IMF says bank rules lag on safety while too-big-to-fail remains

New financial regulations have yet to make markets safer and financial systems are still too complex, according to an International Monetary Fund report.

In some regions, financial reform measures are delaying a “reboot” to a safer economic system, the IMF said today in Washington. Risks remain that too-big-to-fail institutions will be further entrenched and that some bank-like activities will be pushed into the shadow banking system, the IMF report said.

“The data suggest that financial systems are still overly complex, banking assets are concentrated, with strong domestic interbank linkages, and the too-important-to-fail issues are unresolved,” the Washington-based lender said in the report.

The IMF report on financial reform comes as the U.S. is still implementing its 2010 Dodd-Frank law in response to the financial crisis. In addition, the European Union is attempting to create a single supervisor by handing the European Central Bank oversight powers over banks in the euro area.

The IMF said the financial system is not safer than before the crisis due to the greater interconnectedness and role of shadow banking. The IMF said it remains particularly concerned about too-big-to fail banks.

“Overall, risks in the financial system remain,” the IMF said as part of its Global Financial Stability Report. “Of particular concern are the larger size of financial institutions, the greater concentration and domestic interconnectedness of financial systems, and the continued importance of non-banks in overall intermediation.”

More Concentrated

The IMF said there is still the risk that “in some markets large institutions will become larger still, and more concentrated, and that these few global institutions will become even more influential -- thereby further entrenching the too- important-to-fail problem.”

Today’s IMF report is more critical of regulation than a study released Sept. 11 by IMF staff which found that new financial regulations will cause a “modest” increase in the interest rates banks charge on loans in developed countries as lenders reduce costs.

Through Dodd-Frank, the U.S. is implementing “resolution authority” that spells out how and when the government can seize and wind down struggling large banks and systemic non- banks before they catastrophically fail. Euro-area leaders are attempting to establish a central regulator and a resolution mechanism for bad banks backed by common funds from member states that could reduce concerns that customers will lose money when lenders fail.

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