An international lobby group is pushing back against some of the more intrusive regulatory reforms being proposed for the financial industry.

The Institute of International Finance, Inc. said Wednesday that it does support regulatory reform, in particular, the work of the G20, the Financial Stability Board and the Basel Committee. As well, the IIF concedes that the industry needs to improve governance, risk and liquidity management, and compensation practices.

“We fully share the concern of policymakers to reduce excessive risk taking in the financial system and to tackle the ‘too big to fail’ problem. Strengthened capital and liquidity requirements, together with improved risk management practices within firms, will have a central role in this and we support the global focus on these areas as the key to greater stability. The Institute also encourages greater attention to convergent cross border resolution regimes that are necessary to achieve the shared goal of ensuring that no institution is seen as too big to fail. We continue to support reform and moderation in compensation practices,” it said.

However, it also cautioned against the threat of overregulation, which could hamper financial markets and the economic recovery, and it stressed that new measures must be introduced on a globally coordinated basis. “In the absence of a coordinated approach, some risk-taking activities may shift to less visible and less comprehensively supervised parts of the financial system, raising questions about the net effect on systemic stability,” it said.

The group said that measures designed to limit the size of financial institutions, or to restrict the scope of banks’ activities, need to be evaluated very carefully. This comes on the heels of proposals in the US designed to do just that.

The IIF argues that there is a danger that limiting banks’ activities too strictly “may reduce liquidity, increase costs to issuers and investors and constrain the capacity of banks to service their clients and support the wider economy. Circumscribing the activities and risks that deposit taking institutions are allowed to take may also result in risk being transferred to more opaque and less comprehensively regulated parts of the financial system.”

IE