IMF warns of worsening stock market crash

Capital markets are like the engines that help support the world economy. To better measure progress in market regulation reforms and the necessary incremental gains, the IMF has in recent research examined the Fund’s Financial Sector Assessment Programs in a number of countries over the past seven years.

These regular reviews have identified risks, vulnerabilities and arrangements for market surveillance and crisis management, focusing on safety nets to manage any potential failures of large companies.

It also looked at the flexibility of central counterparties and entities acting as buyer-to-seller and seller-to-buyer, to ensure that the execution of open contracts that grew under derivatives reforms was adequately organized.

Rapid growth of financial services companies

One of the main reasons why the IMF has seen the need for greater reform, even after the significant progress that has emerged in recent years, is that it has been accompanied by the rapid growth of financial services companies that do not have banking licenses or take deposits , as e.g. as insurance companies, mutual funds and exchanges.

Available data indicate the growth of non-bank financial intermediation, as it is known, to represent almost half of the assets of the global financial system, and thus play a much larger role in the global economy.

Regulators need to better ensure that vulnerabilities and business models do not amplify future shocks to markets and financial stability, and when applied to the asset management sector, a key priority is to expand the range of liquidity management tools available to investment fund managers.

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Another priority for regulators is to strengthen financial safety nets and crisis management arrangements, while the third priority is to strengthen early warning capabilities through improved stress testing instruments and capabilities.

The IMF has stated that such issues are a challenge in themselves, but that security regulators should not be limited to implementing the capital market reform agenda that followed the global financial crisis, and instead should also develop and expand their priorities in compliance with the financial systems. in which they protect it.

This is especially true in capital markets, where cyber resilience, fintech and climate change are major emerging issues, and trading venues are central to cyber security, as both supervisors and market participants seek to improve their technological and operational flexibility to address potential disruptions in Fintech also risks crypto risks. assets and decentralized financing.

The IMF stressed that regulators need to be vigilant amid the shift away from benchmarks, such as the London Interbank Offered Rate (LIBOR), to new references to interest rate swaps and other major financial contracts.

Finally, the impact of climate change should be appropriately reflected in the financial statements, calendars and source disclosures on which investors rely.

New reviews reveal shortcomings

One of the top priorities, highlighted by the broad program of future work, is to ensure that the environment for financial regulation is appropriate to cover all relevant actors, activities and tools, and the IMF’s assessment of the financial sector continues to show significant shortcomings despite all the progress made since The onset of the global financial crisis a decade and a half ago.

The Fund has stated that some countries have regulatory loopholes for asset management firms, and also that policymakers need to look more explicitly at what derivatives should be regulated as part of efforts to manage risks of commodities, climate, emissions and other carbon-related instruments.

This set of challenges raises concerns, given the insufficient resources available to supervisors, even in some of the world’s largest and most developed markets, as confirmed by IMF financial sector assessments. Post-crisis reforms have included a significant expansion of the regulatory environment and raising expectations of the oversight needed to assess and mitigate risks, but security regulators have rarely seen a proportionate increase in resources.

The IMF has revealed that emerging challenges such as new market technology and a growing regulatory environment make it important for regulators to have a wider range of specialized expertise and ensure that their oversight techniques keep pace, but at the same time exacerbate stressed resources in some jurisdictions. due to the lack of operational independence of the authorities, This limits their ability to effectively monitor and respond to risks. Therefore, everyone must continue to make further progress in these key aspects of the institutional and regulatory framework on which the capital markets are based in order to prevent the aggravation of their collapse crisis.

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