A Tale of Titans: The Too Important to Fail Conundrum


By Aditya Narain and İnci Ötker-Robe

Folklore is riddled with tales of a lone actor undoing a titan: David and Goliath; Heracles and Atlas; Jack and the Beanstalk, to name a few.

Financial institutions seen as too important to fail have become even larger and more complex since the global crisis. We need look no further than the example of investment bank Lehman Brothers to understand how one financial institution’s failure can threaten the global financial system and create devastating effects to economies around the world. Continue reading

Macroprudential Policy—Filling the Black Hole


By José Viñals

When the global financial system was thrown into crisis, many policymakers were shocked to discover a gaping hole in their policy toolkit.

They have since made significant progress in developing macroprudential policy measures aimed at containing system-wide risks in the financial sector. Yet progress has been uneven. Greater efforts are needed to transform this policy patchwork into an effective crisis-prevention toolkit. 

Given the enormous economic and human cost of the recent financial debacle, I strongly believe that we cannot afford to miss this opportunity for substantial reform. Continue reading

No End in Sight: Early Lessons on Crisis Management


By Stijn Claessens and Ceyla Pazarbasioglu

(Version in Español)

Crises are like stories; they have a beginning, middle, and an end, and on occasion, we learn something along the way.

In times of crisis, choices must be made. In the most recent global economic crisis policymakers moved quickly to stabilize the system, providing massive financial support, which is the right response in the beginning of any crisis. But that only treated the symptoms of the global financial meltdown, and now a rare opportunity is being thrown away to tackle the underlying causes.

Without restructuring financial institutions’ balance sheets and their operations, as well as their assets ‒ loans to over-indebted households and enterprises ‒ the economic recovery will suffer, and the seeds will be sown for the next crisis. Continue reading

Macro-Prudential Policies: Putting the “Big Picture” into Financial Sector Regulation


By John Lipsky

The devastating impact of the global financial crisis created a consensus that pre-crisis financial regulation didn’t take the “big picture” of the system as a whole sufficiently into account and, as a result, supervisors in many markets “missed the forest for the trees.” In other words, they did not take into account the macro-prudential aspects of regulation, which has now become the focus of many authorities.

Consensus regarding the need for macro-prudential regulation is particularly striking—previously this type of regulation had been used relatively little and, at present, there are no agreed standards that can be applied internationallyContinue reading

Toto, we’re not in Kansas anymore: Exploring the Contours of the Financial System After the Tornado


By Laura Kodres

Just as a tornado in Kansas transplanted Dorothy and, her dog, Toto, from familiar comforts to the unknown land of Oz, the global crisis has led many to wonder what has become of the global financial system and, more importantly, what will it look like next. Is the wicked witch of the West—excessive risk taking and leverage—really dead?

But now, as the storm subsides, there is time to speculate about what the future financial sector might look like. My IMF colleague, Aditya Narain, and I have done just that in a new Staff Position Note that attempts to discern the contours of this new financial landscape. What is clear is that the new landscape will be influenced by both the private and public sectors—their reactions to the crisis and to each other.

Continue reading

Going Beyond the Rules


By José Viñals

Some countries with similar financial and regulatory systems fared differently during this crisis. What are the reasons for this? And what made some financial institutions with similar business models, and in the same country, better equipped to deal with the virulence of the crisis? To find the answers, we need to ask the following question: How well did the four key components of a sound financial system―good regulation, effective supervision, robust risk management, and credible resolution mechanisms―perform?

A lot of attention has been paid to improving regulation, the first key component. Sweeping changes are being proposed through new and enhanced rules of the game, such as higher capital, loan loss provisions, liquidity buffers, and limits on executive compensation. I believe that corresponding changes are also needed in the other three components if a crisis of this magnitude is to be avoided in the future.

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