This spring the IMF has published several reports on financial regulation, but little practical reform has been accomplished. In late May, the Fund’s managing director Christine Lagarde said: “A big gap is that the too-big-to-fail problem has not yet been solved. A recent study by IMF staff shows that these banks are still major sources of systemic risk.” However, the Fund has ignored demands for deeper changes in financial systems (see Update 82).
The late March Global Financial Stability Report (GFSR), an IMF multilateral surveillance output (see Observer Summer 2014), estimated the implicit government subsidies given to the largest banks in 2012. The Fund analysis found it highest in the eurozone (up to $300 billion), followed by Japan and the UK (up to $110 billion each) and lower in the US due to tightened regulations (up to $70 billion). It concluded that “the expected probability that [systemically important banks] will be bailed out remains high in all regions”. The GFSR argued for greater international cooperation, because “solo initiatives, even though individually justifiable, could add unnecessary complexity to the regulation and consolidated supervision of large cross-border institutions and encourage new forms of regulatory arbitrage.” It also expressed a preference for regulators to enhance capital requirements and implement financial stability taxes based on banks’ liabilities (see Update 71).
In early May, the IMF published a staff discussion note on bank size, which does not represent the IMF’s official view. It argued that governments need to implement stronger systemic regulation because “traditional bank regulation, which focusses on individual bank risk, may be insufficient for large banks.” While the staff paper found that “some banks operate at a scale that is too large from a social welfare perspective”, the Fund has not argued for structural reforms for banks, such as limits on bank size or scope.
structural reform of banks is the most important among the various measures proposedGreg Ford, Finance Watch
“The size and interconnectedness of too-big-to-fail banks is a serious challenge”, said Greg Ford of Brussels-based NGO Finance Watch. “That is why structural reform of banks is the most important among the various measures proposed to tackle too-big-to-fail, as it can tackle the problem at source: the separation of trading from credit would reduce the funding subsidies that help banks become too big and too interconnected to fail in the first place.”
Marcus Stanley of US-based NGO Americans for Financial Reform agreed, noting that in the US the IMF “do[es] not really have a direct impact on regulatory decision-making”. He concluded “the large universal banking model has become central to globalised financial markets over the past two decades and apparently regulators see it as easier to increase loss absorbency within that model than to change the model more fundamentally.”