IMF raises alarm on capital flows. "risk that the “Basel III” capital accords, which set minimum capital cushions for banks to hold, would be implemented in an inconsistent fashion that would encourage financial institutions to relocate to a more lax jurisdiction – so-called “regulatory arbitrage "
IMF raises alarm on capital flows.
By Alan Beattie in Washington
National financial regulators should keep a closer watch on banks to prevent cross-border capital flows spreading instability abroad, according to a study by the International Monetary Fund.
In the latest study of global capital flows, the IMF said that governments had so far not done enough to prevent a repeat of the cross-border contagion that fuelled the global financial crisis.
“National policies have the potential to influence the riskiness of capital flows in a way that can contribute to instability in other countries, or even the global economy,” a policy paper by IMF staff concluded. Banks and financial institutions in rich countries lent too much to emerging market nations during the boom years, while the US exported financial instability to Europe through selling overpriced mortgage-backed assets.
But the IMF staff reiterated their view that super-loose monetary policy in advanced economies, such as the quantitative easing strategy followed by the US Federal Reserve, had not played a significant role in creating destabilising international capital flows.
The IMF report said there was a risk that the “Basel III” capital accords, which set minimum capital cushions for banks to hold, would be implemented in an inconsistent fashion that would encourage financial institutions to relocate to a more lax jurisdiction – so-called “regulatory arbitrage”.
Recent draft legislation from the European Commission that translated Basel III into rules for EU financial institutions “is in certain areas less prescriptive/ambitious than the Basel III framework,” the IMF report said. “This could trigger a ‘race to the bottom’ in Basel III implementation, or else risky activities could shift to less well-regulated jurisdictions”.
The UK government has clashed with Michel Barnier, the EU internal market commissioner with responsibility for bank regulation issues, who proposed a law limiting the amount of capital that national regulators could demand their banks hold.
The IMF also said that authorities needed to do more to bring the so-called “shadow banking” sector – including institutions such as insurance companies that in effect act as financial intermediaries – inside the scope of regulation.
The fund’s staff views on monetary policy and capital flows have disappointed officials in countries such as Brazil, who have complained that investors have destabilised the Brazilian economy by borrowing very cheaply in dollars and then making short-term investments in Brazil, pushing up the currency and threatening financial instability.
Brazil and other emerging market countries have experimented with controls on capital to dampen such speculative flows. The IMF has shifted position on such measures and given them a cautious seal of approval, but warned their extensive use could have unfortunate international implications. |
