Financial innovation needs supervision

Washington: The International Monetary and Finance Committee (IMFC) said financial innovation and securitisation, while having contributed to enhanced risk diversification and improved market efficiency, could go out of control without proper supervision.

The IMFC, which comprises 24 finance ministers from major developed and developing countries, met against the backdrop of renewed volatility in markets, with Wall Street stocks tumbling again last week after a period of recovery.

The IMF earlier cautioned that market adjustment to the fallout from the meltdown in the US subprime mortgage market is likely to be uncertain and longer than expected.

The session, on the first day of the IMF-World Bank 2007 annual meetings, was chaired by Italian Economy and Finance Minister Tommaso Padoa-Schioppa, chosen last month to succeed Gordon Brown as head of the key committee.

At a post-meeting briefing, Padoa-Schioppa said while recent market turbulence had successfully been countered by timely and determined action by several central banks, it had also revealed a number of deeper problems.

"There are developments in the financial system which like genies moved out of the bottle are hard to follow," he said.

"There is a clear need for supervisory bodies, and even for the very financial institutions which create these new instruments, to understand better what their creatures are doing out in the market. This is a reason for concern."