As promised, FedFin has reviewed key sections of the IMF’s “Global Financial Stability Report,” a study that will have considerable impact on forthcoming G-20 and global-agency action. The paper takes a dim view of progress to date on Basel III and international resolution standards. As a result, it recommends consideration of new, simpler options: flat bans on problematic activities (e.g., securitized derivatives counterparty-risk products), structural simplification and barriers between banks and “shadow” firms to block product migration. This report assesses these recommendations in detail because, as regulators focus on more “simple” proposals, they may well take on increased potency. The IMF expresses numerous worries about the Basel III capital rules and their potential adverse impact on financial-market competition and shadow-bank risk arbitrage. However, FedFin does not expect the report to derail Basel III or speed action on shadow banking. Rather, it may lead to quicker action on additional bank-focused rules.
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