U.S. financial system is stronger but reforms must continue, IMF says

Reporting from Washington —  The United States financial system is stronger than it was five years ago but risks remain and regulators need to complete reforms, while policymakers should resist efforts to roll back some of the changes, the International Monetary Fund said Tuesday.

In its first major assessment since 2010, the IMF said the U.S. has made strides in improving its oversight of financial firms. Many of those actions were mandated by the Dodd-Frank financial reform law, which was enacted five years ago this month in the wake of the 2008 financial crisis.

Congressional Republicans have been highly critical of the law. They have successfully softened some of the regulations and have pushed to water down more, including trying to weaken the powers of the Consumer Financial Protection Bureau created by the law.

On Monday, Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, said his panel would hold three hearings in the coming weeks to assess the Dodd-Frank law as it hits its fifth anniversary.

“We were told Dodd-Frank would ‘lift the economy,’ ‘end too big to fail’ and ‘increase financial stability,’” Hensarling said. “Instead, five years later the big banks are bigger, the small banks are fewer and the economy remains moribund”

But the IMF said the Dodd-Frank reforms have been positive and U.S. officials should resist efforts to water them down.

“Welcome steps have been taken in strengthening the financial system.... But before the memory of the crisis begins to fade, it will be important to complete the reform agenda and resist attempts to overturn previously agreed measures,” the IMF said in its 111-page assessment.

Among the helpful steps was the creation of a new panel of regulators, the Financial Stability Oversight Council, to watch for risks and coordinate responses, the report said.

Information sharing among agencies has improved, so-called stress tests of firms is helping deal with risk-management problems and new regulatory powers are in place to shut down firms on the brink of failure instead of bailing them out.

“Bank and insurance capitalization is stronger, household balance sheets are healthier, and progress has been made in addressing key regulatory fault lines,” the report said.

“Also, major reforms of financial regulation and supervision have been implemented, and work is ongoing on addressing the misaligned incentives that led to excessive risk taking,” it said.

But some key vulnerabilities still have not been addressed, including overhauling the housing finance system and reducing the exposure of firms to money market mutual funds, the IMF said.

The long period of extremely low interest rates, led by Federal Reserve policy designed to promote growth, have pushed some firms to take risks in search of better investment returns, the report said.

And a string of mergers in the banking sector, some pushed by regulators during the crisis, have created potential problems.

“Large and interconnected banks dominate the system even more than before,” the report said.

The IMF said it was imperative that the U.S. create “an independent national regulator” for the insurance industry, which now is largely overseen by state officials. The Financial Stability Oversight Council should be strengthened and agencies should finish crafting regulations for complex securities known as derivatives, the report said.

Despite the warning about the effects of low interest rates, the IMF in a separate report Tuesday urged the Fed to wait until next year to raise the central bank’s key short-term interest rate. The federal funds rate has been near zero since December 2008.

A higher federal funds rate “could still result in significant market volatility and financial stability consequences that go well beyond U.S. borders,” the IMF said. The report echoed comments last month by IMF Managing Director Christine Lagarde.

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