In its April 2008 Report on Enhancing Market and Institutional Resilience ("the FSF Report"), the Financial Stability Forum (FSF) and its member bodies issued a comprehensive set of recommendations reflecting a consensus, both internationally and cross-sectorally, on the actions needed to address the fundamental weaknesses that have been at the root of the present turmoil and to build a more resilient financial system. The FSF Report sets out concrete actions in five areas: (i) strengthening capital, liquidity and risk management in the financial system; (ii) enhancing transparency and valuation; (iii) changing the role and uses of credit ratings; (iv) strengthening the authorities' responsiveness to risks; and (v) putting in place robust arrangements for dealing with stress in the financial system. A well-defined process was created for follow-up, with institutional responsibilities and timetables for implementation, and a rigorous framework for monitoring and reporting.

In October 2008, the FSF published a follow-up report ("the Follow-up Report") reviewing progress in implementation of the recommendations, and described the work underway by national authorities and international bodies as well as parallel initiatives in the private sector complementing official action. The Follow-up Report reiterated the FSF's commitment to monitor and coordinate implementation so as to preserve the advantages of integrated global financial markets and a level playing field across countries.

This report provides an update of implementation progress since October 2008. Since October, extensive progress has been made in the implementation of the FSF Report's recommendations:

  • Banking supervisors have published proposals for improving risk coverage under Basel II, especially with regard to credit-related risks in the trading book. They have also published revised capital charges for liquidity commitments to offbalance sheet entities and for the re-securitised instruments.
  • The Basel Committee on Banking Supervision (BCBS) published in January 2009 the standards for firm-wide risk management that supervisors will assess under Pillar 2 of the capital framework. The standards cover governance, risk concentrations, capital planning, off-balance-sheet exposures, underwriting, securitization activities and reputational risk.
  • Central counterparty clearing for over-the-counter (OTC) credit derivatives have been launched in the US and in Europe. 
  • Consistent guidance has been issued by the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) for fair valuation when markets are illiquid, and for the transfer of assets between valuation categories in rare circumstances. The IASB has also proposed revised standards for the consolidation and disclosure of off-balance sheet entities and related exposures. The IASB finalised in March 2009 an amendment to International Financial Reporting Standards (IFRS) 7 setting forth enhancements to required risk and valuation disclosures for financial activities, including for complex financial instruments.
  • The 2008 revisions of the International Organization of Securities Commissions (IOSCO) Code of Conduct Fundamentals for Credit Rating Agencies (CRAs) have been substantially implemented by several CRAs including the three largest agencies. IOSCO has also developed a model examination module to be used by authorities that regulate and inspect CRAs.  
  • Supervisory colleges have been established for most of the financial institutions identified by the FSF Working Group on Market and Institutional Resilience (FSF WG), and many of them held face-to-face meetings by end-2008. `
  • The International Association of Deposit Insurers (IADI) and BCBS issued in March 2009 Core Principles for Effective Deposit Insurance Systems.
  • The FSF has adopted Principles for Cross-border Cooperation on Crisis Management, published in April 2009.

Since issuing its April 2008 report, the FSF and its member bodies have examined the forces that contribute to procyclicality in the financial system and developed recommendations covering the bank capital framework, loan loss provisioning practices, and ways of dampening the adverse interaction between leverage and valuation. The recommendations and outputs of the workstreams related to procyclicality are presented in the Report of the FSF on Addressing Procyclicality in the Financial System, published in April 2009. In addition, the FSF has developed Principles for Sound Compensation Practices, also published in April 2009.

The efforts underway following the FSF Report also helped support key aspects of the Action Plan adopted by the G20 Leaders at their November 2008 Summit and have resulted in an extensive exchange of information with the G20 in the preparation of the London Summit.

The following pages summarise the progress since October 2008 in implementing the five areas of recommendations set forth in the FSF report. Continue reading