Thursday, April 2, 2009

G-20 Leaders Pledge Action; Financial Stability Board to Replace FSF

Earlier today, leaders of the G-20 nations issued a nine-page Communique announcing they have "pledged to do whatever is necessary to:

  • restore confidence, growth, and jobs;
  • repair the financial system to restore lending;
  • strengthen financial regulation to rebuild trust;
  • fund and reform our international financial institutions to overcome this crisis and prevent future ones;
  • promote global trade and investment and reject protectionism, to underpin prosperity; and
  • build an inclusive, green, and sustainable recovery

Under the heading of 'strengthening financial regulation,' the G-20 leaders state: "We have today also issued a Declaration, Strengthening the Financial System. In particular we agree:

  • to establish a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission;
  • that the FSB should collaborate with the IMF to provide early warning of macroeconomic and financial risks and the actions needed to address them;
  • to reshape our regulatory systems so that our authorities are able to identify and take account of macro-prudential risks;
  • to extend regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds;
  • to endorse and implement the FSF’s tough new principles on pay and compensation and to support sustainable compensation schemes and the corporate social responsibility of all firms;
  • to take action, once recovery is assured, to improve the quality, quantity, and international consistency of capital in the banking system. In future, regulation must prevent excessive leverage and require buffers of resources to be built up in good times;
  • to take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information;
  • to call on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards; and
  • to extend regulatory oversight and registration to Credit Rating Agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest."

The G-20 leaders add: "We instruct our Finance Ministers to complete the implementation of these decisions in line with the timetable set out in the Action Plan. We have asked the FSB and the IMF to monitor progress, working with the Financial Action Taskforce and other relevant bodies, and to provide a report to the next meeting of our Finance Ministers in Scotland in November."

Read more in the G-20 Communique (Leaders Statement), the Communique Annex: Declaration on Strengthening the Financial System, and the related Declaration on Delivering Resources Through the International Financial Institutions.

FEI members interested in financial regulatory reform, contact Cady North, manager, Government Affairs, in our Washington D.C. office, if you are interested in participating in an FEI working group to discuss and learn more about financial regulatory reform proposals in the U.S. Not an FEI member? Learn more about FEI membership here, or feel free to contact me for info about membership at

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Per Kurowski said...

Financial Stability Forum, please, show some courage to tell it as it is.

“Addressing procyclicality in the financial system is an essential component of strengthening the macroprudential orientation of regulatory and supervisory frameworks.” [and so there is a need to] “mitigate mechanisms that amplify procyclicality in both good and bad times”. That is part of what the Financial Stability Forum recommends in their report of 2 April 2009.

Indeed it sounds a so very impressive and technically solid conclusion? Yet it completely ignores that the prime reason why we find ourselves in the current predicament has much less to do with prociclicality in good times or bad times and much more with some good old fashioned plain vanilla type plain bad investment judgments. What had the world to do, whether in good or bad times, investing in securities collateralized by awfully bad awarded mortgages to the subprime sector in the USA? Would we be so deep in this mess had not the credit rating agencies awarded AAA to such securities? Of course not!

It is a shame that the Financial Stability Forum does not have in it to openly accept the fact that the whole risk based minimum capital requirements for banks idea imposed by Basel is fundamentally flawed, in so many ways. They only accept it in a veiled way when they recommend a “supplementary non-risk based measure to contain bank leverage”.

The lack of forthrightness serves no purpose and can only supply further confusion. Let me here just spell out two of the arguments I have been making.

The current minimum capital requirements are based on requiring less capital for investments that are perceived as being of lower risk while in fact, in a cumulative way, what most signifies a truly systemic risk for the world, lies exclusively in the realms of the investments that are perceived and sold as being of a low risk. In other words systemically the world at large does never enter B- land it goes like a herd to where it is told the AAAs live. The problem was not so much that the world went to play at the casino, the real problem was that the tables were rigged, one way or another.

In the current minimum capital requirements dictated by Basel a loan by a bank to a corporation rated AAA by a human fallible credit rating agencies requires only $1.60 for each $100 lent, equivalent to 62.5 to 1 leverage and this obviously has much more to do with regulators losing their marbles than with times being good or bad.

This financial and economic crisis will cause more misery in the world than most if not perhaps all wars. Do you really not think the world merits the truth and nothing but the truth?

Butler Consultants said...

I hear we can thank G20 for the stock market increase yesterday.

Phil Henshaw said...

It's impressive how forceful and balanced the April 2 G20 report is, but there's a major flaw.

I'm an environmental systems physicist, and know exactly how to define the kind of growth that is certain to fail in collapse and the kind that matures and become sustainable. The distinction between the kind of growth that caused the failure of the financial system is easily specified, but takes some thinking to understand.

The G20 proposals clearly don't distinguish between the two kinds, though, and even seem to side on promoting the kind of growth that collapses. Promises that are too good to be true are not flawed by the character of the person promising them, but by whether they will upset their environments. That's the problem.

To go into detail would take some back and forth, since physics and economics don't used the same language, but refer to the same physical world. The curious starting point is that in all natural systems new organization develops by a process beginning with compound growth. You can list any one and identify its compound growth period. That *primary compound growth* is itself an environmental instability, though, invariably. The question is which kind of *secondary growth* process is triggered by it, whether maturation or collapse. You can bet on that being the choice as confidently as one can bet on the earth being round or gravity keeping it in orbit, really.

Phil Henshaw

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Anonymous said...

I've been trying to come to some kind of decision about this issue. I'm just an ordinary working American housewife and I'm just as confused as ever. We ordinary people don't always have the time and patience to weave through all the nuances and near truths, so we depend on the "experts" to tell us the truth. In all of our history, we have been lied to in some way, even (gasp!)Lincoln, FDR, Truman. No one appears to be listening to any of our protests, so when these big issues emerge all we can do is choose perhaps the least evil and hope we can survive.

Chiang Mai said...

This post is a great resource for anyone who wants to start a discussion on the issue. Police officers did not have sufficient training to tackle public disorder on the scale of the G20 protests. Authorities will be paying for police officers to protect delegates attending the September summit and to monitor protesters who could spawn violence.

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