The International Monetary Fund (IMF) will monitor the health of key financial centres every five years to promote global financial stability. Twenty-five nations will have to submit their financial sectors to scrutiny to ensure they do not derail the world economy.
The nations include major emerging market centres like China in addition to America and Britain. The major areas under review would be risk, financial stability policies and crisis resolution.
The IMF has also recommended further reform by key financial centres, despite the progress authorities have made so far. (article continues below)
Speaking last week at the depositary trust and clearance corporation executive forum, John Lipsky, the first deputy managing director at the IMF, said the Fund was working with the Bank for International Settlements and the Financial Stability Board on an official definition of systemically important financial institutions (SIFIs), to ensure all SIFIs are adequately monitored.
He added that financial sector regulators also needed to improve their supervisory practices. “It is all too common to find that supervisory practices in enforcing compliance or sanctioning non-compliance are sub-standard, and that timely corrective action often is lacking,” he said.
In the second chapter of its Global Financial Stability Report, published last week, the IMF focused especially on liquidity risk and on ensuring banks had sufficient capital buffers in case short-term wholesale funding dried up.
Banks came under particular strain during the financial crisis because lenders refused to renew their short-term borrowing agreements, forcing them into a liquidity trap.
The IMF suggested monitoring providers of wholesale liquidity more closely, including money market mutual funds and secured repo lenders. The Fund criticised aspects of the repo lending system that boosted systemic risk, including badly designed margin requirements, ignorance of counterparty credit risk and reliance on central bodies for clearing trades and managing collateral.
According to the IMF, the financial industry should also ensure it distinguishes adequately between money market funds and bank deposits, especially in America.
Money market portfolios saw massive outflows after the collapse of Lehman Brothers following abnormal losses and concerns over guarantees for investors.