07 November 2008

European Conclusions on G20 summit

European leaders discussed their common position and agreed to propose that ‘no market segment, no territory, and no financial institution should escape proportionate and adequate regulation or at least oversight’.

The informal meeting discussed the common European position for the G20 meeting in Washington on 15 November and agreed on four main principles including proportionate and adequate regulation or at least oversight”.

 

Five approaches were agreed that could be adopted on the G20 meeting.

These include to “decide that no market segment, no territory, and no financial institution should escape proportionate and adequate regulation or at least oversight”. Further issues include the treatment of rating agencies, codes of conduct to avoid excessive risk-taking, the role of the IMF and the FSF, and accounting issues.

 

A period of 100 days starting on 15 November should be used for drawing up measures to implement the principles that have just been restated.

 

European Conclusions

 

Agreed principles:

(i) No financial institution, no market segment and no jurisdiction must escape proportionate and adequate regulation or at least oversight.

• − All financial players of systemic importance, such as rating agencies or geared funds, will accordingly have to be subject to rules or at least to oversight, wherever they operate. Means of actually putting that principle into practice will have to be introduced by national authorities, if appropriate under international financial institutions' supervision.
• − Every step will be taken, nationally and internationally, to protect the stability of the international financial system from unco-operative centres.
• − In more general terms, the rules applicable will have to be so designed as to create common standards between financial centres in ways not detrimental to international financial stability.

 

(ii) The new international financial system must be based on principles of accountability and transparency.

• Transparency of financial transactions must be ensured by means of a more comprehensive information system, which no longer omits vast swathes of financial activity from auditable, certifiable accounts.
• Arrangements conducive to excessive risk-taking must be overhauled, particularly debt securitisation procedures and pay policy.
• Both prudential and accounting standards applicable to financial institutions will have to be revised to ensure that they do not contribute to creating speculative bubbles in periods of growth and make the crisis worse at times of economic downturn.
• Standards bodies, in particular in the area of accountancy, will have to be reformed to allow a genuine dialogue with all the parties concerned, in particular prudential authorities.

 

(iii) The new international financial system must allow risks to be assessed so as to prevent crises.

• The large international financial groups will have to be monitored in a co-ordinated manner as between the different national authorities concerned, by the setting up of colleges of supervisors.
• An early warning system must be established to identify upstream increases in risks or the formation of bubbles in the valuation of different economic assets.
• More generally, multilateral surveillance will have to be reformed in order to prevent and eliminate world imbalances.

 

(iv) Give the IMF a central role in a more efficient financial architecture

• The task of preventing financial crises will fall to the IMF, which enjoys the legitimacy and universality necessary to become increasingly the pivot of a renewed international system. To that end, its role will be better co-ordinated with that of the Financial Stability Forum.
• The IMF's intervention tools will have to be modernised to enable it to intervene preventively and its resources will have to be increased to enable it to give effective assistance to countries affected by the crisis.

 

The five specific approaches:

• submit rating agencies to registration, surveillance and rules of governance;
• adopt the principle of convergence of accounting standards and review the application in the financial sector of the fair value rule in order to improve its consistency with prudential rules;
• decide that no market segment, no territory, and no financial institution should escape proportionate and adequate regulation or at least oversight;
• establish codes of conduct to avoid excessive risk-taking in the financial sector, including in the area of systems of remuneration. Supervisors will have to take them into account in evaluating the risk profile of financial institutions;
• give the IMF the initial responsibility, together with the FSF, of recommending the measures needed to restore confidence and stability. The IMF must be given the necessary resources and appropriate instruments to support countries in difficulty, and must fully exercise its role of macro-economic surveillance.

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