Priority financial stability: strengthening the resilience of inv …
(MENAFN – Caribbean News Global) By Kristalina Georgieva, Managing Director of the IMF
Launch event of the document “Investment funds and financial stability”
To illustrate the importance of our new report , we must return to the height of the crisis in March 2020. We were facing the greatest economic shock of our life.
But we did not face another global financial crisis last year, not only because of the extraordinary monetary and fiscal measures, but also because countries worked together after the global financial crisis to strengthen the resilience of the banking sector , to ensure that banks have more reliable liquidity and capital buffers.
The experience of the past year has been less encouraging for the investment fund industry, as the crisis exposed fundamental vulnerabilities that could affect global financial stability.
Many investment funds were severely affected by the turmoil in the financial markets, and the initial shock was amplified by rapid outflows and rapid asset sales as liquidity suddenly dried up in the markets. keys. The so-called “dash-for-cash” has spread across borders, triggering large capital outflows from emerging and developing markets.
Today, the global economic recovery is underway; but there is also growing uncertainty, including growing concerns about overexploited asset valuations . It is therefore not surprising that policymakers and regulators are keeping a close eye on investment funds.
Over the past two decades, nonbank financial institutions have played such an important role that they hold about 50 percent global financial assets. It benefits everything from entrepreneurs growing their business, to families buying their first home, to saving for retirement.
These investment funds are essential engines of prosperity. They come in all shapes and sizes, such as money market funds and open-ended mutual funds, and they are subject to a range of investor protection and market conduct regulations. But we also know that many funds have ventured into riskier investments, such as high yield debt and real estate which make them more exposed to liquidity pressures in times of distress.
This in turn requires greater vigilance to ensure that critical parts of the financial system do not freeze when they are needed most.
So our key message today is: if we are to preserve financial stability nationally and globally, we need to strengthen the resilience of investment funds .
What can policy makers do?
A priority is to further strengthen risk management, in particular liquidity risk management . Our new report shows how this can be achieved with a combination of cash management tools.
The key is that these tools can be deployed sequentially as needed based on the intensity of pressures facing a particular fund. This means funds would no longer have to rely on so-called redemption fees and regulatory threshold barriers, which was problematic last year.
These measures would benefit all investment funds, but especially those with less liquid assets. We also believe that there is room for more prescriptive regulatory approaches in this critical area.
Here we can take advantage of lessons learned from the banking sector. We have seen a significant strengthening of risk management in banks, in large part due to the stricter regulatory frameworks put in place after the global financial crisis.
This approach has served us well and is even more important now. Just think about the risk of financial fallout that could affect emerging and developing economies .
Again, this is an area where investment funds play a central role. Over the past decade we have seen nearly $ 1,000 billion of foreign investments in emerging market sovereign debt with investment funds representing about two thirds of these vital capital flows.
In our report, we provide specific proposals on how to mitigate the volatility of capital flows and how to better manage cross-border fund flows in times of crisis.
These are important measures, but we must go further. Even as some countries tighten their policies and accelerate investment fund reforms, we must remain vigilant of those who try to outsmart the system. Fight regulatory arbitrage beyond borders remains critical.
This is why we need strong international cooperation . It is at the heart of the ongoing reform process led by the Financial Stability Board. And this is reflected in the joint efforts of national supervisors and central banks, the International Organization of Securities Commissions and other standard-setting bodies, and international financial institutions such as the IMF.
Policymakers worked together to make banks safer after the global financial crisis; now the same must be done for investment funds . We know the risks to financial stability remain high and asset prices are tight, so speed is key when it comes to these reforms. Financial risks take time to develop, but conditions can change quickly and pose new, unforeseen challenges for the financial sector, as we saw during the turmoil of last year.
Given the essential role of investment funds in stimulating growth and safeguarding financial stability, we must take the right steps now to strengthen their resilience.
With that, I look forward to hearing your perspective on this crucial issue.
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