IMF says Basel III will make big banks even more "too important to fail"

From the IMF’s October 2012 Global Financial Stability Report: The Reform Agenda: An Interim Report on Progress Toward a Safer Financial System

A host of regulatory reforms are under way to make the financial system safer, and the reforms are aimed in the right direction: to make markets and institutions more transparent, less complex, and less leveraged. The chapter uses these qualities, among others, as normative benchmarks and adds value by providing new measures of financial intermediation structures and an early assessment of whether the financial system is headed in a safer direction. The same framework can be used for further evaluation when the crisis subsides. The chapter also takes stock of the host of regulatory reforms and their status with regard to implementation, and indicates where further effort is still needed. Most reforms are in the banking sector and impose higher costs to encourage banks.

The analysis in this chapter suggests some areas for further attention, including the too-importantto- fail problem, risks posed by systemically important nonbank institutions, and methods to ensure that globalization does not reverse. Regulations imply that costs will rise for certain riskier activities, and some of the largest institutions will pursue their scale economies in certain business lines to absorb the higher costs. Consequently there is a risk that in some markets large institutions will become larger still, and more concentrated, and that these few global institutions will become even more influential—thereby further entrenching the too-important-to-fail problem.

Read the full chapter here.

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