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The debate is not about "self-regulation" versus "more regulation". Instead, there is an emerging consensus on the benefits of reinforcing market-based corrections with improved regulatory incentives and structures, IIF Managing Director Charles Dallara said and called also to reconsider regulatory capital requirements for off-balance-sheet activities.
Addressing critical issues, Dallara noted that:
- First, steps should be taken to enhance the role of boards of directors and increase the effectiveness of stress-testing in the risk-management process.
- Second, strengthen the ties between compensation, shareholders' interests and long-term, company-wide profitability, with compensation programmes taking the cost of capital more clearly into account.
- Third, consider an external, independent review process regarding the governance, methodologies and models of rating agencies as they concern structured credit products.
- Fourth, explore alternative valuation techniques for assets in illiquid markets to avoid unintended adverse consequences in the application of fair-value accounting.
With regard to voluntary industry best practice as a credible alternative to sound supervisory arrangements, Dallara noted that industry is exploring plans to monitor the implementation of industry standards. “Implementation by leading banks of industry best practices can never be a substitute for sensible supervisory oversight”, he said.