IMF MD sees renewed stability but remains cautious about global economic recovery, asks for continued policy actions

2. Reforming the Financial Sector

He expressed concern that the improvement in financial markets “is leading to complacency in dealing with remaining and difficult problems in the banking system.” He urged policy makers to remain focused on the crisis response agenda, which includes undertaking a comprehensive diagnosis of banking systems and launching asset-management programs to deal with banks’ bad assets.

On financial regulation, he cautioned that reforms are not proceeding as quickly as necessary. He called for increasing capital requirements and making them more sensitive to risk. He added that the operational framework for macroprudential supervision remains a “work in progress.”

With regard to financial sector compensation, he noted that a culture of risk-taking in major financial firms had been an important factor in the crisis, and he raised concerns that financial sector recovery could lead to “business as usual.” He said that the international community must “stand together to make meaningful progress in this area”.

3. Strengthening the International Monetary System

While noting that many proposals had emerged for reforming the international monetary system, he said that “the current system, despite its problems, is working better than is often said.” The U.S. dollar had actually strengthened during the crisis, which in his view “reflects the dollar’s status as an unrivaled safe haven asset.”

To make the international monetary system more stable, he emphasized that reducing countries’ demand for reserves and strengthening insurance mechanisms would be essential. The IMF could play an important role in this regard and ideas that could be explored include: making access to its funding more predictable; making Special Drawing Right allocations more responsive to global developments; and increasing the Fund’s resource base.

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