Global financial system still vulnerable: IMF

Global financial system still vulnerable: IMF Washington: Five years after the start of the crisis, global financial system is still not well and there is a lot of work to be done by regulators, supervisors, and the private sector to put it on a firmer footing, IMF has said in a report.

Although reforms are moving in the right direction, they are yet to create a safer set of financial structures and there are still some difficult issues left to tackle, the IMF said in its Global Financial Stability Report.

"Although the intentions of policymakers are clear and positive, the reforms have yet to effect a safer set of financial structures, in part because, in some economies and regions, the intervention measures needed to deal with the prolonged crisis are delaying a ?reboot? of the system onto a safer path," the report said.

The analysis -- An Interim Report on Progress Toward a Safer Financial System -- says reforms are aimed in the right direction, to make markets and institutions more transparent, less complex, and less leveraged.

But it argues that reforms in some areas still need to be further refined and far more work needs to be done to implement them.

Besides, the system, in many cases, remains vulnerable, overly complex, and activities are too concentrated in large institutions, IMF said.

Reliance on non-deposit funding is very high, linkages across domestic financial institutions are very strong and complex financial products are taking on new forms.

Despite much progress on the reform agenda, reforms in some areas still need to be further refined by policymakers, the IMF report said.

IMF said these areas include a global-level discussion on the pros and cons for direct restrictions on business models; monitoring, and a set of prudential standards if needed, for nonbank financial institutions posing systemic risks within the so-called shadow banking sector; careful thought on how to encourage the use of simpler products and simpler organisational structures; and further progress on recovery and resolution planning for large institutions, including cross-border resolution to help secure the benefits of financial globalisation.

"Finally, the success of the current and prospective reforms depends on enhanced supervision, incentives for the private sector to adhere to the reforms, the political will to implement regulations, and the resources necessary for the task of making the financial system simpler and safer," it added.

According to the report, so far most reforms have been in the banking sector, with the aim of imposing higher costs on certain risky activities.

"Higher capital and liquidity buffers under Basel III requirements should enable institutions to better withstand distress.

"Reform of regulation of derivative markets aims to make them more transparent, could improve the pricing of derivatives, and mitigate some of the counterparty risks," it said.

The report said that banks will likely adjust to the new costs in various ways, some of which may not have been intended.

"Innovative products are already being developed to circumvent some new regulations, it pointed out," it said, adding that the new banking standards may encourage certain activities to move to the nonbank financial sector, where those standards do not apply.

"Alternatively, big banking groups with advantages of scale may be better able to absorb the costs of the regulations; as a result, they may become even more prominent in certain markets, making these markets more concentrated," the report said.

PTI