The changes brought about by financial globalization in cross-border capital flows, financial institutions, and financial markets have been mainly positive, according to Jaime Caruana, Director of the IMF’s Monetary and Capital Markets Department. But these opportunities are not without risks, he told the Heinrich Boll Foundation and the Association of German Banks in Berlin on May 30. All participants in the financial system—households, financial institutions, regulators, and the IMF—have roles and responsibilities to ensure that threats to the system from globalization are minimized and benefits widely shared.
Households, in the main, have benefited from increased access to credit at lower cost and more investment options, but they are increasingly exposed to market risks that had been borne by companies or governments. Responsibilities for retirement, health care, higher education, and long-term old-age care are being shifted back to households in many countries. But households often lack the basic knowledge and skills they need to make wise investment and financial decisions.
Caruana said that governments, regulators, and the private sector all have a role to play to help increase the financial literacy of households, which in turn should provide incentives for the financial industry to be competitive. Governments should offer financial education in schools and make counseling available to low-income groups. The private sector should understand their customers and provide appropriate products as providers and good-value savings plans as employers. Regulators can promote transparent products that are appropriate for all investors, Caruana said.
Financial institutions can contribute to financial stability by “increasing the soundness of their risk management systems to match the growing complexity of domestic and international financial markets, to help ensure that their actions do not have a negative impact on other participants in global financial markets.” In turn, Caruana said, financial market participants “have a responsibility to impose greater market discipline on financial institutions by rewarding those that have better risk management systems and disclosure practices, and punishing those where such systems are weak.” To achieve that dis-cipline will require meaningful disclosure without overburdening financial institutions.
National authorities and regulators have two sets of responsibilities, he said. “First, they need to have in place a risk-based regulatory and supervisory framework that ensures the key financial institutions in their jurisdiction are well managed, with adequate capital buffers and risk management systems in place.”
They also must ensure that the information they require from and provide about regulated institutions “is sufficient for market discipline to be effective.” To ensure financial stability, two key elements are essential: greater cooperation among supervisors, and good transparency and dialogue with the private sector. National authorities and regulators also have to be prepared for crises, and consider the potential international impact of their policies. That is especially true in Europe, Caruana said, because of the increasing integration of financial markets and growing cross-border banking there. But, because of the common framework of regulation in Europe, the continent can also be ambitious and set an example of “good practices for coordination and cooperation for other countries and regions in the world.”
The IMF has a responsibility to monitor global financial stability and threats to it, as well as to advise its 185 member countries—nearly all of the world’s nations—on good economic policies and provide technical assistance and cooperation to help them develop markets and infrastructure to cope with the challenges of globalization.
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