core sector communique

IMF Calls on Middle Eastern and Central Asian Countries to Embrace Overhaul of Global Financial Regulation and Pursue Reforms to Strengthen Markets

July 12, 2010

The International Monetary Fund (IMF) called today on regulators and supervisory authorities in the Middle East and Central Asia (MECA) to play an active role in efforts currently under way to repair the international financial system, and to implement the reforms needed to render the region’s financial systems more resilient. Representatives from the IMF and senior officials from central banks and regulatory authorities from the MECA countries were meeting in Beirut on the occasion of a high level seminar to exchange views on the regional implications of global financial market reform.

Speaking at the conclusion of the seminar, Mr. José Viñals, Financial Counsellor and Director of the Monetary and Capital Markets Department at the IMF, said: “As the international community advances in designing the measures to tackle the imbalances and vulnerabilities of the global financial system, it is very important for the region’s regulators to be heard in the ongoing international debate, as many of the measures will impact the way their financial markets will work in the future.”

Mr. Viñals added that it will be particularly important for emerging markets, such as in the MECA region, to ensure that the reform strikes the right balance between safety and efficiency so as to avoid stifling financial market development. He also stressed the importance of discouraging regulatory arbitrage by making sure that regulations designed at national level are internationally consistent.

Given their more limited exposure to international financial markets and focus on traditional lending and savings mobilization, MECA banks have been less affected by the crisis than their counterparts in advanced economies. Nevertheless, the crisis revealed a number of vulnerabilities across the region, highlighting the need for further reforms and continued supervisory vigilance.

“The recent crisis has brought to light some old shortcomings in the region’s financial sectors and regulatory framework, including excessive dependence by banks on name lending and inadequate supervisory powers to take early remedial action. But the crisis has also prompted a number of global regulatory initiatives, which are particularly relevant to the region,” Mr. Adnan Mazarei, Assistant Director at the IMF’s Middle East and Central Asia Department, explained.

Amongst these initiatives, ensuring an adequate level of high-quality capital and reducing cyclicality—including by the use of countercyclical capitalization and provisioning requirements—will be particularly pertinent for the financial sectors in the Middle East that are vulnerable to swings in capital inflows and the oil price cycle. “We have seen in the past that the absence of such a framework has resulted in important vulnerabilities for banks that became too exposed once the boom was over,” Mr. Mazarei noted.

In this context, it will also be important for regulatory authorities to ensure that liquidity management practices and buffers are strengthened, as episodes of rapid credit growth in the region have not been accompanied, in some countries, by rising stable retail funding, forcing banks to turn to foreign financing sources. The ongoing discussions on liquidity standards are pertinent in this regard.

Finally, efforts to strengthen crisis preparedness, resolution frameworks, and cross-border cooperation will be very relevant to the financial sectors of the region: cross-border banking activity is of growing importance, large international banks are active in the region, and several countries license banks that appear large relative to the ability of authorities to provide support. An important step in this context would be to put in place a more comprehensive legal framework for financial institutions that provides for early preemptive measures and, when needed, speedy restructuring options, both locally and across borders.