IMF mulls a global banking ringfence

Tim Wallace
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INCOMING regulations are not managing to end the “too big to fail” problem, and could even be giving the world’s largest banks an even more dominant position, an International Monetary Fund (IMF) report warned yesterday.

It also said that raising capital requirements against risky activities may be insufficient to have the impact regulators are looking for, calling for global authorities to consider more direct action – for example by ring-fencing retail and investment banking operations.

The high cost of regulations aid bigger banks, the report found, as they can absorb the costs better than smaller institutions, strengthening their market position.

And the IMF noted that higher costs are reducing returns to investors, driving banks to undertake riskier activities in an effort to boost profits – the opposite of the result regulators hoped for.

As a result, the IMF believes there is “a need for a global-level discussion on the pros and cons for direct restrictions on certain business activities for banks, rather than just requiring them to hold more capital for these activities.”

The aim is to “reduce systemic risk by prohibiting deposit-funded banks from engaging in certain investment banking businesses that are deemed to be too risky.”

The only examples of this are the US Volcker Rule, and the proposed ring-fence in the UK – something which the IMF hopes will be considered more widely.