Improving Financial Regulation

Report of the Financial Stability Board to G20 Leaders

1. Since the London Summit, the Financial Stability Board (FSB) and its members have advanced a major program of financial reforms based on clear principles and timetables for implementation that are designed to ensure that a crisis on this scale never happens again.

2. Much has already been achieved, and much is underway that when implemented will result in a very different financial system than the one that brought us this crisis. However, policy development is not completed, and detailed implementation of the full set of needed reforms will take time and perseverance.

3. In a globally integrated market economy, where concerns about a level playing field and protectionist pressures are real, it is vital that G20 Leaders strongly support the international policy development underway and signal their determination to implement fully and consistently the reforms at national levels.

4. In recent months, expectations have taken hold in some parts of the private financial sector that the financial and regulatory system will remain little changed from its pre-crisis contours. These expectations - that business will be able to go on just as before - need to be dispelled.

5. Our objective is to create a more disciplined and less procyclical financial system that better supports balanced sustainable economic growth. This system will not allow leverage to increase to the extent that it did. Nor will we allow risks to be taken where profits accrue to individual actors but ultimate losses are borne by governments and the wider public.

6. To these ends, our program includes substantially higher requirements for the quantity and quality of capital and liquidity at financial institutions. It also includes reforms to accounting standards and compensation regimes that improve transparency and limit incentives to excessive risk taking. We will constrain risks in trading-related activity by improving market infrastructure and by significantly raising capital charges for trading books.

7. Our reform plans set reasonable implementation windows to avoid aggravating the present crisis. While the financial system will continue to face challenges for some time, the faster our financial systems and economies recover, the faster we should implement finalised reforms.

8. This crisis has highlighted the moral hazard risks posed by institutions that have become too big to fail or that, by their interconnected nature, are too complex to resolve. We need to address the deeper-seated challenges that these institutions pose. We are committed to developing the solutions to these problems over the next twelve months.

9. In recent quarters, many financial institutions have returned to profitability. These profits owe much to the extraordinary official measures taken to stabilise the system, many of which remain in place. It is imperative that these profits be retained in financial institutions to rebuild capital necessary to support lending, allow official support measures to be removed and prepare institutions to meet future higher capital requirements.

10. The international supervisory and regulatory community is agreed that restricting dividend payments, share buybacks and compensation rates are appropriate means to these ends.

11. The support of G20 Leaders will be vital for the major decisions that will need to be made in these important areas, and we ask that you support us in these endeavours. Continue reading