By Anita Hawser
Reid: Imposing strict limits might impede growth
With the concept of systemic risk still preoccupying global banking regulators, the International Monetary Fund has weighed in on the debate with some suggestions for far-reaching and surprisingly stringent reforms. In its latest "Global Financial Stability Report," the IMF suggests that a levy or higher capital requirements be imposed on banks to stop them from engaging in risky business activities.
The IMF admits there are no concrete methods for preventing financial institutions becoming systemically important but says regulators need to consider direct methods for addressing systemic risks, such as risk-based capital surcharges, levies related to institutions' contributions to systemic risk, or limits on the scale of certain business activities. Richard Reid, director of research at the International Centre for Financial Regulation (ICFR), based in London, says the IMF believes levies should be considered "partly as a way of making banks pay some contribution to the costs of increased systemic risk and partly as a means of perhaps forcing them to think harder about engaging in certain types of business."
Although the IMF's report explains how risk-related capital surcharges could be implemented, it stops short of endorsing them, adding that these charges and other regulatory measures are likely to place an additional financial burden on a banking system at a time when capital is scarce. The cost of implementing them also needs to be weighed against the perceived risk benefits, the IMF adds.
Dealing with systemically important financial institutions is far from straightforward, though, says Reid. "You can have a big, relatively simple financial institution or a relatively small, complex institution, and the regulatory requirements for these may differ." He adds that imposing strict limits on a bank's size or structure could impede some aspects of financial intermediation and economic growth. "A number of countries do not see the merit in just breaking up a financial institution just because it is big; it's the risk incurred in carrying out its business which is key and also how this risk affects the rest of the financial system," Reid says.