The Institute of International Finance called on leading finance ministers, central bank governors and the International Monetary Fund, to engage in an extensive dialogue with the finance industry to secure the stability of the global financial system.

The IIF, which represents more than 375 financial services firms, said this is timely given the increasing use of credit derivatives and other forms of financial leverage, plus the growth of hedge funds and private equity funds, which are adding to the complexity of global markets.

Market innovations are contributing to global economic expansion and are continuing to yield many benefits, but the systemic implications of the rapid expansion of these instruments have not been tested during times of stress, said the IIF. This should be of interest to the IMF, as well as to leading regulators, central bankers and finance officials, stated IIF managing director Charles Dallara in a letter on behalf of the IIF’s board of directors to Britain’s Chancellor of the Exchequer Gordon Brown in his capacity as chairman of the International Monetary and Financial Committee, which guides IMF policy.

The group says global growth continues to be strong and is likely to be close to 5% this year. Net private capital flows to emerging markets are running at a record annual rate of around $500 billion, which represents more than a fourfold increase from 2002 when they amounted to around $112 billion, and these markets are attracting new investors and creditors and innovative financial approaches.

However, Dallara pointed out, “There are growing vulnerabilities to the outlook for global growth. Geo-political developments and persistent global imbalances cloud the future, with the latter raising the prospects of protectionism and disorderly adjustment. In financial markets, events earlier this year involving a spike in volatility and downward adjustments in global asset prices reflected in part concerns about the outlook for the U.S. economy, sparked by deterioration in the subprime mortgage sector. These events may also have signaled prospects of a return of risk aversion, particularly as the current high levels of international liquidity recede.”

Dallara added that there is, “An unusual sense of unease and anxiety amidst prosperity.” He noted in his letter to the IMFC, “It is now timely for leaders of public and private finance to build on current activities and engage more deeply with one another on these issues and for the IMF to reassert the leadership in our collective efforts to underpin global financial stability.”

It calls for: annual meetings between chairmen and chief executive officers of major private sector firms and the IMFC, deepening the general policy dialogue between leaders of private finance and the IMF through the IMF’s Capital Markets Consultative Group, and more complete contributions by the IMF to the implementation process for the Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets.