Front Matter Page
INTERNATIONAL MONETARY FUND
Monetary and Capital Markets Department
Redesigning the Contours of the Future Financial System
Prepared by Laura Kodres and Aditya Narain
Authorized for distribution by José Viñals
August 16, 2010
DISCLAIMER: The views expressed herein are those of the author(s) and should not be attributed to the IMF, its Executive Board, or its management.
Authors’ E-mail Addresses: lkodres@imf.org, anarain@imf.org
Contents
Executive Summary
I. Introduction
II. What Went Wrong
III. Principal (and Principled) Changes to the Regulatory Environment
IV. The Future of the Financial System: Action and Reaction to the Crisis and Regulatory Reforms
V. The Role of the IMF
VI. Concluding Remarks
Executive Summary
This paper explores the responses of the private and public sector to the crisis and some of the probable outcomes. Aside from improved supervision of individual institutions, greater emphasis needs to be put on financial regulations that reflect the systemic nature of financial risks and the role that macroeconomic policies play. Global consistency of regulation and financial sector taxation will be essential to mitigate systemic risks, to avoid unintended distortions, and to help ensure a level playing field. This note suggests the key aspects of the future contours will likely be:
- Banks are expected to return to their more traditional function as stricter regulation will limit the risks and activities that banks can undertake.
- The nonbanking sector will likely have a greater competitive advantage—both in supplying credit and providing investors with nonbank services—and will thus grow.
- The perimeter of regulation is bound to expand to take into account the risks in the nonbank sector.
- Market infrastructure will be reinforced to protect investors and as a consequence will need to provide needed simplicity and transparency to make risks clearer and the financial system safer.
- The global financial system is likely to be smaller, and less levered, than in the recent past, and could well be less innovative and dynamic, at least for a while.