Root Causes of Crisis
The G-20 noted their consensus view on root causes of the credit crisis included unsound risk management practices, increasingly complex and opaque financial products, excessive leverage, inconsistent and insufficiently coordinated macroeconomic policies, and inadequate structural reforms. Additionally, the G-20 observed: “policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.”
Action Plan Based on Five Principles for Reform
The G-20 Declaration includes an Action Plan that details priority actions (to be accomplished by March 31, 2009) and medium-term actions to be taken consistent with 5 common principles of reform:
1. Strengthening Transparency and Accountability
2. Enhancing Sound Regulation – including with respect to Regulatory Regimes, Prudential Oversight, and Risk Management,
3. Promoting Integrity in Financial Markets
4. Reinforcing International Cooperation
5. Reforming International Financial Institutions (IFIs), including the IMF, and expanding the Financial Stability Forum to a broader membership of emerging economies
The G-20 finance ministers, working in coordination with G-20 leadership (currently Brazil, the U.K. and the Republic of Korea) have been tasked with overseeing actions taken by regulators, IFIs, accounting-standard setters and others to accomplish these reforms.
Actions to be Taken by Accounting Standard-Setters and Regulators
Under the heading: Strengthening Transparency and Accountability, the G-20 asks that accounting standard-setters and regulators take the following actions. (Note: additional actions for regulators are described in other sections of the action plan.)
Immediate Actions by March 31, 2009
- The key global accounting standards bodies should work to enhance guidance for valuation of securities, also taking into account the valuation of complex, illiquid products, especially during times of stress.
- Accounting standard setters should significantly advance their work to address weaknesses in accounting and disclosure standards for off-balance sheet vehicles.
- Regulators and accounting standard setters should enhance the required disclosure of complex financial instruments by firms to market participants.
- With a view toward promoting financial stability, the governance of the international accounting standard setting body should be further enhanced, including by undertaking a review of its membership, in particular in order to ensure transparency, accountability, and an appropriate relationship between this independent body and the relevant authorities.
- Private sector bodies that have already developed best practices for private pools of capital and/or hedge funds should bring forward proposals for a set of unified best practices. Finance Ministers should assess the adequacy of these proposals, drawing upon the analysis of regulators, the expanded FSF, and other relevant bodies.
- The key global accounting standards bodies should work intensively toward the objective of creating a single high-quality global standard. * Regulators, supervisors, and accounting standard setters, as appropriate, should work with each other and the private sector on an ongoing basis to ensure consistent application and enforcement of high-quality accounting standards.
- Financial institutions should provide enhanced risk disclosures in their reporting and disclose all losses on an ongoing basis, consistent with international best practice, as appropriate. Regulators should work to ensure that a financial institution' financial statements include a complete, accurate, and timely picture of the firm's activities (including off-balance sheet activities) and are reported on a consistent and regular basis.
- In addition the G-20 state: “In consultation with other economies and existing bodies, drawing upon the recommendations of such eminent independent experts as they may appoint, we request our Finance Ministers to formulate additional recommendations, including in the following specific areas:
1. Mitigating against pro-cyclicality in regulatory policy;
2. Reviewing and aligning global accounting standards, particularly for complex securities in times of stress;
3. Strengthening the resilience and transparency of credit derivatives markets and reducing their systemic risks, including by improving the infrastructure of over-the-counter markets;
4. Reviewing compensation practices as they relate to incentives for risk taking and innovation;
5. Reviewing the mandates, governance, and resource requirements of the IFIs [International Financial Institutions, e.g. the Financial Stability Forum and the IMF]; and
6. Defining the scope of systemically important institutions and determining their appropriate regulation or oversight.
Some may observe that the SEC’s release of its proposed IFRS Roadmap on November 14 may be viewed as a step consistent with point 2 above (aligning global accounting standards, generally). More specifically, with respect to aligning global standards for complex securities, FASB and the IASB have a number of initiatives currently under way, including a series of roundtables and a high level advisory group, and the SEC is currently conducting a study of the impact of mark-to-market (fair value) accounting which Congress requested the SEC to report on by Jan. 2. In related news, the second in a series of SEC’s roundtables on MTM is slated to take place on Friday, Nov. 21. (See our prior post on SECs Oct. 29 MTM roundtable.)
Officials Note Some Changes May Seem Technical, Mundane, But Are Not
A press briefing by Senior Administration Officials at the White House yesterday on the results of the G-20 meeting included references to the accounting-related recommendations. One official said, “I'm going to turn to my colleague in a moment to walk us through some of the very concrete steps and measures and decisions that were adopted … let me point out that a number of these may sound very technical or very mundane. I can assure you they are not. These technical changes, these agreements to change practices or enhance rules and regulations, this is the stuff of financial markets reform.”
The next “Senior Administration Official” stated, according to the transcript: “Well, after that description of what I'm going to talk about, I'm sure you're all on the edge of your seat. (Laughter.) This is my life. I've been living this stuff. I want you to get all excited about it.” The official added: “So there was, for a leaders meeting… probably a more detailed and more substantive discussion of a number of topics … given the nature of this broader subject than you would have expected. And within the context of strengthening transparency and accountability, the leaders had a conversation about the need for better disclosure. And as part of the action plan, there was a specific commitment made that by March 31st of 2009, regulators and accounting standard setters should have required enhanced disclosure of complex instruments by firms to market participants. So a very specific -- one of many of the 47 -- but a very specific request that kind of makes sense as you think about some of the challenges we have had over the last year and how they've been driven by the lack of transparency and the complexity of a number of these products.”
The level of engagement of the G-20 officials in discussing accounting-related matters was specifically commented on by the senior administration official, who described one aspect of the G-20 summit as: “not so much the content of the actions, because people don't follow valuation of securities and FASB and accounting standards so closely -- but how detailed and concrete and immersed in the detail these leaders were. They weren't talking at this level and saying, oh, experts will deal with this. This was a very detailed discussion by the leaders themselves about what needed to be done, both at the most specific level and also, stepping back, the affirmation of these core principles.”
Commitment to an Open Global Economy; Caution on Over-Regulation
The G-20 reaffirmed their commitment to an open global economy. As noted in the Declaration, they stated, “We recognize that these reforms will only be successful if grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems.”
Additionally, the G-20 state: “Recognizing the necessity to improve financial sector regulation, we must avoid over-regulation that would hamper economic growth and exacerbate the contraction of capital flows, including to developing countries.” See the Declaration for a full discussion of the G-20 views on maintaining an open global economy and other matters.
Next Meeting By April 30
The G-20 agreed to meet again by April 30, 2009. President George W. Bush hosted yesterday’s G-20 summit in Washington, DC, we cited the President’s opening remarks in our post on Friday. President-elect Barack Obama did not attend this weekend’s G-20 meeting (he has been quoted as emphasizing the U.S. has one administration and one President at a time), however he sent former Secretary of State Madeleine Albright and former Congressman Jim Leach to meet privately with representatives of the G-20 nations. Albright and Leach noted in a statement, as reported in this Reuters article in the New York Times, "The president-elect believes that the G20 summit of leaders from the world's largest economies is an important opportunity to seek a coordinated response to the global financial crisis.”
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