Financial regulators need to consider breaking up big banks to make the global economy safer, the International Monetary Fund said as it blasted the authorities for letting the reform programme stall and warned that the system remains "vulnerable and overly complex".
By Philip Aldrick, Economics Editor
Banks are as risky as they were before the financial crisis and are devising new ways of gaming the rules, the IMF warned in an analytical chapter of its Global Financial Stability Report.
To build a safer system, regulators need to "refine" policy further, including "a global-level discussion on the pros and cons for direct restrictions on certain business activities for banks, rather than just requiring them to hold more capital", the IMF said.
It drew attention to the UK, where banks will have to ringfence their retail operations to protect them from investment bank risks, and the US, which has barred casino-style proprietary trading. Both plans may herald a move to formal bank break ups, it said.
While the US proposal is clear, the paper suggested Britain's less explicit requirement may also convince lenders to spin off investment banking activities. "One outcome [of ringfencing] could be that some UK banks divest trading activities given the increased capital and liquidity costs," it said.
Regulators need to consider break up plans more fully, the IMF said as it warned that "although the intentions of policymakers are clear and positive, the reforms have yet to effect a safer set of financial structures, in part because ... the intervention measures needed to deal with the prolonged crisis are delaying a ?reboot' of the system onto a safer path".
In the meantime, lenders have already begun developing "innovative products ... to circumvent some new regulations" and have started shifting business into shadow banks, where "new banking standards do not apply".
Complex new rules may also be entrenching the dominance of the big banks, as those "with advantages of scale may be better able to absorb the costs", the IMF said. "The system, in many cases, remains vulnerable, overly complex, and activities are too concentrated in large institutions."
Low interest rates may also be creating "new vulnerabilities" in the future. Some banks, notably those in the UK, are still too reliant on short-term funding - the failing that ultimately brought down Northern Rock, Royal Bank of Scotland and HBOS.
The report followed comments on Monday from IMF managing director Christine Lagarde, who said: "Worryingly, the energy to implement the reforms that have been agreed - as well as the other reforms that we need - is waning. I am often asked, five years into the crisis, whether the financial sector is safer today than it was then. My answer? ?Despite real progress, not yet.'"
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