The meeting welcomed the Basel Committee’s global bank capital and liquidity standards; agreed on a framework for addressing systemically important financial institutions; endorsed recommendations for increasing the intensity and effectiveness of financial supervision; approved recommendations for implementing central clearing and trade reporting of over-the-counter (OTC) derivatives; and endorsed principles for reducing reliance on credit rating agency ratings.
The FSB expressed its appreciation for Korea’s support as the G20 Chair for the FSB’s reform work and its completion within the time frame set by G20 Leaders.
Key financial regulatory reforms
The meeting today focused on the following elements of the program of financial regulatory reform agreed by the G20 economies and coordinated by the FSB in the wake of the financial crisis. The FSB will remain engaged with the remaining policy development and closely monitor national implementation of these reforms in 2011 and beyond:
New bank capital and liquidity standards. The new standards developed by the Basel Committee on Banking Supervision have been designed to markedly increase the resilience of the global banking system by raising the quality, quantity and international consistency of bank capital and liquidity, constrain the build up of leverage and maturity mismatches, and introduce capital buffers above the minimum requirements that can be drawn upon in bad times. The new standards will reduce the likelihood and severity of future financial crises and create a less procyclical banking system that is better able to support long-term economic growth.
The FSB and the Basel Committee, in close collaboration with the BIS and IMF, have assessed the macroeconomic impact of the transition to the stronger capital and liquidity standards. The implementation horizon and transition arrangements have been designed to ensure that implementation does not harm the recovery. National implementation of the risk-based capital requirements by member countries will begin on 1 January 2013. Member countries will translate the capital rules into national laws and regulations before that date. From that point forward, the capital standards rise each year, reaching their new level on 1 January 2019.
Addressing systemically important financial institutions. The FSB agreed and will recommend to the G20 Leaders’ Seoul Summit for their endorsement a policy framework, work processes and timelines to address the “too big to fail” problem associated with systemically important financial institutions (SIFIs). The FSB’s work to address SIFIs is also part of the broader G20 financial reform process, and specifically follows up on the Leaders’ mandate at the Pittsburgh Summit.
The framework calls for jurisdictions to put in place:
· Capacity to resolve national and global SIFIs without disruption to the financial system and without taxpayer support;
· A requirement that SIFIs and initially in particular global SIFIs (G-SIFIs) have higher loss absorbency capacity to reflect the greater risks that these institutions pose to the global financial system;
· Supplementary prudential and other requirements to reduce the probability and impact of SIFI failure;
· Increased intensity of SIFI supervision; and
· Updated standards for more robust core market infrastructures, including central counterparties in the OTC derivatives market.
The effectiveness and consistency of national policy measures for G-SIFIs will be subject to review by an FSB Peer Review Council.
Increasing supervisory intensity and effectiveness.
The FSB endorsed recommendations to increase supervisory intensity and effectiveness. Strong supervision is a necessary complement to stronger rules. Supervisors are expected to detect problems proactively, intervene early to reduce the impact of potential stresses on individual firms and therefore on the financial system as a whole. The actions and processes endorsed cover the following elements necessary to deliver greater supervisory intensity and effectiveness:
· Ensuring that supervisors have unambiguous mandates, sufficient independence and appropriate resources;
· Providing supervisors with the full suite of powers necessary for effective early intervention;
· Improving supervisory standards to reflect the complexity of financial institutions and the system as a whole; and
· Increasing the frequency of assessments of supervisory regimes.
National authorities and standard setters will follow up on these recommendations as they make improvements to their core principles. FSB thematic peer reviews and IMF/World Bank FSAP assessments will assess national implementation.
© Financial Stability Board
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