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03 April 2009

FSF recommendations and principles to strengthen financial systems


The FSF issued several reports covering its recommendations for addressing pro-cyclicality in the financial system, principles for sound compensation practices, and principles for cross-border co-operation on crisis management.

The FSF issued several reports covering its recommendations for addressing pro-cyclicality in the financial system, principles for sound compensation practices, and principles for cross-border co-operation on crisis management.

 

The Forum also published an update on the implementation of the recommendations contained in the FSF’s April 2008 Report on Enhancing Market and Institutional Resilience.

 

Addressing pro-cyclicality (Report)

The recommendations mitigate mechanisms that amplify pro-cyclicality in both good and bad times. They encompass a mix of quantitative/rules-based and discretionary measures that are inter-related and reinforce one another. They will be implemented over time, once conditions in financial markets return to normal.

 

Ø       The recommendations on the bank capital framework include the development of counter-cyclical capital buffers and a supplementary non-risk based measure to contain bank leverage. An integrated package of measures covering the recommendations will be issued for consultation before the end of 2009.

 

Ø       Recommendations on bank loan loss provisions include accounting and capital measures and reflect the view that earlier recognition of loan losses could have dampened cyclical moves in the current crisis, and that earlier identification of and provisioning for credit losses are consistent both with financial statement users’ needs for transparency regarding changes in credit trends and with prudential objectives of safety and soundness.

 

Ø       On leverage and valuation, these recommendations call on regulators and supervisors to obtain a clear and comprehensive picture of aggregate leverage and liquidity, and to use quantitative indicators and/or constraints on leverage and margins as macroprudential tools for supervisory purposes. Accounting standard setters are encouraged to improve approaches to valuation and financial instruments.

 

Principles for Sound Compensation Practices (Report)

The Principles call for effective governance of compensation, and for compensation to be adjusted for all types of risk, to be symmetric with risk outcomes, and to be sensitive to the time horizon of risks. Authorities expect progress in the implementation by the 2009 remuneration round. Full implementation should proceed as rapidly as possible.

 

Principles for Cross-border Co-operation on Crisis Management (Report)

Relevant authorities, including supervisory agencies, central banks and finance ministries, commit to co-operate both in making advanced preparations for dealing with financial crises and in managing them.

They commit national authorities to meet regularly alongside core supervisory colleges to consider co-ordinated action.

 

Update on FSF Recommendations

The update on progress in implementing the recommendations of the April 2008 Report includes:

Ø       strengthening capital, liquidity and risk management in the financial system;

Ø       enhancing transparency and valuation;

Ø       changing the role and uses of credit ratings;

Ø       strengthening the authorities’ responsiveness to risks; and

Ø       putting in place robust arrangements for dealing with stress in the financial system.

 

Press release

Recommendations for Addressing Procyclicality in the Financial System

Principles for Sound Compensation Practices

Principles for Cross-border Co-operation on Crisis Management.

Enhancing Market and Institutional Resilience - Update

 

Background papers

BIS note: Addressing financial system procyclicality: a possible framework

Joint FSF-BCBS Working Group on Bank Capital Issues - Reducing procyclicality arising from the bank capital framework

Report of the FSF Working Group on Provisioning

Joint FSF-CGFS Working Group - The role of valuation and leverage in procyclicality

 



© FSF - Financial Services Forum


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