April 4 (Reuters) - The non-bank sector now accounts for
half of the assets of the entire world financial system and
should be more closely regulated to protect its stability, staff
economists from the International Monetary Fund said on Tuesday.
The release of the research comes a week before the IMF and
World Bank convene a semi-annual gathering of central bankers
and finance ministers in Washington, amid the fallout from last
month's failures of American and European banks.
In the years since the 2008 Wall Street meltdown,
governments have promoted economic growth by keeping interest
rates low while beefing up oversight of traditional banks.
According to the IMF paper, this has driven trillions of
dollars of financial assets into the hands of hedge funds,
insurance companies, pension plans and others outside the
banking sector that may make riskier investments in search of
profits but with fewer safeguards and scant publicly available
data of the sort needed for oversight.
"Policy makers need appropriate tools to tackle turmoil"
among non-bank financial intermediaries, senior IMF officials
said in a blog post released simultaneously. "Robust
surveillance, regulation, and supervision are essential
pre-requisites."
The authors, Fabio Natalucci, Antonio Garcia Pascual and
Thomas Piontek, pointed in particular to last year's bond crisis
in Britain, when an ill-fated government stimulus plan set off a
vicious cycle.
The increase in government borrowing drove up bond yields,
causing eye-watering losses for pension funds with leveraged
fixed-income investments, which resulted in margin calls that
forced the funds to sell and drove yields even higher - until
the Bank of England stepped in.
In times of high inflation, market stress like this can
leave central banks facing hard choices between contradictory
aims: on one hand needing to tighten monetary policy to keep
prices under control, while on the other feeling pressure to
stabilize failing institutions or markets with cash injectons,
according to the research paper.
As a result, non-bank financial intermediaries "need to be
regulated and supervised from a myriad of different angles", it
said, including with data disclosure and governance requirements
to manage risk and rules for capital and liquidity management.
Central banks may still face crises, but their interventions
should be temporary, targeting specific areas that pose the
greatest threat, providing access to special loan facilities or
acting as lenders of last resort under strict conditions with
close oversight from regulators, the IMF paper said.
(Reporting by Douglas Gillison; Editing by Sonali Paul)
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