The Managing Director of the International Monetary Fund (IMF) has called for further action to reform the global financial system, by strengthening crisis management tools and the overall architecture of the system.
She said that five years into the crisis, while important steps have been taken, the goal of a safer financial system was not yet secured.
“We are still at a great distance from our final destination,” Ms. Lagarde said in a speech at the recent Leaders’ Dialogue hosted by the Süddeutsche Zeitung, the Atlantic Council and Roland Berger Consultancy, in New York. “And with the stakes rising by the day, we stand at a crossroads. Policymakers need to lay out and follow a clear roadmap of how to finish the job, not just looking to the next five or ten years, but looking to the next weeks and months ahead.”
The next steps by policymakers in the financial sector will be “critical to breaking the damaging cycles of the crisis,” which include the political economy of deciding and implementing policies, she said, adding, “The immediate focus should be on repairing the health of the financial system. Without repair, weak banks will continue to strangle growth.”
In this regard, European banks are a priority to repair, she said, but because the world is deeply interconnected, restoring the health of the European banks lies in the interest of all. “Let me be clear: The heart of European bank repair lies in Europe. That means more Europe, not less,” Ms. Lagarde said, adding that a single European financial market needs to have a more integrated framework.
“To break the vicious cycle of financial-sovereign risks, there simply must be more risk-sharing across borders in the banking system,” she said, and deeper fiscal integration “should go hand-in-hand with these efforts.”
Further, she urged to strengthen the architecture of the financial system with smarter regulation, stronger supervision, and appropriate private sector incentives. “Given the size, complexity and interconnections of the system, we need consistency, coordination and cooperation that should span institutions, markets, and borders,” Ms. Lagarde said.
Good progress has been made on regulation, but “we must implement what has been agreed, and make more progress on what has not,” Ms. Lagarde said. However, progress on regulation was only part of the solution and more needs to be done to strengthen the mandate and authority of supervisors.