Unfinished financial reforms are hampering recovery in key parts of the global economy and weighing on economic growth, the head of the International Monetary Fund warned on Thursday.
In a speech in Toronto, IMF Managing Director Christine Lagarde urged world leaders to “do whatever it takes” to rebuild the world’s financial system, which is still recovering from the 2007-2009 financial crisis and has been further weakened by the euro zone debt crisis.
The global financial crisis prompted an overhaul of regulation in almost every part of the financial system from over-the-counter derivatives to bank capital requirements.
But Lagarde said the global financial system was still not functioning well and there were powerful industry groups working against the implementation of the new rules.
“There are many vested interests working against change and push-back is intensifying,” Lagarde told the Canadian International Council, according to prepared remarks.
“It is interesting how some banks say the new regulations will be too burdensome, but then spend hundreds of millions of dollars lobbying to kill them,” she added.
Lagarde said progress was needed for financial institutions that are viewed as too big to fail and she called on regulators to coordinate and align their rules.
“Most countries have committed to adopt some or all of the new regulations, and some have moved further ahead with their own national policies,” she said. “The challenge now is to proceed to the end of the reform path all together.”
Bank of Canada Governor Mark Carney said it was time to end the too-big-to-fail problem, “so that the shareholders, bondholders and management bear the consequences of the financial system’s mistakes rather than the taxpayers.”
Carney was referring to a situation where a bank becomes so big that it is too costly to let it fail, requiring a government financial bailout.
Lagarde said later about 75 percent of needed financial reforms had been agreed on by countries but not implemented. An initial enthusiastic drive by regulators to strengthen the financial system had now faded, she added.
“What is of most concern to me is the general fatigue” that has set in, she said. “If you ask me how much has been done, I’d say a good 75 percent of the reform work has actually been prepared and done, and you are in this 25 percent last push.”
Lagarde welcomed recent calls by euro zone leaders to build a new system of bank supervision led by the European Central Bank, as a step toward a banking union where euro zone countries would back problem lenders.
She said moving toward a banking union was a necessary step for the troubled 17-nation currency bloc.
“We look forward to more details about the scope of this new supervisor and to more news about direct bank recapitalization,” Lagarde said.