial structure is best under all circumstances.
What is good for China may not be good for Germany, and what works in Japan may not work in the US, it noted.
"Our analysis reinforces the lesson from the crisis that high quality regulation and supervision should be at the forefront of reform efforts," Laura Kodres, chief of global stability analysis in the IMF’s Monetary and Capital Markets Department, said at a press conference held at the IMF headquarters in Washington.
The IMF’s preliminary findings examined data from 58 economies between 1998 and 2010.
The IMF research which focused on the financial system’s structural features, the report said, found that higher ratios of capital to assets within banks are associated with better results for the economy.
"Many emerging market economies had these large buffers in place before the crisis, and as a result, their banking systems weathered the financial turmoil far better than many of their counterparts in advanced economies," it said.
However, beyond a certain point, a large storage of capital may actually start to be a drag on growth.
"A system that is too safe may limit the funds available for lending, and hinder growth," said Kodres.
Also, cross border connections through foreign banks are beneficial most of the time, but during a crisis may be associated with instability, the report said.
The financial connections between banks in different countries can mean that what begins as a problem in the United States is quickly transmitted around the world.
Instead of a route for risk-sharing, such connections become a conduit for contagion, it said.