IMF chief presses for global action - The Nation

Financial crisis

The Nation October 26, 2012 3:53 pm

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In her address to Canadian International Council in Toronto on October 25, Lagarde said that as a start, the world needs a concrete progress with the too-important-to-fail conundrum.

"We need a global level discussion of the pros and cons of direct restrictions on business models. For example, the Volcker Rule in the US, the Vickers Commission proposals in the UK, and the Liikanen Report on the EU banking system will have important effects beyond their jurisdictions. Here a global perspective is sorely needed," she said.

The globe also needs further progress on recovery and resolution planning for large institutions, especially cross-border resolution. Much work is underway to develop the tools to intervene in distressed institutions, but compliance and assessment on an international scale is also necessary.

She also stressed the necessary regulations of "shadow banking", the operations of nonbank institutions which operate outside regulatory perimeter. She also urged for reform in the derivatives markets so that transactions become truly "over the counter"; the implementation of principles for compensation; and implementation of the Basle Committee's principles for effective banking supervision.

"Even the best rules are of no value if not implemented and well supervised," she said.

She admitted that reforms should come at a cost. The IMF?s study showed that the costs of regulatory reform could result in about an increase in borrowing costs by one quarter of one percentage point in the US, and lower elsewhere. This is against the backdrop that after six years of crisis, over 200 million people around the world are out of work.

"Some estimates put GDP in the US and Europe at about 10-15 percent lower than what it would otherwise have been. Not sure about you, but I would say that the return is well worth the investment."

She noted that commitment and actions are necessary "because, to date, policies in the major advanced economies have not been sufficient to rebuild confidence, and the world's financial system is still not functioning well."

"For now though, the financial sector - the source of this crisis - is holding down the recovery in key parts of the global economy. Considering the staggering economic and human costs over the past six years, we must do whatever it takes to make sure this does not happen again," she said.

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