The IMF calls for regulations in the non-bank financial sector to prevent turmoil

WASHINGTON (Armfalcon.com) – The non-bank financial sector now accounts for half of the assets of the entire world financial system and must be more tightly regulated to protect its stability, staff economists from the International Monetary Fund (IMF) said Tuesday (4/4/2023).

The research release comes a week before the IMF and World Bank hold semiannual meetings of central bankers and finance ministers in Washington, amid the fallout from last month’s failures of American and European banks.

In the years since the Wall Street crash in 2008, governments have boosted economic growth by keeping interest rates low while increasing oversight of traditional banks.

According to the IMF paper, this has pushed trillions of dollars of financial assets into the hands of hedge funds, insurance companies, pension plans and others outside the banking sector who may make risky investments for profit but with less protection and less publicly available data available. needed for supervision.

“Policy makers need the right tools to deal with volatility” among non-bank financial intermediaries, a senior IMF official said in a blog post released simultaneously. “Strong oversight, regulation and oversight is an important prerequisite.”

The authors, Fabio Natalucci, Antonio Garcia Pascual and Thomas Piontek, point specifically to last year’s bond crisis in Britain, when an ill-fated government stimulus plan set off a vicious cycle.

An increase in government borrowing pushed up bond yields, causing huge losses for pension funds with fixed income investments, which resulted margin calls that forced funds to sell and pushed yields higher – until the UK central bank stepped in.

In times of high inflation, market pressures like these can leave central banks facing a difficult choice between contradictory objectives: on the one hand needing to tighten monetary policy to keep prices under control, while on the other hand feeling pressure to stabilize failing institutions or markets by cash injection, according to the research paper.

As a result, nonbank financial intermediaries “need to be regulated and supervised from multiple angles”, he said, including with data disclosure and governance requirements to manage risk and rules for capital and liquidity management.

Central banks may still be facing a crisis, but their interventions must be temporary, target specific areas that pose the greatest threat, provide access to special lending facilities or act as lender of last resort under strict conditions with close scrutiny from regulators, the IMF paper said.

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Translator: Apep Suhendar
Editor: Click Dewanto
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