Financial sector risks remain

26 June 2013

A May IMF staff discussion note evaluated international efforts to address gaps in regulation of “a relatively small number of large, complex financial institutions” which remain “very difficult to regulate, supervise and resolve”. The note argues that these institutions that are “too important to fail, pose a risk to the financial system as a whole”. Assessing recent structural reform proposals in the US, UK, EU, France and Germany, the paper found that structural reforms to address financial instability due to the excessive risk taking of large cross-border financial institutions have yet to be implemented. The Bank and Fund have not consistently acknowledged these risks (see Update 82). A March IMF working paper, which sought to assess the optimal level of financial sector development in developing countries, found that there is a threshold of development beyond which risks of financial crisis increase. The paper found that overshooting of the financial system significantly beyond levels appropriate to structural fundamentals is associated with credit booms and busts.