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31 March 2014

IMF: Global Financial Stability Report

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Western banking regulations could be 'mutually destructive' claims the international Monetary Fund's report, says policymakers have failed to stabilise the sector and protect taxpayers from banks "too big to fail".

The IMF's Global Financial Stability Report, entitled "Moving from liquidity- to growth-driven markets", examines the role of the composition of the investor base and local financial systems for the stability of emerging market portfolio flows and asset prices. Chapter two finds that the investor base has been tilting toward making capital flows more sensitive to global financial conditions. However, emerging market economies can improve their resilience by deepening their financial systems.

Chapter three looks at the issue of too-important-to-fail and provides new estimates of the implicit funding subsidy received by systemically important banks. The subsidy comes from the expectation that the government will support large banks if they get into distress. Although financial reforms have helped reduce this subsidy, it remains sizeable. Policymakers should aim to remove this advantage to protect taxpayers, ensure a level playing field, and promote financial stability.

Full report

More specifically, it said Basel III rules that force banks to hold more capital should be implemented alongside more co-ordination of international rules.

"In areas such as the implementation of resolution frameworks or structural reforms, countries have adopted policies without much co-ordination. These solo initiatives, even though individually justifiable, could add unnecessary complexity to the regulation and consolidated supervision of large cross-border institutions and encourage new forms of regulatory arbitrage," it said.

"In the case of resolving cross-border banks, local initiatives may well end up being mutually destructive. For example, attempts to ringfence the assets of failed internationally active banks are considered a factor behind the increasing financial fragmentation in Europe."

Further reporting by the Guardian  © Guardian News and Media 

© International Monetary Fund

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