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IMF backs regulation review in wake of Treasury plans

Tobias Adrian 100

The IMF has indicated it would back proposals by the US Treasury to ease the burden of regulation on US firms and capital markets while Europe could follow the US lead as moves to review the Capital Requirements Regulation

Tobias Adrian
Adrian: unintended consequences

Parts of the post-crisis financial regulatory regime could be “streamlined and simplified”, the IMF has said in the wake of a report from the US Treasury that suggested easing bank rules to boost market liquidity and encourage capital markets activity.

The IMF’s financial stability staff said the regime could be revised provided banks still had high levels of capital and liquidity. “Capital, liquidity and resolution make the core banking system much more resilient and stable, but there might be some unintended consequences of those regulations,” said Tobias Adrian, financial counsellor and director of the IMF’s monetary and capital markets department. 

“Regulators are starting to evaluate the impacts of the regulatory reforms on credit supply and liquidity and other things, and there might be some scope for streamlining or simplifying some aspects of the reforms, without rolling back the overall high levels of capital and liquidity that we feel is very important for financial stability.”

The US Treasury report entitled A Financial System that Creates Opportunities proposed a series of moves to ease the burden of regulation on US firms and capital markets, largely by removing certain provisions of the Dodd-Frank Act. It built on proposals in July that suggested tweaking the leverage ratio to make it easier for banks to participate in trading Treasuries and in the repo market.

Will EU follow? 

Europe could follow the US lead as moves to review the Capital Requirements Regulation, announced in December last year, could cut the burden of regulation for smaller firms, while parts of the Capital Markets Union proposals could cut capital costs for infrastructure investment and securitization.

Some of Europe’s most senior bankers doubt it will follow all the way.

“It’s still a little premature to see if Europe would follow the US thoughts on deregulation,” said Frédéric Oudéa, chief executive of Société Générale. “There’s a big difference between reducing the burden of certain process, compared to fundamentally changing the philosophy of regulations. If there’s a major change, Europe would have to reflect on what that means for the objective of maintaining the stability of the financial system.”

In particular, while the US Treasury proposes to exempt US government debt from the leverage ratio for US banks, the Basel Committee is still working on a way to revise the treatment of sovereign debt, which will likely increase risk-based capital held against government bonds.

Germany backs a move away from zero risk weights for sovereign debt, writing in a paper circulated on Tuesday that “further significant risk reduction is necessary, including the regulatory treatment of sovereign bonds”.