Debt burdens endanger world financial stability, IMF warns (2)

08:44, April 21, 2010      

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Regulation tools

Governments and central banks around the world came up with "a flood of regulatory reform proposals" since the most severe financial crisis in decades paralyzed the world economy. But details on many of these proposals, as IMF put it, are still lacking.

IMF argued that it is not enough to mandate that regulators " monitor" systemic connections, but that better tools would also be needed to combat systemic risks.

"Without such tools, regulators will have the tendency to be more lenient with systemic institutions in distress than others," the report said.

Regarding the introduction of systemic risk-based capital surcharges, IMF reiterated the importance of taking into account institutions' cross-border linkages, hence requiring supervisors in different countries to collaborate to design such surcharges.

IMF report stressed the importance of better regulation of financial derivatives, which is regarded by many to have triggered the crisis.

"Soundly run and regulated over-the-counter (OTC) derivative central counterparties (CCPs) will reduce counterparty risk among dealers and minimize the systemic risk associated with cascading counterparty failures," the report said.

IMF called for closer cross-border coordination of regulatory and supervisory frameworks of OTC derivatives markets to avoid regulatory arbitrage and mitigate systemic risk and adverse spillovers across countries.

"All OTC derivative transactions should be recorded and stored in regulated and supervised trade repositories, and detailed individual counterparty data should be available to all relevant regulators and supervisors," the report said.

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