August 3, 2021

The IMF criticizes the role of rating agencies in the financial sector and calls for "rethinking" its model

The IMF criticizes the role of rating agencies in the financial sector and calls for "rethinking" its model

The International Monetary Fund (IMF) celebrates its annual summit in Bali this week. In this forum, he has presented a report on the global financial sector, coinciding with the tenth anniversary of the collapse of the banking system precipitated by the fall of Lehman Brothers, in the US. The extensive document puts on the table the necessity of which, in spite of the advances, "the reform agenda must be completed".

One of the main pending tasks of the sector is the rating agencies. These are companies like Moody's, Fitch or S & P that certify the quality of a debt of a company or public institution and, with it, the cost of its financing is conditioned. The IMF considers that they are companies that have generated "conflicts of interest", since they are hired by the companies they must write down.

In this sense, the agency ensures that during the pre-crisis period, the trust of the clients of these agencies led their clients to make decisions based on "failures and weaknesses" of this rating model. In this sense, he assures that there have been advances during this last decade that have given "some success", such as the creation of a code of conduct.

However, the IMF regrets that despite the advances, there have been no actors "to replace the rating agencies" and that they continue to maintain "a central role" in the financial sector. For this reason, the organization repeatedly claims in its report that it is necessary to "rethink" the model and move towards the consolidation of reforms that reduce dependency on these agencies.

The payment of incentives to employees is another of the pending tasks indicated in the document. After the financial crisis, the IMF developed a plan, together with other agencies, that limited the existence of compensation to workers for accessing operations or practices that, in many cases, were accompanied by a high risk, putting at risk the stability of the system .

These incentives are, for the body chaired by Christine Lagarde, one of those responsible for the excessive level of risk that financial institutions had before their debacle. In this sense, the IMF says that "it is not clear" the effect of international standards on this practice and that "there is a risk" that new practices are being created that avoid these limitations and turn to those actions of "excessive assumption". of risks ".

In this regard, the IMF stresses the need to strengthen the structures of good internal governance in financial companies, in order to control the salaries and incentives of the entity's management by the board of directors. Although the organism defends that this by itself is not necessary because "self-regulation was not able to stop the assumption of risks".

A structure that has not been put to the test

Thus, although progress has been made, the IMF considers that there are latent risks in the international financial sector. In addition, as underlined, it is not proven that the structure of the banking industry towards which progress has been made in recent years will better resist the arrival of a new crisis.

The IMF defends that a change in the macroeconomic situation will test the resistance of the financial sector. To this is added that the international body sees that the price of some assets are already "very high" and that a "rapid adjustment" can occur. He gives as an example the prices of housing in some countries that have not stopped growing for more than six years.

Other aspects that remain pending for the coming years for the financial sector and regulators are those linked to digitalization. In this sense, he assures that fintech and other technological companies provide a strong innovation potential for the sector. But he warns that regulators should allow this innovation "avoiding the increase in risks".

In conclusion, the IMF considers that although the financial sector "is stronger" than before, "it is not yet out of the forest". The agency understands that there are still certain vulnerabilities and one of them is the high indebtedness that exists, especially among non-financial companies and states. Thus, he points out that the improvement of control and resolution systems are key to maintaining the stability of the sector in the event of a new recession.


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