The International Monetary Fund (IMF) favours greater financial regulation in a key background paper for the Group of 20 world leaders’ meeting in London in April.
Initial Lessons of the Crisis recommends expanding regulation to include more institutions and markets. It says such regulation should be underpinned by more effective cross-functional regulation and co-operation.
Regulatory and institutional practices should be re-examined with a view to reducing procyclicality, it says. Liquidity management practices and regulatory policies must also change to ensure that financial institutions maintain larger liquidity buffers. The report further highlights the importance of strengthened public disclosure practices for systemically important financial institutions.
Policymakers, the IMF says, need to take the lead in translating disclosures into effective assessments of institutional and systemic risk. They also need to incorporate this information into early warning frameworks and the formulation of macro-prudential policies.
Cross-border and cross-functional regulation and cooperation should be improved and promote level playing fields across markets.
The IMF also says that national liquidity frameworks need to be strengthened, and, at the international level, enhanced mechanisms for providing cross-border liquidity are vital.
On macroeconomic policies, the papers suggest dealing with the build-up of systemic risk through pre-emptive policy responses, including to large imbalances and capital flows.
The fund’s lending framework – instruments, conditionality, and financial terms – is also being reviewed to make sure it meets members’ needs. The IMF will aim to ensure that its resources are adequate to meet financing needs from the crisis as it unfolds.
The IMF report says that the seeds of the crisis were sown during the years of high growth and low interest rates. That bred excessive risk-taking and spawned a range of failures in market discipline, financial regulation, macroeconomic policies and global oversight.