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Banks are getting round new rules intended to make a still vulnerable industry safer while countries are distracted by the continuing financial crisis, the International Monetary Fund said on Tuesday.
The IMF's latest Global Financial Stability Report said banks will adjust to new costs from tougher regulation to curb excessive risk taking, with deep-pocketed lenders likely to consolidate market share at the expense of smaller rivals.
The IMF regularly reviews how countries implementing financial reform pledges made by the G20 leading economies in 2009 at the height of the financial crisis.
It said that even five years after the start of the financial crisis in 2007 the global financial system is still not well and many rules have yet to bed down or even be agreed.
"Innovative products are already being developed to circumvent some new regulations ... The new banking standards may encourage certain activities to move to the nonbank financial sector, where those standards do not apply," the report said.
It cites new insurance and investment products like exchange traded products, customized derivatives and synthetic debt obligations.
"Alternatively, big banking groups with advantages of scale may be better able to absorb the costs of the regulations. As a result, they may become even more prominent in certain markets, making these markets more concentrated," the report added.
Policymakers have yet to tackle "shadow banks" such as money market funds, off-balance sheet vehicles and big broker dealers that handle credit but are less regulated than banks.
The G20's task force, the Financial Stability Board, will present recommendations in November to regulate shadow banks but there is already strong opposition to regulating money market funds further in the United States.
Reforms like Basel III to increase bank capital levels from January go in the right direction but the financial system is still too complex and too concentrated, the report said.
"The reforms have yet to effect a safer set of financial structures, in part because, in some economies and regions, the intervention measures needed to deal with the prolonged crisis are delaying a ‘reboot' of the system onto a safer path."
Low interest rates may also be creating "new vulnerabilities" in the future.
There should also be a global discussion on whether some risky bank activities should be directly restricted rather than just making lenders hold more capital, it added.
Higher capital buffers at banks are associated with better results for the economy, as seen in emerging markets, but beyond a certain point very high buffers may drag on growth.
"A system that is too safe may limit the funds available for lending, and hinder growth," the IMF said, lending support to long-standing warnings from banks and some regulators.