Posted on July 5, 2010 by iMFdirect
By José Viñals
Financial system reform has reached a critical point around the world. Pressure is building from the financial industry to slow reform and concerns about fiscal conditions risk drawing public and political energies away from the need to act on financial sector problems. Fortunately, the Group of Twenty (G-20) reaffirmed its commitment at a summit in Toronto on June 26-27 to a comprehensive reform agenda—and we must seize the moment.
Filed under: Advanced Economies, Economic Crisis, Financial Crisis, Financial regulation, Globalization, IMF, International Monetary Fund, Multilateral Cooperation | Tagged: financial reform, financial sector regulation, Financial Stability Board, FSB, G-20, nonbanks, Toronto summit, World Bank | 5 Comments »
Posted on December 8, 2009 by iMFdirect
By José Viñals
Over the past two years, disruptive failures, shotgun marriages, and government bailouts of some household names in the financial industry have placed the age-old issue of “too big to fail” at the center of financial sector policy discussions. As well, the Lehman bankruptcy and government support for AIG extended the “too-big-to-fail” notion from banks to include nonbank financial institutions. And in some cases, the financial institutions in distress were not even particularly big; rather, they were too interconnected, and too important for the functioning of the global financial system, to be allowed to fail.
We need to think about how to deal with such “too-important-to-fail” institutions for at least three reasons.
- When institutions are provided with implicit (and explicit) public support, they are apt to take on riskier activities than they otherwise would, with the knowledge that the government will step in if those risks turn out badly. This is called moral hazard.
- Well-run institutions are forced to compete with institutions that are implicitly guaranteed—or even directly financially supported—by the government. This makes for an unlevel playing field in the financial sector.
- Government support absorbs valuable public resources, arguably at the expense of more equitable and productive public spending; it could also endanger the fiscal stability of a country.
Filed under: Economic Crisis, Financial Crisis, Financial regulation, recession | Tagged: AIG, capital requirements, financial sector supervision, Financial Stability Board, G-20, José Viñals, risk | 1 Comment »