G-20 creates Financial Stability Board from FSF; frees up $1.1 trillion for IMF

The G-20 leaders agreed to create a new body for international systemic oversight, new regulatory requirements for banks and hedge funds and a massive cash injection for the IMF

LONDON - The G-20 nations yesterday released a statement pledging a number of broad international initiatives in response to the global financial crisis. This includes a new body to provide international systemic oversight and $1.1 trillion of additional funds - mostly to a strengthened International Monetary Fund (IMF).

The 'Leaders' Statement' creates a new Financial Stability Board (FSB) from the previous Financial Stability Forum (FSF), with a new macro-prudential supervision mandate and a membership including the G-20 countries, the previous FSF members, Spain, and the European Commission. It is unclear how strong this new mandate will be, without, for example, mention of powers of 'comply or explain'.

Leaders also agreed to wait until recovery is assured before taking action to improve the Basel II banking capital system. The statement says future regulation "must prevent excessive leverage and require buffers of resources to be built up in good times" - a reference to future use of leverage ratios to raise capital and dynamic provisioning to counteract pro-cyclicality in Basel II.

The G-20 also pledged to implement "the FSF's tough new principles on pay and compensation" presented on Thursday, reforming banker bonuses and corporate responsibility.

The release also agrees on the need to extend regulation and oversight to all systemically important firms and instruments - specifically including hedge funds in future supervision. There was no further detail as to the details of supervision or how funds could be defined as systemically important.

The IMF will see its resources trebled to $750 billion. This will allow it greater capability as the lender of last resort for national governments running into insolvency. The new FSB will co-operate with the IMF on systemic issues, but the FSB's creation has been designed to placate US, Asian and other emerging nations who distrust the IMF's disproportionately European composition.

The statement can be read here.
http://www.g20.org/Documents/g20_communique_020409.pdf