Western governments have put in place banking regulations that could be "mutually destructive" and undermine efforts to prevent bust banks from costing taxpayers billions of pounds, according to a report by the International Monetary Fund.
Policymakers representing the world's biggest financial centres have failed to make the banking sector stand on its own feet by ending implicit subsidies and co-ordinating rescue plans when multinational banks go bust, the Washington-based lender of last resort said.
In a hard-hitting report, it accused policymakers of falling short in their efforts to protect taxpayers from banks that are still too big to fail.
Subsidies to the banking sector in some countries are as high as they were before the crash, amounting to $590bn (£355bn), with the eurozone the worst affected.
The IMF praised efforts to make banks more secure, particularly by forcing them to hold more capital and through rules that restrict them from making risky loans. It said the US had limited its implicit subsidy to the banking sector to $70bn (£42bn) at most.
A week before vital meetings of G20 ministers in Washington, it said efforts such as the Dodd-Frank Act in the US and the Vickers report in the UK limited the scope for banks to embark on reckless lending and then need a taxpayers' bailout if they went bust.
But in its Global Financial Stability Report, the IMF said the impact of a bank crash would still be severe and could destabilise the international financial system. It said the implicit subsidy for banks in the eurozone could be as much as $300bn (£181bn).
It said Basel III rules that force banks to hold more capital should be implemented alongside more co-ordination of international rules. "In areas such as the implementation of resolution frameworks or structural reforms, countries have adopted policies without much co-ordination.
These solo initiatives, even though individually justifiable, could add unnecessary complexity to the regulation and consolidated supervision of large cross-border institutions and encourage new forms of regulatory arbitrage," it said.
"In the case of resolving cross-border banks, local initiatives may well end up being mutually destructive. For example, attempts to ringfence the assets of failed internationally active banks are considered a factor behind the increasing financial fragmentation in Europe."
France, Spain and Canada have seen a series of rescue mergers since 2008 that have left more than 60% of bank assets in the hands of three mega-banks. In a warning shot, the IMF said the distress or failure of one bank could bring down a country's entire financial system.
Nevertheless, it warned there were costs to reducing the size of systemically important banks, as many MPs in the UK have proposed. Other methods of reducing the impact on taxpayers were likely to give a more clear-cut benefit, it said, including greater co-ordination of existing rules.
The report is likely to strengthen the hand of the Financial Stability Board (FSB) as it seeks to broker a deal over new global banking standards this year.
Given the role by the G20, the FSB wants to establish commonly agreed rules for dealing with banks that could suffer the same fate as Lehman Brothers and jeopardise the financial system.
FSB head Mark Carney, who is also the Bank of England's governor, has met resistance from several banks, especially in the US.
Carney is expected to press ahead with plans to bring greater co-ordination to bank regulation, though the European Union has yet to complete its banking union and investor groups remain fearful that banks will play one regulator off against another in the event of an impending bankruptcy.
The FSB is concerned that investors will pull the plug on banks that look vulnerable to having their assets in effect seized in some jurisdictions and not others.
heguardian.com
Policymakers representing the world's biggest financial centres have failed to make the banking sector stand on its own feet by ending implicit subsidies and co-ordinating rescue plans when multinational banks go bust, the Washington-based lender of last resort said.
In a hard-hitting report, it accused policymakers of falling short in their efforts to protect taxpayers from banks that are still too big to fail.
Subsidies to the banking sector in some countries are as high as they were before the crash, amounting to $590bn (£355bn), with the eurozone the worst affected.
The IMF praised efforts to make banks more secure, particularly by forcing them to hold more capital and through rules that restrict them from making risky loans. It said the US had limited its implicit subsidy to the banking sector to $70bn (£42bn) at most.
A week before vital meetings of G20 ministers in Washington, it said efforts such as the Dodd-Frank Act in the US and the Vickers report in the UK limited the scope for banks to embark on reckless lending and then need a taxpayers' bailout if they went bust.
But in its Global Financial Stability Report, the IMF said the impact of a bank crash would still be severe and could destabilise the international financial system. It said the implicit subsidy for banks in the eurozone could be as much as $300bn (£181bn).
It said Basel III rules that force banks to hold more capital should be implemented alongside more co-ordination of international rules. "In areas such as the implementation of resolution frameworks or structural reforms, countries have adopted policies without much co-ordination.
These solo initiatives, even though individually justifiable, could add unnecessary complexity to the regulation and consolidated supervision of large cross-border institutions and encourage new forms of regulatory arbitrage," it said.
"In the case of resolving cross-border banks, local initiatives may well end up being mutually destructive. For example, attempts to ringfence the assets of failed internationally active banks are considered a factor behind the increasing financial fragmentation in Europe."
France, Spain and Canada have seen a series of rescue mergers since 2008 that have left more than 60% of bank assets in the hands of three mega-banks. In a warning shot, the IMF said the distress or failure of one bank could bring down a country's entire financial system.
Nevertheless, it warned there were costs to reducing the size of systemically important banks, as many MPs in the UK have proposed. Other methods of reducing the impact on taxpayers were likely to give a more clear-cut benefit, it said, including greater co-ordination of existing rules.
The report is likely to strengthen the hand of the Financial Stability Board (FSB) as it seeks to broker a deal over new global banking standards this year.
Given the role by the G20, the FSB wants to establish commonly agreed rules for dealing with banks that could suffer the same fate as Lehman Brothers and jeopardise the financial system.
FSB head Mark Carney, who is also the Bank of England's governor, has met resistance from several banks, especially in the US.
Carney is expected to press ahead with plans to bring greater co-ordination to bank regulation, though the European Union has yet to complete its banking union and investor groups remain fearful that banks will play one regulator off against another in the event of an impending bankruptcy.
The FSB is concerned that investors will pull the plug on banks that look vulnerable to having their assets in effect seized in some jurisdictions and not others.
heguardian.com
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