IMF: 'Profound' Changes Likely for U.S. Financial Sector

The International Monetary Fund predicted “profound” changes in the U.S. financial sector as a result of new regulations, according to a report released on Tuesday.

New rules for banks, money-market mutual funds, securitization, and over-the-counter derivatives will bring big changes to the sector, the IMF said in an analytical chapter of its Global Financial Stability Report. Many of these are part of the 2010 Dodd-Frank financial reform law. Regulators tasked with the law's implementation are still developing many of the rules.

“Because many of the new rules remain under development, predicting their impact on the structure of the financial sector is difficult,” the report said. “Nevertheless, profound changes are likely, as investment banking becomes less profitable and the costs of running OTC [over-the-counter] derivative and securitization businesses rise.”

The IMF argued for further financial reform on a global scale. “The data suggest that financial systems are still overly complex, banking assets are concentrated, with strong domestic interbank linkages, and the too-important-to-fail issues are unresolved,” the report said.

Despite the remaining hurdles, “we believe that the thrust of the reforms is pushing in the right direction and will, over time, deliver a system less prone to instability,” the authors wrote.

But the organization also warned of the unintentional consequences of that reform, namely that banks may move certain activities to the nonbank sector to avoid new regulations, and that the rules could also favor the large banks that are better able to absorb their costs.  In the United States, the report said that the impact of the "Volcker Rule," a controversial Dodd-Frank provision, could be blunted. The Volcker Rule prohibits banks from engaging in proprietary trading but the challenge will be distinguishing market-making and underwriting--which are permitted--from proprietary trading, the report said. 

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