US banks stronger

Still need more capital :

*Reforms to financial rules step in right direction

*Stress tests point to pockets of weakness

*Housing finance reform is unfinished business

The United States financial system is stable, but risks remain and implementing reforms recently signed into law is the next challenge, according to the IMF’s first detailed assessment of the world’s largest financial system.

The IMF’s report was issued on July 30 under the Financial Sector Assessment Program, which provides an in-depth analysis of a country’s financial system and its vulnerabilities. Created in the wake of the Asian crisis in 1999, over three quarters of the IMF’s 187 member states have volunteered to undergo an assessment.

The global financial crisis began in the United States with the meltdown of the sub-prime housing market in 2007, which spilled over into the US financial sector and spread quickly around the world.

The IMF said reforms to the financial system signed into law in the Dodd-Frank Act were an important step forward to address the weaknesses exposed by the global financial crisis.

However, the IMF says that the law missed the opportunity to streamline the complex web of agencies that oversee banks and other financial institutions. The legislation establishes a new oversight council of regulators, who face two significant implementation challenges:

* Improve the cooperation of US regulatory agencies and enable a more timely response to emerging systemic risks

* Write the specific rules needed to help contain systemic vulnerabilities and reverse perceptions that some financial institutions too big and complex to fail.

The IMF also released a report on its annual check-up of the US economy, known as the Article IV consultation, which found that the United States’ economy is recovering, with debt and unemployment the next challenges.

Key decisions on reforms to the US system of housing finance, and the mortgage giants Fannie Mae and Freddie Mac, are still pending. The IMF said the Government’s support for the housing market is costly, inefficient and complex, with subsidies that do not translate into a higher homeownership rate.

Given the key role played by the United States’ financial sector in the global financial system, coordination at the international level will continue to be important. With US firms linked to many other countries through cross-border operations and trades, the United States will need to continue to play a leading role in international crisis coordination, as well as helping to shape new international rules on bank supervision and regulation.

The IMF’s assessment of the US financial system included stress tests, carried out to see how banks and other financial institutions would fare if economic conditions worsened.

IMF Survey Magazine