IMF Questions Regulators On Big Banks

“Top officials at the International Monetary Fund on Tuesday challenged financial regulators imposing far-reaching reforms on the biggest banks, arguing that the global benefits of reform efforts must outweigh their costs.

Officials including José Viñals, financial counsellor and director of the IMF’s monetary and capital markets department,said in a paper that initiatives such as the Volcker rule in the U.S. and similar proposals in Europe could impose significant costs on the global economy, such as reduced liquidity in financial markets. They could also increase the risk that financial activity will migrate to institutions, sectors or jurisdictions subject to less supervision, the paper said.

The warning comes as U.S. regulators attempt to finalize various proposals, including the one named after Paul Volcker, the former Federal Reserve chairman, which bans banks from trading for their own profit and significantly restricts their investments in risky ventures such as hedge funds and private-equity firms. Another pending rule threatens to raise costs for foreign banks by ratcheting up their capital requirements.

The IMF staff paper may buttress arguments made by foreign regulators and officials who have complained about proposals they say could harm foreign banks or drive up sovereign borrowing costs because leading U.S. banks may limit their activities.

But the IMF paper stops short of fully endorsing claims made by these authorities, including those from Germany and Japan. Instead, the IMF officials said that national proposals to restructure large banks, limit their activities or heighten requirements on foreign banks may be justified if regulators are unable to effectively supervise complex financial institutions or if foreign officials refuse to rein in banks considered to be “too important to fail”….”

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