The International Monetary Fund (IMF)on Tuesday advised regulators to consider imposing capital surcharges to discourage financial institutions from evolving in ways that threaten the stability of financial markets.
According reports from Bloomberg, â€œdirect preemptive measures,â€ including constraining the size of certain activities to limit the emergence of â€œsystemically importantâ€ firms, is necessary the Washington_based IMF said Tuesday in its bi_annual Global Financial Stability Report.
The report precedes an April 23 meeting of the Group of 20 nations in Washington, where the IMF plans to detail for finance chiefs ways that financial firms may help pay for the costs of bailouts. Since the start of the credit crisis, governments and central banks have spent more than $11 trillion to support the financial industry, according to the Paris_based Organization for Economic Cooperation and Development.
The capital surcharge would be â€œa bufferâ€ designed to increase â€œthe resiliency of the institution to sustain different shocks,â€ Juan Sole, one of the reportâ€™s authors, told reporters in Washington on Tuesday.
Political momentum to overhaul financial regulations in some countries may be weakening as economic growth returns, IMF Managing Director Dominique Strauss_Kahn said in an interview in Kenya last month.
Parts of the financial industry have gone â€œback to practices of risk taking, which is probably not the most appropriate to have a stable financial system at the global level,â€ he said.
Officials from the Group of Seven nations in February pledged to cooperate in requiring financial companies to increase reserve capital. That still allows regulators room to pursue individual policies, they said.
The fund said in the report that it is â€œnot necessarily endorsing the adoption of systemic_based capital surcharges.â€
The IMF detailed two methods for determining a surcharge. Under a â€œrisk_budgeting approach,â€ an institution would be assessed based on its â€œmarginal contribution to systemic risk and its own probability of distress.â€
Alternatively, regulators could assign a risk rating â€œbased on the amount of system_wide capital impairment that a hypothetical default of each institution would bring to bear on the financial system.â€ Institutions with the highest rating would incur the highest surcharge.
The IMF acknowledged limitations to the creation of a surcharge, including the difficulties of imposing a system worldwide and of sharing information among regulators of various countries.
â€œIn practice, it is likely that most national supervisors would regulate systemic risk exclusively within their own borders and based mostly on domestically available data,â€ the IMF said.
â€œIt is necessary to consider more direct methods to address systemic risks, such as instituting systemic_risk_based capital surcharges, applying levies that are related to institutionsâ€™ contribution to systemic risk, or perhaps even limiting the size of certain business activities,â€ the IMF said.
The IMF also looked at whether setting capital controls is a sound response to a surge in global liquidity and capital inflows. Such measures, if interest rate reductions or a more flexible exchange rate policy are insufficient, â€œmay have a role in complementing the policy toolkit,â€ the IMF said, echoing a study released in February.
â€œThere is some indication that controls can lengthen the maturity of inflows, although they do not reduce the volume of inflows, and create greater room for monetary independence,â€ the IMF said. Still, â€œthey may lead to adverse multilateral effects.â€