The International Monetary Fund has recommended increasing regulation on private investment funds worldwide in a new policy analysis released today.
The study was undertaken at the request of the IMF’s policy steering committee and is intended to guide the work of the Group of 20 meeting in London this April. In it, the IMF called for more alignment in the responses of national governments to the economic crisis, new macroeconomic policies and increasing the scope and rigour of regulation of the financial markets.
Meanwhile, the chairman of the European Private Equity and Venture Capital Association wrote a letter to members saying that new regulations would likely be based around a fund registration system, which would include disclosure and transparency rules, a unified industry code, a supervisory regime and some restrictions on leverage at the fund level.
The IMF report grouped private funds in a “shadow banking system” of financial institutions that falls outside the regulatory system and needs to be subjected to greater scrutiny in the future.
The clock should not be turned back on fair value accounting just to address the issue of temporary market illiquidity.
“The shadow banking system—including investment banks, mortgage brokers/originators, hedge funds, securitisation vehicles and other private asset pools—has long been lightly regulated by a patchwork of agencies, and generally not supervised prudentially,” the study says.
“This reflected a philosophy that only insured deposit-taking institutions need to be tightly regulated and supervised, so that financial innovation might thrive under a regime of market discipline. But not only did market discipline fail, so did the effectiveness of regulation, as banks evaded capital requirements by pushing risk to affiliated entities in the shadow system—on whose activities regulators had little information.”
The IMF also said the “intrinsic procyclicality” imparted by fair value accounting was to blame for much of the severity of the crisis. But the study does not suggest doing away with the standard.
“The problem is not too much transparency but too little, and the clock should not be turned back on fair value accounting just to address the issue of temporary market illiquidity,” the study said.
“What is needed is to make clear the nature of price uncertainty, and to do so in a way that speaks symmetrically to the potential for mispricing in illiquid markets as much as in booming markets. Enhancements could include better guidance and principles for mark-to-model valuation, information on the variance around fair value calculations, and data on price history.”