International Monetary Fund Report on Financial Reform (with Lofchie Comment)

The International Monetary Fund (IMF) released Chapters 3 and 4 (we could not find the first 2 chapters) of a paper titled "Global Financial Stability Report, Restoring Confidence and Progressing on Reforms" on global systemic risk and the effects of financial regulatory reform. The IMF described the chapters as having the following purpose:

"Chapter 3 examines whether the regulatory reforms designed to make the financial system safer are moving the system in the correct direction, using a benchmark set of features that include financial institutions and markets that are more transparent, less complex, and less leveraged. The analysis suggests that progress has been limited so far, in part because many of the reforms are still in the early stages of implementation. Chapter 4 evaluates how aspects of current changes to financial structure, including those elicited from regulatory reforms, may be associated with economic outcomes."

Lofchie Comment: This paper provides a global discussion of banking systems around the world with some perspective as to how vulnerable the financial systems in various countries may be to systemic risk. The authors' perspective is so big-picture and dispassionate that it can be a little hard to tell what their opinions are on most any issue: they are generally "on the one hand, this; and on the other hand, that." That said, rabid critic of Dodd-Frank that I am, I read into the Chapters some lack of enthusiasm for the benefits to date of much of financial reform. The paper warned that Basel III rules would exacerbate the "too big to fail" problem. Basel III rules, global regulators' response to the financial crisis, may push businesses to the biggest banks. This would make it more difficult to allow the world's largest lenders to fail. The report asserts that "financial systems are still overly complex, banking assets are [too] concentrated, and that heavy regulation of banks that hurts their profitability may result in dangerous growth to the shadow banking system." While the report seems generally supportive of the notion of cleared derivatives, the report also warns that central clearing parties may become major sources of systemic risk and are themselves likely to be too big to fail.

Link here to Chapters 3 and 4 (links externally to IMF website).