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IMF urges U.S. to finish tougher rules on insurers, mutual funds

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(Bloomberg) — The U.S. needs to follow through on plans to impose tougher rules on nonbank financial institutions such as mutual funds and insurers that are increasingly posing a risk to the financial system, the International Monetary Fund said.

It’s critical that U.S. policy makers finish implementing the Dodd-Frank Act of 2010, the Washington-based lender said Tuesday in a report on the stability of the financial system in the world’s biggest economy.

“The regulatory landscape remains fragmented resulting in gaps, overlaps, and the potential for delayed responses to emerging risks, and should be simplified over time,” the IMF said in the assessment, which it conducts every five years.

The Financial Stability Oversight Council, overseen by the Treasury Department, needs to impose the tougher standards it has promised to put in place on non-banks designated as “too big to fail,” the IMF said.

The fund’s warning comes as lawmakers and policy makers prepare to mark the fifth anniversary of the 2010 law, which was designed to insulate the financial system against a repeat of the 2008 crisis.

The FSOC has designated four non-bank financial institutions as systemically important: MetLife Inc., Prudential Financial Inc., General Electric Capital Corp. and American International Group Inc.

The IMF said non-bank institutions such as insurers, hedge funds and other managed funds now account for more than 70 percent of U.S. financial-industry assets. These institutions “appear to be taking on higher credit and duration risk, and concern remains about the relative opacity of the leverage and other risks embedded in securities lending and cash reinvestment,” the fund said.

‘Herding Behavior’

There’s evidence that “herding behavior” among U.S. mutual funds is intensifying, particularly in less liquid markets, the IMF said. A “disorderly” exit from ultra-low interest rates by the Federal Reserve could materially effect managed funds and life insurers, it said.

The IMF conducted its own “stress tests” of the 31 largest bank holding companies and found that all have sufficient capital to absorb losses, “the first time since the start of annual stress tests in 2009 that no firm fell below any key capital threshold.”

At the same time, the review found risks emerging in insurance companies, and the IMF urged U.S. officials to develop and perform insurance stress tests.

Separately, in its annual assessment of the U.S. economy, the IMF reiterated its forecast from a few weeks ago that the U.S. economy will grow 2.5 percent this year, followed by 3 percent next year.

Expansion is then projected to slow to 2 percent in 2020, matching the potential growth rate “unless a broad range of structural issues are addressed to raise productivity, create incentives for innovation and capital formation, and raise labor force participation,” the IMF said.

The fund also repeated its view that the Fed should hold off raising rates until the first half of 2016, when wage and price inflation are expected to pick up.