G30: Financial Reform: A Framework for Financial Stability 2009
Financial Reform: A Framework for Financial Stability 2009, 80 pages. Type: Special Report ISBN: 1-56708-146-0. Price: $49 …
www.group30.org/pubs/pub_1460.htm -
In July 2008, the Group of Thirty (G30) launched a project on financial reform under the
leadership of a Steering Committee chaired by Paul A. Volcker, with Tommaso Padoa-
Schioppa and Arminio Fraga Neto as its Vice Chairmen. They were supported by other
G30 members who participated in an informal working group. All members (apart from
those with current and prospective national official responsibilities) have had the opportunity
to review and discuss preliminary drafts.
The Report is the responsibility of the Steering Committee and reflects broad areas of
agreement among the participating G30 members, who participated in their individual capacities.
The Report does not reflect the official views of those in policymaking positions or
in leadership roles in the private sector. Where there are substantial differences in emphasis
and substance, they are noted in the text.
The G30 undertook this project as the global financial crisis entered its second year.
The analysis has been informed by the extreme events later in 2008, which rocked the very
foundation of the established financial system and which led to unprecedented and massive
government intervention both in the United States and in many other countries to contain a
spreading financial panic.
The Report does not address the need for these or possible further emergency actions.
Difficult questions of weaning markets and financial institutions from official life support
are sure to arise. While the analysis and recommendations deal in some instances with the
need for legislation, regulation, and supervision, the Report is not directed toward questions
about the appropriate focus and nature of national administrative arrangements.
These are, in any event, influenced by the particular constitutional, legal, and administrative
traditions of individual nations and regional arrangements.
The Report, rather, focuses on how the financial system might reasonably be organized
once the present crisis has passed, to better assure a reasonable degree of stability. Policymakers,
central bankers, and financial regulators will necessarily remain focused on dealing
with immediate threats to the effective functioning of markets. However, in taking what
are in effect emergency measures, a consensus on the desirable and lasting elements of a
reformed system can be useful, and even necessary, to speed restoration of confidence in
sturdy, competitive, and efficient financial arrangements serving both national and international
markets. The Report, benefitting from the experience and broad perspective of
G30 members, is intended to help inform the needed debate among policymakers and the
international financial community on these issues. The Report addresses:
a. The policy issues related to redefining the scope and boundaries of prudential
regulation;
b. Reforming the structure of prudential regulation, including the role of central banks,
the implications for the workings of “lender-of-last-resort” facilities and other elements
of the official “safety net,” and the need for greater international coordination;
c. Improving governance, risk management, regulatory policies, and accounting practices
and standards; and
d. Improvements in transparency and financial infrastructure arrangements.
Two final notes are in order.
First, this Report is intended to be useful to policymakers in all the countries whose
financial systems have been disrupted in this crisis. For this reason, most recommendations
are framed in terms that should permit consideration in different countries in a fashion that
takes account of particular features of their national systems. However, since this crisis has
been rooted in developments within the United States, and given the particular importance
of reforms to the U.S. financial system in terms of its size and global impact, several of the
issues and recommendations have a direct U.S. focus.
Second, the focus of this Report is on the safety and soundness aspects of financial
regulation. There are many other important aspects of financial regulation that are touched
upon here only to the extent that they bear on financial stability, including competition
policies, customer and investor protection, market practices oversight, and financial fraud
and crime prevention. Also, to the extent distinctions are drawn between regulation and
supervision, the former encompasses the setting of policies, principles, rules, and standards,
while the latter encompasses the judgmental application of those policies and standards to
particular institutions.
The key issue posed by the present crisis is crystal clear: How can we restore strong,
competitive, innovative financial markets to support global economic growth without once
again risking a breakdown in market functioning so severe as to put the world economies
at risk?
The search for viable answers to that question needs to begin.
Paul A. Volcker
Chairman of the Trustees
The Group of Thirty
Jacob A. Frenkel
Chairman
The Group of Thirty
The report addresses flaws in the global financial system and provides 18 specific recommendations to: improve supervisory systems by redefining the scope, boundaries, and structure of prudential regulation; enhance the role of the central banks; improve governance practices and risk management; address pro-cyclicality via capital and liquidity standards; enhance accounting practices; strengthen the financial infrastructure; and increase coordination internationally. The project was led by Paul Volcker, Chairman, and Tommaso Padoa-Schioppa and Arminio Fraga Neto, Vice Chairmen. Click here to read a copy of the list of recommendations.
To read press coverage of the report, click here.
To download the list of recommendations, click here.
Paul Volcker discusses the report on CNBC.
How to fix finance
Jan 15th 2009 | NEW YORK
From Economist.com
An influential group makes some provocative proposals for re-regulating global finance
AP
WITH the fires still raging, scorching industry after industry, it might seem premature to ask what should rise from the ashes. But policymakers are understandably keen to start work on redesigning their financial systems. If 2008 was the year when the flaws in the old model became painfully clear, 2009 is likely to be the one when governments embrace re-regulation in an effort to fix it. A weighty report published on Thursday January 15th is sure to play a crucial role in shaping the agenda.
The Group of Thirty’s “Financial Reform: A Framework for Financial Stability” is important both because of the concreteness of its 18 recommendations and because of who was involved. The authors were led by Paul Volcker, a former head of the Federal Reserve who, as an economic adviser to Barack Obama, has the president-elect’s ear. Other members of the G30 include Tim Geithner, Mr Obama’s nominee for treasury secretary, Larry Summers, another economic adviser, and Jean-Claude Trichet, president of the European Central Bank. Although they recused themselves from direct participation, they are understood to support the bulk of the findings. “Everyone stands behind the report in spirit. No one disowned it,” says an insider.
And muscular stuff it is. Under the proposals, banks that are deemed systemically important would face restrictions—in the form of “strict” capital requirements—on high-risk proprietary activities, that is bets made using their own money. While this would not quite mean a return in America to the separation of commercial banking and investment banking that ended with the repeal of the Glass-Steagall act in 1999, it would strongly encourage the investment-banking arms of universal banks to focus on client businesses, such as merger advice, rather than trading. One reason for separating these functions is that they seem to be “unmanageable in financial conglomerates”, says Mr Volcker.
The report also calls for raising the level at which banks are considered to be well-capitalised. This should be expressed as a broad range, it says, with the expectation that banks will operate at the upper end when markets are frothy.
The recommendations concerning non-bank financial institutions—the so-called “shadow” banking system that has contributed so much of the pain—are no less radical. One proposal is sure to make the hair stand up on hedge-fund managers’ necks: pools of private capital that live on borrowed money should have to register with a regulator and produce regular reports, disclosing things such as leverage and performance. The biggest of them would even be subject to capital and liquidity standards. The report even recommends bank-like regulation for money-market funds that give assurances about maintaining a stable net-asset value, as most presently do. And it calls for legislation in America to set up a mechanism for dealing with non-bank failures, the lack of which has caused no end of regulatory consternation. For banks and non-banks alike, the report calls for a more refined analysis of liquidity in stressed markets and more robust contingency-planning.
Central banks should have a stronger role in policing such things, the authors argue, and need to be especially vigilant in good times, when credit is expanding quickly. They should also be more involved in supervising bank safety and soundness—although, to safeguard central-bank integrity, the role of chief firefighter is best played by others once trouble ignites. Central bankers “need to be more concerned about financial stability, but less involved in crises,” says Tommaso Padoa-Schioppa, one of the G30.
Of the other areas covered by the report, three are particularly eye-catching. It advocates a formal system of regulation for over-the-counter derivatives, such as the type of credit swaps that sank American International Group, an insurer. It urges regulators to force banks to hold on to a significant portion of credit risk when they package loans into securities and sell them on, in order to curb reckless underwriting of mortgages and other debt. And it calls for a rethink of certain accounting principles that may exacerbate downturns through pro-cyclicality, including the practice of marking assets to the current market value; “more realistic guidelines” are needed for illiquid instruments and distressed markets. It also wants to see more flexibility in guidelines for loan-loss reserves. Some regulators take a dim view of banks that squirrel away extra reserves in good times, on the grounds that this constitutes earnings manipulation, even though it leaves them better prepared to ride out the bad times.
The other important message is that a global crisis requires a global fix. International co-ordination should go beyond rule-making to closer harmonisation, including enforcement, say the authors, and more needs to be done to curb the uneven application of international rules at national level—although they shed little light on how this could be achieved.
It is quite a package. At the press conference to unveil the document Mr Volcker was typically modest, insisting it was more an agenda for discussion than a hard-and-fast blueprint. But, given his closeness to Mr Obama, it is hardly far-fetched to imagine much of it becoming official policy. All that talk of the biggest overhaul of financial regulation since the 1930s just took a step towards reality.