A report released today entitled 'Financial reform - A framework for financial stability' includes four core and 18 specific recommendations that aim to strengthen the oversight and stability of the systemically important financial institutions largely responsible for maintaining the market infrastructure. The first recommendation emphasises the need for the largest and most complex banking organisations to be subject to particularly close regulation and supervision, meeting high and common international standards. The G-30 says these institutions should be restricted in undertaking proprietary activities that present particularly high risks and serious conflicts of interest.
Much of the report concerns the governance, operations, regulation and supervision of banks but capital market participants, including hedge funds and equity funds, would also be required to meet higher standards of transparency, paying greater attention to capital, liquidity and risk management practices.
Attention is also directed to the practices of credit rating agencies, settlement and clearance arrangements for derivatives, approaches towards common international accounting standards and the treatment of fair value accounting, and the need for closer international co-operation and co-ordination. The report calls for the creation of a framework for national level consolidated prudential regulation and supervision over all large insurance companies in countries where such a structure is lacking - namely the US.
The report also proposes that an appropriate prudential regulator be designed for large investment banks and broker-dealers not organised as bank holding companies. It states there are compelling grounds for the regulation of hedge funds, and it also recommends increased supervision of money-market mutual funds and a variety of other private pools of capital.
Arminio Fraga, the G-30 steering committee's vice-chairman, founding partner at Gavea Investimentos and former governor of Banco do Brasil, says: "The report recommends a series of significant reforms. On the prudential side, they include the regulatory treatment of the so-called parallel banking system, the role of the central bank in maintaining financial stability, and the need to improve information standards and to regulate over-the-counter derivatives markets. Given the pervasive failures in risk management in financial institutions, the report also emphasises the role of proper governance and incentives, including the important link between risk taking and compensation systems. Lastly, on the crisis management side, the report focuses on how far the access to lender-of-last-resort facilities should go, and on the importance of having in place a proper resolution mechanism for failed financial institutions."
The G-30 stresses that the recommended regulatory policies and accounting standards should guard against procyclical effects and are consistent with maintaining prudent business practices. The report also states that regulatory capital standards should be enhanced and benchmarks for bank capital raised.
A host of recommendations in the report are based on the key conclusion that financial markets and products must be made more transparent, with better-aligned risk and prudential incentives. The report adds that the infrastructure supporting such markets must be more robust and resistant to potential failures of even large financial institutions. Several sections of the report emphasise that, given the global nature of the markets, it is essential that there be consistent regulatory frameworks on an international scale, and national regulators should share information and enter into appropriate co-operative arrangements with authorities of other countries responsible for overseeing activities.
The report also proposes strengthening the role of central banks. In countries where the central bank is not the prudential regulator, the G-30 recommends central banks should have: (i) a role on the governing body of the prudential and markets regulator(s); (ii) a formal review role with respect to proposed changes in key prudential policies, especially capital and liquidity policies as well as margin arrangements; and (iii) the supervisory role in regard to the largest systemically significant firms, as well as critical payment and clearing systems.
Click here to read the full report: http://www.group30.org/index.htm