Warning on Slow Progress of Financial Reforms from IMF’s Lagarde

Progress on reforming the global financial services sector following the financial crisis is moving too slowly, according to the managing director of the International Monetary Fund (IMF), Christine Lagarde.

Speaking at the Conference on Inclusive Capitalism at the Mansion House and Guildhall in London yesterday (27 May 2014), Lagarde noted that while progress has partially been slowed down by the sheer complexity of the task, she also commented: “We must acknowledge that it also stems from fierce industry pushback, and from the fatigue that is bound to set in at this point in a long race.”

Lagarde cited the issue of ‘too-big-to-fail’ as a problem that has yet to be solved. “A recent study by IMF staff shows that these banks are still major sources of systemic risk,” said Lagarde. “Their implicit subsidy is still going strongly – amounting to about US$70bn in the US, and up to US$300bn in the Euro Area.”

As well as promoting tougher regulation and tighter supervision to tackle the too-big-to-fail problem, Lagarde also advocated greater vigor across the rest of the reform agenda. This includes better rules for nonbanks, better monitoring of shadow banks, and better safety and transparency over derivatives. “To reduce the scope for contagion, I would like to see much more progress on cross-border issues, for example, in the mutual recognition of rules for derivatives markets,” added Lagarde.

Some initiatives following the financial crisis drew praise from Lagarde, who highlighted the stronger capital and liquidity requirements in regulations from the Basel Committee. “This should make the system safer, sounder, and more service oriented,” said Lagarde.

Overall, though, the speech was generally critical of the pace of reform in the financial services sector. “While some changes in behavior are taking place, these are not deep or broad enough,” said Lagarde. “The industry still prizes short-term profit over long-term prudence, today’s bonus over tomorrow’s relationship.”

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