The Bank for International Settlements says that there’s still work to be done in repairing the global financial system, and it calls on government and the financial industry to work together to build a more resilient system.

In its 79th annual report, released Monday, the BIS notes that despite unprecedented fiscal and monetary policy efforts to combat the crisis the balance sheets of many financial institutions have still not been repaired. It stresses that further steps are needed to address this issue.

The bank’s annual report says that it is “essential that authorities … repair the financial system” and “persevere until the job is done”. It also calls on policymakers to resist financial protectionism, which can be an unintended consequence of efforts to support local financial sectors, “as this would moderate growth and development”.

“Implementing the rescue is a complex task that is fraught with risks. Policies should aid, not hinder, orderly adjustment. They need to strike a balance between short-term stimulus and well articulated exit strategies that ensure long-term sustainability. They need to allow the financial sector to shrink as borrowers reduce their leverage. And they need to promote a shift in production patterns away from export- and leverage-led growth models towards more balanced ones,” it adds.

The bank also says that governments and the private sector have to work together to build a more resilient financial system. “Addressing the broad failures revealed by the crisis means that systemic risk in all its guises must be identified and mitigated, adopting a macroprudential perspective,” it says.

The report argues that financial instruments, markets and institutions all require reform if a truly robust system is to emerge. “For instruments, it means a mechanism that rates their safety, limits their availability and provides warnings about their suitability and risks. For markets, it means encouraging trading and clearing through central counterparties and exchanges. For institutions, it means the comprehensive application of enhanced prudential standards that integrate a system-wide perspective,” it says.

“Above all, regulators and supervisors must adopt a macroprudential orientation. By focusing on the stability of the system as a whole, as much as on the viability of individual institutions, it would reduce the probability of joint failures that arise from common exposures and at the same time moderate the procyclicality inherent in the financial system,” the BIS says.

BIS general manager, Jaime Caruana, stressed that “there are several projects under way to make the macroprudential approach operational, building on the newfound international consensus supporting it.”

But better regulation, by itself, is not enough, the BIS stresses. It insists that macroeconomic policies must play a role in promoting financial stability too. “For monetary policy, this means taking better account of asset prices and credit booms; for fiscal policy, it means putting a premium on medium-term fiscal discipline and long-term sustainability.”

http://www.bis.org/press/p090629.htm