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Conceiving the Contours of A New Financial System

19 Aug 2010

Shane Fitzgerald

 

A new Staff Position Note[1] from the IMF surveys the international policy response to the financial crisis and attempts to discern the future contours of the global financial system.
 
It argues that two very different regulatory scenarios are possible in the months ahead:
 
  • First, having skirted systemic collapses, in part due to the rapid deployment of new government facilities and other support mechanisms, and facing strong resistance from the private sector to new regulation and at least a temporary recovery of profits, the official community allows complacency to set in and the difficult reform agenda is allowed to languish. 

 

  • Second, that the crisis has been so devastating and generated such a public backlash that every public body wants to be seen as responding vigorously. However, action on numerous fronts by the various public entities could result in over-regulation to a degree that certain markets may simply disappear and valuable financial innovations and products are blocked.
 
The authors acknowledge that there are a multitude of possibilities between these two extremes and encourage policymakers to think carefully about how to achieve a ‘goldilocks’ or ‘just-right’ approach.
 
They then try to sketch the future outlines of the system by asking, in the context of what we already know about reform efforts, simple questions such as: 
 
  • Will the global financial system be safer and simpler?
  • What will be the role of banks versus nonbanks?
  •  Will the financial system be smaller as a proportion of the economy?
  • At the global level, will financial expansion and integration continue?
 
The report concludes that in the future there “will likely be a simpler, safer, higher-cost financial system with perhaps slower, but more stable growth and fewer crises—assuming financial regulation and supervision are effectively reformed.”
 
This is of course no small assumption. As the political infighting, lobbying and spin surrounding European financial reform resumes in the next couple of weeks (the first Ecofin summit of the season will take place on 7 September), we would do well to think carefully about what the contours of the future system should be, and to ask such clear and clarifying questions of our representatives.
 


[1] Kodres, Laura & Narain, Aditya (2010). “Redesigning the Contours of the Future Financial System”. IMF Staff Position Note, 16 August 2010. Page 4. Accessed at: www.imf.org/external/pubs/ft/spn/2010/spn1010.pdf  



As an independent forum, the Institute does not express any opinions of its own. The views expressed in the article are the sole responsibility of the author.


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