Lagarde urges action to transform financial sector landscape
The feedback loop between weak sovereigns and future banking sector risks has to be cut; otherwise, the impact of new rules and institutions on the flow of credit and economic growth will be limited.
Addressing an audience of financiers and policymakers at the Frankfurt Finance Summit in Germany, Lagarde suggested that five years after the beginning of the global financial crisis, reform of the financial sector had advanced, but that many of the causes of that crisis had yet to be resolved.
“I believe we are making progress,” said Lagarde, but added that while some measures had been taken, for example to raise capital, “more needs to be done.”
According to Lagarde, “balance sheet repair needs to be tackled at the same time as regulatory reform, in a mutually reinforcing manner.” She said weak banks remained a drag on growth while credit to the real economy was still being hampered.
“Many banks are still shackled by the leftover effects of the crisis,” Lagarde said.
“This is the weak link in the chain of recovery,” she added. The feedback loop between weak sovereigns and future banking sector risks has to be cut; otherwise, the impact of new rules and institutions on the flow of credit and economic growth will be limited.
The IMF head also highlighted the key regulatory issues on the reform agenda, including concerns about the delay in implementation of Basel III in major jurisdictions.
“Different rates of implementation could contribute to dilution of overall minimum standards,” she warned.
She also pointed to the threat caused by large systemic banks that, given their size, complexity, and interconnectedness, are still considered “too-important-to-fail”.
The IMF chief proposed tackling the problem on three fronts: regulation, like systemic surcharges, intensive supervision, and frameworks for orderly failure and resolution.
“There is good progress in these areas, led by the Financial Stability Board,” she said.
Lagarde also raised concerns about national differences in the calculation of the riskiness of assets—the very basis for determining the capital needs of all banks, and the success of the new rules. The two main accounting bodies have not reached agreement on a common approach. “This is not an academic exercise,” Lagarde stressed.
Progress on over-the-counter derivatives has also been disappointing. “We all agree that wider use of clearing houses will raise transparency, and make the system safer, but no authorities have met the deadlines to implement reforms. Recent scandals point to the daunting complexity of assessing risks in big institutions,” she said.
Banking union in Europe
Lagarde recognized the key steps taken so far toward a banking union in Europe, which she described as aiming at a “single supervisory and regulatory framework, a single resolution mechanism and resolution authority, and a common safety net that includes deposit insurance, and lender of last resort capabilities.”
She pointed to the agreement on the Single Supervisory Mechanism and proposals by the European Community to harmonize regulations on capital as examples of considerable progress toward a banking union.
But, she also stressed the need for policymakers to “plow ahead with their ‘to do list.’” This includes implementing the common resolution and safety nets with a coherent, credible backstop, and the swift adoption of various directives such as the Basel III agreement on capital adequacy.
Full embrace of this union-wide architecture is needed to ensure durable financial stability, but also to sustain the currency union and the single market for financial services in Europe.
“Our job today, as policymakers and regulators, is to bring about change in a more effective, permanent manner, in a way that brings about a robust set of banks and also reduces the frequency and severity of systemic busts,” she added.
India Infoline Research Team / 08:44, Jun 26, 2015
IIFL is hosting 10 companies at a Management Roadshow in Mumbai today. The opening is a subdued start. US market saw minor losses with Dow, S&P 500 and Nasdaq closing marginally lower.