As finance ministers and central bank chiefs fly to Washington this week to confront the toll from global financial upheavals, yesterday’s analysis of the credit crisis from the International Monetary Fund offered them plenty to grapple with.

Even as it predicted that the turmoil is to set tighten its grip on the global economy, the IMF looked both backwards, in search of the causes and culprits behind the crisis, and forwards in search of cures, short-term and long.

The study pins the blame for spawning worldwide financial turbulence variously on reckless banks and their bosses, careless investors, lax regulators, rating agencies that lacked rigour, and insufficiently austere central banks. It is a long list of blame.

“There was a collective failure to appreciate the extent of the leverage taken on by a wide range of institutions … and the associated risks of a disorderly unwinding,” it concludes.

“Private sector risk management, disclosure, financial sector supervision, and regulation, all lagged behind the rapid innovation and shifts in business models, leaving scope for excessive risk-taking, weak under-writing, and asset price inflation.”

Banks over-estimated the extent to which, by offloading loans through both “off-balance sheet vehicles”, unpoliced by regulators, and by selling them on through securitization, they could then also offload their risks, the report finds.

“As risks have materialized, this has placed enormous pressures back on the balance sheets of banks”, as “a surprising amount of risk has returned to the banking system from where is was originally dispersed”.

The basic model underpinning the proliferation of complex structured finance was “flawed”, the report finds. Many investors were “too complacent about the risks they were taking on … relying too heavily on ratings agencies for assessing the risks to which they were exposed”.

Regulators and central banks do not escape rebuke, either.

Regulators worldwide are told to re-examine the way that off-balance sheet activities, and the adequacy of banks’ liquidity, or access to ready funds, is policed. Central banks are told that they must “reflect on the role that monetary policy may have played in fostering a lack of credit discipline”.

As minister prepare to thrash out responses to crisis, the IMF offers an extensive catalogue of short- and long-term proposals.

In the short-term, it calls for steps to hasten banks’ disclosure of losses, and risks of further exposure, and for them to make rapid write-downs to “cleanse balance sheets”. Banks with weak capital bases should also immediately seek to raise new funding “even if the cost of doing so appears high”.

The IMF calls for regulators to promote consistency is the way that institutions account for losses, with one move expected to be considered by the G7 to be for it to orchestrate concerted disclosure of losses by banks, to an agreed template.

The report also backs the potential, and highly controversial, use of public funds to stem the crisis, should it escalate.

Action being debated by ministers includes possible steps to remove illiquid, hard-to-trade mortgage backs securities from banks’ balance sheets, to end uncertainty, and promote more normal conditions.

The IMF says it would be vital for the public money used to be as little as possible, and for shareholders of reckless banks to “bear the full brunt” lest public bailouts encourage future crises.

Yet it concludes: “National authorities may wish to prepare contingency plans for dealing with large stocks of impaired assets if write-downs lead to disruptive dynamics …”

In the longer-term, the IMF concedes that the lessons from the turmoil will “decisively” reshape the use of the complex financial engineering.

The report advocates eventual measures to standardise complex securities, reform ratings systems, improve transparency, curb off-balance sheet vehicles, toughen liquidity regimes for banks, and bolster supervision.

Yet as pressure builds for a crackdown, the IMF also sounds a cautionary call against a “a rush to regulate, especially in ways that would unduly stifle innovation, or that would exacerbate the effects of the current credit squeeze”.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive