MANCHESTER, England (Reuters) - The International Monetary Fund needs more money to become a better bulwark against financial crises spreading, a senior Bank of England official said on Wednesday.
Andy Haldane, the central bank’s executive director for financial stability, said the Group of 20 leading economies (G20) lamented when they met in Sydney last month that U.S. Congress had still not approved an increase for IMF funds.
The meeting coincided with a surge of volatility in emerging markets after selloffs triggered by worries about current account deficits in some emerging economies and the turn in U.S. monetary policy.
“The IMF does not have the fuel in the tank it needs to meet the respective needs of countries,” Haldane told students at the University of Manchester.
A well-funded IMF could help it step intervene as an international lender of last resort to underpin an increasingly interconnected global financial system that allows contagion to spread more quickly, he added.
“It remains to be seen if their quotas will be improved and what the future fortunes of the IMF might be, but it’s one ingredient of a reform programme if we are to put global finance on a somewhat stronger footing than it appears to be on today.”
Another flaw in the global financial system is that foreign exchange reserves are too concentrated in countries that are unlikely to need them.
“This leaves us with a not altogether comfortable position of a more joined up global web and therefore somewhat more fragile global web than previously, and we have not accumulated the additional insurance that might be needed,” Haldane said.
Other ways to shield the global financial system from shocks would be for countries to issue sovereign bonds linked to national economic growth, as Bulgaria has done, Haldane said.
In a crisis the interest paid to holders of debt linked to gross domestic product would fall and ease the strain on government finances, he said.
International rules for the use of macro prudential tools to cushion busts and moderate booms would also bolster the global financial system.
Haldane is a member of the BoE’s Financial Policy Committee, which sets the tone for financial regulation in Britain and has macro prudential powers, such as forcing banks to hold more capital to dampen credit.
He cited South Korea as an example of where a macro prudential regime has been effective in moderating the housing market, to limit booms and cushion busts.
Critics say the FPC should also be taking action to cool parts of Britain’s housing market which they say has become overheated, a view the BoE has yet to agree with.
The FPC meets shortly and is due to report its latest recommendations at the end of March, with any measures aimed at the housing market closely watched.
Haldane said the Korean regime has made the housing market become self-stabilising to some degree and offer a predictability, allowing markets to do the work of regulators to some extent.
Reporting by Huw Jones; Editing by Ruth Pitchford