Authorities should use international colleges of supervisors for each of the largest global financial institutions by end-2008, the FSF recommends in its final report. Also, supervisors must set capital and liquidity buffers at levels that take account of the potential for risk management failures to occur and that limit damage to markets and the financial system when they occur.
A striking aspect of the turmoil has been the extent of risk management weaknesses and failings at regulated and sophisticated firms, the report says. However, authorities should not pre-empt or hinder market-driven adjustments, but should monitor them and add discipline where needed.
In particular, the FSF proposes to raise Basel II capital requirements for certain complex structured credit products and to introduce additional capital charges for default and event risk in the trading books of banks and securities firms. Also the capital treatment of liquidity facilities to off-balance sheet conduits should be strengthened.
Guidance for supervisory reviews under Basel II will be developed that will strengthen oversight of banks’ identification and management of firm-wide risks, and their stress testing practices for risk management and capital planning purposes. Also, it requires banks to soundly manage and report off-balance sheet exposures.
The FSF strongly encourages financial institutions to make robust risk disclosures using the leading disclosure practices. Further guidance to strengthen disclosure requirements under Pillar 3 of Basel II will be issued by 2009.
Standard setters will take urgent action to improve and converge financial reporting standards for off-balance sheet vehicles. An expert advisory panel will the established in 2008.
Credit rating agencies should implement the revised IOSCO Code of Conduct and differentiate ratings on structured credit products from those on bonds and expand the information they provide.
Supervisory guidance will be issued by July 2008 for the supervision and management of liquidity risks.
The FSF will report on progress in June followed by a fuller follow-up report in September.
Press release
Report
© Graham Bishop
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