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New Financial Regulation and the changing IMF

Here’s the take from IMF as published ahead of its spring session, finally capitulating to the importance of Capital Controls without quitting on the development motives of Jeffery Sachs and the free markets Economists..It shows that the strength of the India and China economic models is also sinking in while of course we all already agree on letting liquidity run growth and its illusion keep the markets happy.

IMF's Dominique Strauss-Kahn Press Conference - Tokyo

The New concept of a super regulator with all the right clauses may be like using a supers opper when the snowing is still on, and though the intentions are good, they are not being achieved any times soon. However the new Fee linked to the credit risk and market risk being carried on the balance sheet may be a great idea though its value needs to increase for it to be an effective deterrent. As IMF notes, any changes in the fee should not be timed with peaks and troughs of the economic cycle otherwise they may have the effect of inordinate correction like John Paulson’s initerant hedge funds with unlimited access to confidential data and trading volumes.

But creating a “systemic risk monitoring mandate” without adding new policy tools might not end up doing much, the I.M.F. found.

“Regulators often have the incentive to keep an institution afloat, even when insolvent, because regulators strongly dislike closing institutions under their watch, especially because in some cases, given enough time, an institution may get back on its feet,” the report found.

“Therefore, in the absence of concrete methods to formally limit a financial institution’s systemic importance — regardless of how regulatory functions are allocated — regulators may tend to be more forgiving with systemically important institutions compared to those that are not.”

On the question of surcharges, the I.M.F. stopped short of endorsing them but said that, in principle, such surcharges should “be commensurate with the systemic interconnectedness of financial institutions.” And the fund warned that countries should resist the impulse to raise the charges during economic downturns and to lower them during economic booms.

The fund also elaborated on a paper it recently published suggesting that emerging economies might sometimes find it useful to impose capital controls to limit sudden and large influxes of money from foreign investors. That view is a departure from I.M.F. orthodoxy, which traditionally has held that capital should flow freely across borders.

The reports Tuesday noted that sudden capital inflows can cause inflation and asset bubbles, and found that capital controls can be useful — but mostly as a last resort.

Before considering such controls, countries should make their exchange-rate policies flexible, accumulate reserves, lower interest rates, tighten fiscal policy and reinforce financial regulation, the fund said.

One comment on “New Financial Regulation and the changing IMF

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