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

Even Bigger

The financial crisis has resulted in even bigger and more interconnected banking groups and financial institutions, the IMF said.

“The officially inspired mergers, the nationalization of banks, and the extension of government underwritten guarantees that have been part of crisis management strategies all further instill the notion that some banks are too important to fail, potentially undermining the credibility of bail-ins,” the IMF said. “These interventions could result in more concentration, rather than less.”

The IMF said new capital rules from the Basel Committee on Banking Supervision should “enable institutions to better withstand distress” while possibly also resulting in unintended responses, such as pushing certain activities to the nonbank sector where those standards don’t apply.


The IMF cautioned that main elements of financial reform have not yet been implemented. As of September 4, 131 Dodd-Frank rules have been finalized while 132 requirements have not yet been proposed by regulators, according to a Davis Polk & Wardwell LLP progress report on the law.

“Some crucial elements of the reform are yet to be finalized, and many have not yet been implemented,” the IMF said in its report. “This leaves open the possibility of differences in their implementation or application, particularly as they trickle down from the international to the national level.”

European Union leaders in June called for a new banking supervisory system and underlined urgency in setting up the new system. In a speech yesterday, IMF Managing Director Christine Lagarde urged European policy makers to implement their plans to form a banking union.

‘Vicious Cycle’

“We have advocated this for some time,” Lagarde said. “We continue to believe it should be initiated as soon as possible -- to break the vicious cycle between banks and sovereigns.”

Also, the IMF said evaluating the impact of these reforms is “challenging because the reforms are in process, the crisis is still not over, and crisis management policies are ongoing in some regions.”

In a separate report, the IMF said there are “trade-offs” between the benefits of financial reform on growth and stability. In the report, the IMF studied the relationships of financial structures from 1998 to 2010.

“On the positive side, protective financial buffers within banks have been associated with better economic outcomes,” the IMF said in its report. “On the negative side, a domestic financial system that is dominated by some types of nontraditional bank intermediation has in some cases been associated with adverse economic outcomes.”

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