The Chancellor will today call for the International Monetary Fund to strengthen its monitoring of international financial risks and enhance its credibility to reduce the chances of the current market carnage recurring.
Ahead of this weekend's meeting of the G7 finance ministers, Alistair Darling will call for a new multilateral surveillance department at the IMF, which has admitted that it failed to see how the US sub-prime crisis could reverberate around the world.
The Chancellor believes the financial crisis has exposed the IMF as being organised too rigidly along national lines. The IMF must scrutinise more closely the links between the financial sector and the real economy and boost its analysis of how problems in one economy can be transmitted to others.
In a speech to the Brookings Institution in Washington DC, Mr Darling will say: "There are two key lessons that can be drawn from the current crisis. First, that national economies are intimately linked and that events in one country can impact on others around the world. Second, that there is a need for national policy makers to take action in response to the risks."
The IMF predicted on Tuesday that losses from the credit crunch could rise to nearly $1trn (£506bn). The fund, set up to monitor the world's financial system, admitted it was humbled after forecasting a year earlier that there would be little overspill from rising defaults on US sub-prime mortgages.
Mr Darling will also call on the IMF and the Financial Stability Forum to work more closely as an "early warning system" for financial risks, combining the IMF's analytical skills with the FSF's market knowledge. He will tell the IMF to reform itself so its advice is carried out. One option would be to replace the International Monetary and Financial Committee, which advises the IMF's board, with a ministerial council, adding political clout.
The IMF's chief, Dominique Strauss-Kahn, said yesterday the IMF should not be blamed for failing to spot the crisis because the US rejected oversight measures in 1999. The IMF's Financial Sector Assessment Programme required a team of experts to perform detailed assessments of the financial sector.
"We can't be held responsible for lack of supervision... owing to the fact that our main instrument to make that kind of supervision was not used in this country," Mr Strauss-Kahn said.Reuse content