14 April 2008

G-7 calls for rapid implementation of the FSF report

Finance Ministers and Central Bank Governors identified four recommendations among the immediate priorities for implementation within the next 100 days. Also, the Basel Committee, IOSCO, the IASB, and the Joint Forum are called to accelerate their work to conclude their efforts by end-2008 and that the recommendations of the FSF be fully and effectively implemented.

Furthermore, regulatory frameworks should be reviewed to consider whether changes are necessary to ensure that our financial systems are as efficient and stable as possible in the future. FSF and IMF shall strengthen co-operation to enhance the early warning capabilities of key risks to financial stability.

In the short term, Finance Ministers and Central Bank Governors call on firms to fully and promptly disclose their risk exposures and strengthen their risk management practices. Standard setters should initiate urgent action to improve the accounting and disclosure standards for off-balance sheet entities and enhance its guidance on fair value accounting. Also, the BIS and IOSCO should revise their liquidity risk management guidelines and the code of conduct for CRAs.

Finance Ministers and Central Bank Governors endorsed the following FSF proposals for implementation by end-2008. These include:

- Strengthening prudential oversight of capital, liquidity, and risk management:

The Basel II capital framework needs timely implementation. The Basel Committee should raise capital requirements for complex structured credit instruments and off-balance sheet vehicles, require additional stress testing, and enhance their monitoring.

- Enhancing transparency and valuation:

The Basel Committee should issue further guidance to enhance the supervisory assessment of banks' valuation processes to strengthen disclosures for off-balance sheet entities, securitization exposures, and liquidity commitments.

- Changing the role and uses of credit ratings:

Investors need to improve their due diligence in the use of ratings. Credit rating agencies should take effective action (consistent with IOSCO's revised code of conduct) to address the potential for conflicts of interest in their activities, clearly differentiate the ratings for structured products, improve their disclosure of rating methodologies, and assess the quality of information provided by originators, arrangers, and issuers of structured products.

- Strengthening the authorities' responsiveness to risk:

Supervisors and central banks should further strengthen co-operation and exchange of information, including the assessment of financial stability risks. It is important that an "international college of supervisors" be established for each of the largest global financial institutions. Market authorities also should act co-operatively and swiftly to investigate and penalize fraud, market abuse, and manipulation.

- Implementing robust arrangements for dealing with stress in the financial system:

Central banks should be able to supply liquidity effectively during financial system stress, and authorities should review, and where necessary, strengthen their arrangements for dealing with weak and failing banks, domestically and cross-border.

A comprehensive follow-up report by the FSF should be presented by the FSF for the next G7 Osaka meeting in June and at our meeting in the fall.

Statement by Finance Ministers and Central Bank Governors

© Graham Bishop