Washington: The International Monetary Fund (IMF) said regulators should consider imposing capital surcharges to discourage financial institutions from evolving in ways that threaten the stability of financial markets.
Capping bailouts: IMF managing director Dominique Strauss-Kahn. Haruyoshi Yamaguchi / Bloomberg
Regulators may find it necessary to weigh direct preemptive measures, including constraining the size of certain activities to limit the emergence of systemically important firms, the Washington-based IMF said on Tuesday in its bi-annual Global Financial Stability Report.
The report precedes a 23 April meeting of the Group of 20 nations in Washington, where the IMF plans to detail for finance chiefs ways that financial firms may help pay for the costs of bailouts. Since the start of the credit crisis, governments and central banks have spent more than $11 trillion to support the financial industry, according to the Paris-based Organization for Economic Cooperation and Development.
The capital surcharge would be a buffer designed to increase the resilience of the institution to sustain different shocks, Juan Sole, one of the report’s authors, told reporters in Washington.
Political momentum to overhaul financial regulations in some countries may be weakening as economic growth returns, IMF managing director Dominique Strauss-Kahn said in an interview in Kenya last month.
Parts of the financial industry have gone back to practices of risk taking, which is probably not the most appropriate to have a stable financial system at the global level, he said.
Officials from the Group of Seven nations in February pledged to cooperate in requiring financial companies to increase reserve capital. That still allows regulators room to pursue individual policies, they said.
The fund said in the report that it is not necessarily endorsing the adoption of systemic-based capital surcharges.
The IMF detailed two methods for determining a surcharge. Under a risk-budgeting approach, an institution would be assessed based on its marginal contribution to systemic risk and its own probability of distress.
Alternatively, regulators could assign a risk rating based on the amount of system-wide capital impairment that a hypothetical default of each institution would bring to bear on the financial system. Institutions with the highest rating would incur the highest surcharge.
The IMF also looked at whether setting capital controls is a sound response to a surge in global liquidity and capital inflows. Such measures, if interest rate reductions or a more flexible exchange rate policy are insufficient, may have a role in complementing the policy toolkit, the IMF said, echoing a study released in February.