The International Monetary Fund has issued a veiled warning to politicians in the United States not to roll back banking regulations that could limit the chances of a repeat of the global financial crisis.
In a study published on the eve of this week’s meetings, analysts at the Fund said that regulatory and supervisory structures put in place during the months before the onset of the crisis may have played a pre-emptive role in influencing subsequent damage.
Specifically, they said stronger restrictions in 2006 on banks’ ability to underwrite, broker and deal in securities, to offer mutual fund products, and to engage in insurance underwriting, real estate investment, development and management were associated with a lower probability of a banking crisis during 2007–08.
“Stronger banking regulation — proxied by restrictions on certain aspects of bank activity — appears to have played a preventive role by lowering the probability of a banking crisis in 2007–08,” it said in its World Economic Outlook report. “The finding is relevant for ongoing debates on rolling back the regulatory standards adopted following the crisis.”
There was an intense focus on tightening financial regulation after the crash, started by the leaders of the G20 nations, which set up the Financial Stability Board to assess vulnerabilities affecting the financial system, and identify and oversee action needed to address them.
Since then reforms have included extensive multilateral efforts to strengthen financial regulatory standards aimed at expanding the breadth of regulatory coverage, containing the build-up of systemic risk, strengthening resilience to shocks, and developing resolution frameworks.
However, in May, US president Donald Trump signed the biggest rollback of bank regulations since the global financial crisis into law, with a piece of legislation backed by both Congressional Republicans and Democrats.
It lifted the threshold to $250bn from $50bn above which banks are deemed too important to the financial system to fail. Smaller institutions would not have to be put through stress tests or draw up so-called living wills, which were signed to help banks plan for financial disaster.
Leading liberal Democratic senator Elizabeth Warren warned at the time that it would encourage more risk taking, saying raising the threshold was “extraordinarily dangerous”. She has pointed out that Countrywide, which originated a large volume of subprime mortgages in the run-up to the crisis, had about $200bn in assets when it collapsed.