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30 Group of Thirty
Financial ReFoRm A Framework for Financial Stability
embargoed for release at 11:00am eST on January 15, 2009
About the Authors
The views expressed in this paper are those of the Working Group on Financial Reform and do not necessarily represent the views of all of
the individual members of the Group of Thirty.
ISBN I-56708-146-0Copies of this report are available for $49 from:
The Group of Thirty1726 M Street, N.W., Suite 200
Washington, D.C. 20036Tel: (202) 331-2472 Fax: (202) 785-9423www.group30.org email:info@group30.org
Financial ReFoRm A Framework for Financial Stability
30 Group of Thirty
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Table oF conTenTs
Acronyms and Abbreviations ..............................................................................................5
Foreword ............................................................................................................................7
Acknowledgements .............................................................................................................9
Financial Reform Working Group .....................................................................................11
Introduction ......................................................................................................................13
Part 1 – An Overview of a Program for Reform ................................................................15 GuidingPrinciplesforFinancialReform....................................................................17
1. ThePublicSectorRoleinSafeguardingFinancialStability..................................172. FairandEffectiveCompetition............................................................................183. OfficialOversightandCrisisResponse................................................................184. InternationalConsistencyandCoordination.......................................................185. GovernanceandRiskManagement.....................................................................19
CoreRecommendations.............................................................................................21
Part 2 – Redefining the Boundaries of Prudential Regulation ............................................231. PrudentialRegulationandSupervisionofBankingOrganizations.......................27 Recommendation1:............................................................................................282. ConsolidatedSupervisionofNon-BankFinancialInstitutions............................29 Recommendation2:...........................................................................................293. MoneyMarketMutualFundsandSupervision...................................................29 Recommendation3:............................................................................................294. OversightofPrivatePoolsofCapital...................................................................30 Recommendation4:............................................................................................305. Government-SponsoredEnterprises.....................................................................31 Recommendation5:............................................................................................31
Part 3 – The Structure of Prudential Regulation and International Coordination ..............336. RegulatoryStructure..........................................................................................34 Recommendation6:............................................................................................357. RoleoftheCentralBank.....................................................................................35 Recommendation7:............................................................................................368. InternationalCoordination..................................................................................37 Recommendation8:............................................................................................37
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Part 4 – Improving Standards for Governance, Risk Management, Capital, and Liquidity .........................................................................39
9. RegulatoryStandardsforGovernanceandRiskManagement.............................40 Recommendation9:............................................................................................4110.RegulatoryCapitalStandards.............................................................................42 Recommendation10:..........................................................................................4311.StandardsforLiquidityRiskManagement..........................................................43 Recommendation11:..........................................................................................4412.FairValueAccounting.........................................................................................44 Recommendation12:..........................................................................................46
Part 5 – Improving Transparency and Incentives, and Strengthening the Financial Infrastructure ..................................................................47
13.RestoringConfidenceinSecuritizedCreditMarkets............................................48 Recommendation13:..........................................................................................4914.RatingAgencyReforms.......................................................................................50 Recommendation14:..........................................................................................5115.OversightofCreditDefaultSwaps(CDS) andOver-the-Counter(OTC)Markets................................................................52 Recommendation15:..........................................................................................5316.AResolutionMechanismforFinancialInstitutions.............................................53 Recommendation16:..........................................................................................5417.ImprovingTransparencyofStructuredProductMarkets.....................................55 Recommendation17:..........................................................................................5518.SharingMarketActivityandValuationInformation............................................56 Recommendation18:..........................................................................................56
Part 6 – Concluding Comment ..........................................................................................57
Appendix ..........................................................................................................................59
Members of the Group of Thirty .......................................................................................69
Publications of the Group of Thirty since 1990 .................................................................73
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acRonyms and abbReviaTions
CCP Centralcounterparty[clearing]
CDO Collateralizeddebtobligation
CDS Creditdefaultswap
CLO Collateralizedloanobligation
CRMPG CounterpartyRiskManagementPolicyGroup
FDIC FederalDepositInsuranceCorporation
FVA Fairvalueaccounting
GSE Government-SponsoredEnterprise
NAV Netassetvalue
NRSROs NationallyRecognizedSecuritiesRatingsOrganizations
OTC Over-the-counter
SEC SecuritiesandExchangeCommission
SIV StructuredInvestmentVehicle
TARP TroubledAssetReliefProgram
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FoRewoRd
InJuly2008,theGroupofThirty(G30)launchedaprojectonfinancialreformunderthe
leadershipofaSteeringCommitteechairedbyPaulA.Volcker,withTommasoPadoa-
SchioppaandArminioFragaNetoasitsViceChairmen.Theyweresupportedbyother
G30memberswhoparticipatedinaninformalworkinggroup.Allmembers(apartfrom
thosewithcurrentandprospectivenationalofficialresponsibilities)havehadtheopportu-
nitytoreviewanddiscusspreliminarydrafts.
TheReportistheresponsibilityoftheSteeringCommitteeandreflectsbroadareasof
agreementamongtheparticipatingG30members,whoparticipatedintheirindividualca-
pacities.TheReportdoesnotreflecttheofficialviewsofthoseinpolicymakingpositionsor
inleadershiprolesintheprivatesector.Wheretherearesubstantialdifferencesinemphasis
andsubstance,theyarenotedinthetext.
TheG30undertookthisprojectastheglobalfinancialcrisisentereditssecondyear.
Theanalysishasbeeninformedbytheextremeeventslaterin2008,whichrockedthevery
foundationoftheestablishedfinancialsystemandwhichledtounprecedentedandmassive
governmentinterventionbothintheUnitedStatesandinmanyothercountriestocontaina
spreadingfinancialpanic.
TheReportdoesnotaddresstheneedfortheseorpossiblefurtheremergencyactions.
Difficultquestionsofweaningmarketsandfinancialinstitutionsfromofficiallifesupport
aresuretoarise.Whiletheanalysisandrecommendationsdealinsomeinstanceswiththe
needforlegislation,regulation,andsupervision,theReportisnotdirectedtowardques-
tionsabouttheappropriatefocusandnatureofnationaladministrativearrangements.
Theseare,inanyevent,influencedbytheparticularconstitutional,legal,andadministra-
tivetraditionsofindividualnationsandregionalarrangements.
TheReport,rather,focusesonhowthefinancialsystemmightreasonablybeorganized
oncethepresentcrisishaspassed,tobetterassureareasonabledegreeofstability.Policy-
makers,centralbankers,andfinancialregulatorswillnecessarilyremainfocusedondealing
withimmediatethreatstotheeffectivefunctioningofmarkets.However,intakingwhat
areineffectemergencymeasures,aconsensusonthedesirableandlastingelementsofa
reformedsystemcanbeuseful,andevennecessary,tospeedrestorationofconfidencein
sturdy,competitive,andefficientfinancialarrangementsservingbothnationalandinter-
nationalmarkets.TheReport,benefittingfromtheexperienceandbroadperspectiveof
G30members,isintendedtohelpinformtheneededdebateamongpolicymakersandthe
internationalfinancialcommunityontheseissues.TheReportaddresses:
a. Thepolicyissuesrelatedtoredefiningthescopeandboundariesofprudential
regulation;
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b.Reformingthestructureofprudentialregulation,includingtheroleofcentralbanks,
theimplicationsfortheworkingsof“lender-of-last-resort”facilitiesandotherele-
mentsoftheofficial“safetynet,”andtheneedforgreaterinternationalcoordination;
c. Improvinggovernance,riskmanagement,regulatorypolicies,andaccountingprac-
ticesandstandards;and
d.Improvementsintransparencyandfinancialinfrastructurearrangements.
Twofinalnotesareinorder.
First,thisReportisintendedtobeusefultopolicymakersinallthecountrieswhose
financialsystemshavebeendisruptedinthiscrisis.Forthisreason,mostrecommendations
areframedintermsthatshouldpermitconsiderationindifferentcountriesinafashionthat
takesaccountofparticularfeaturesoftheirnationalsystems.However,sincethiscrisishas
beenrootedindevelopmentswithintheUnitedStates,andgiventheparticularimportance
ofreformstotheU.S.financialsystemintermsofitssizeandglobalimpact,severalofthe
issuesandrecommendationshaveadirectU.S.focus.
Second,thefocusofthisReportisonthesafetyandsoundnessaspectsoffinancial
regulation.Therearemanyotherimportantaspectsoffinancialregulationthataretouched
uponhereonlytotheextentthattheybearonfinancialstability,includingcompetition
policies,customerandinvestorprotection,marketpracticesoversight,andfinancialfraud
andcrimeprevention.Also,totheextentdistinctionsaredrawnbetweenregulationand
supervision,theformerencompassesthesettingofpolicies,principles,rules,andstandards,
whilethelatterencompassesthejudgmentalapplicationofthosepoliciesandstandardsto
particularinstitutions.
Thekeyissueposedbythepresentcrisisiscrystalclear:Howcanwerestorestrong,
competitive,innovativefinancialmarketstosupportglobaleconomicgrowthwithoutonce
againriskingabreakdowninmarketfunctioningsosevereastoputtheworldeconomies
atrisk?
Thesearchforviableanswerstothatquestionneedstobegin.
PaulA.Volcker
Chairman of the Trustees
The Group of Thirty
JacobA.Frenkel
Chairman
The Group of Thirty
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Acknowledgements
On behalf of the entire Group of Thirty (G30), I would like to express appreciation to
those whose time, talent, and energy have driven this project to successful fruition.
In particular, we acknowledge the leadership of the Steering Committee, chaired by Paul
Volcker and Vice Chairmen Arminio Fraga Neto and Tommaso Padoa-Schioppa. Their
collective understanding of the nature of the financial crisis and insights as to the necessary
reforms are invaluable.
Special recognition must also go to those members of the G30 who actively participated
in the working group project deliberations and discussions.
Crafting a thoughtful report that addresses many difficult supervisory, regulatory,
market, and other matters requires considerable knowledge of the issues and an ability to
synthesize the views of numerous individuals. We particularly appreciate the work of Ste-
phen Thieke, who served as principal draftsman of the report, who brought extraordinary
experience and accomplishment to that role and to our deliberations.
We would also like to thank a number of experts who advised the Steering Group and
participated in our deliberations. In particular, thanks go to Mark Walker, Alan Beller, and
Mayree Clark. Several institutions provided valuable in-kind support to the project including:
Cleary Gottlieb Steen and Hamilton LLP, Promontory Financial Group, and RiskMetrics.
Thanks also to the editor, Diane Stamm, and the designers, Sarah McPhie and Katie
Burgess, for their dedicated efforts and flexibility when working on this project.
Finally, the coordination of this project and the many aspects of report production had
their logistical center at the offices of the Group of Thirty. This project could not have been
completed without the efforts of Executive Director Stuart Mackintosh, Sviatlana Francis,
and Nicole Firment of the Group of Thirty.
Jacob A. Frenkel
Chairman
The Group of Thirty
11
Financial ReFoRm woRking gRoup
Steering Committee
Chairman
Paul A. Volcker
ChairmanoftheTrustees,TheGroupofThirty
FormerChairman,BoardofGovernorsoftheFederalReserveSystem
Vice Chairman
Arminio Fraga Neto
FoundingPartner,GaveaInvestimentos
FormerGovernor,BancodoBrasil
Vice Chairman
Tommaso Padoa-Schioppa
FormerMinisterofEconomyandFinance,Italy
FormerChairman,InternationalAccountingStandardsCommittee
FormerMemberoftheExecutiveBoard,EuropeanCentralBank
FormerChairman,CONSOB,Italy
Project Director
Stephen Thieke,RiskMetrics
Wethankthefollowingmembers,whoparticipatedintheprojectintheirindividualcapaci-
ties.Theviewsexpresseddonotnecessarilyreflectthoseoftheinstitutionswithwhichthey
areaffiliated.
Jacob A. Frenkel
Chairman,GroupofThirty
Vice-Chairman,AmericanInternational
Group
FormerGovernor,BankofIsrael
Geoffrey L. Bell
ExecutiveSecretary,GroupofThirty
President,GeoffreyBell&Company
E. Gerald Corrigan
ManagingDirector,GoldmanSachs
Group,Inc.
FormerPresident,FederalReserve
BankofNewYork
Andrew D. Crockett
President,JPMorganChaseInternational
FormerGeneralManager,Bankfor
InternationalSettlements
12
Richard Debs
AdvisoryDirector,MorganStanley
FormerPresident,MorganStanley
International
FormerCOO,FederalReserveBank
ofNewYork
Jacques de Larosière
Counseiller,BNPParibas
FormerPresident,EuropeanBank
forReconstructionandDevelopment
FormerManagingDirector,International
MonetaryFund
FormerGovernor,BanquedeFrance
Gerd Häusler
MemberoftheBoardofDirectorsand
SeniorAdvisor,RHJInternational
FormerCounsellorandDirector,
InternationalMonetaryFund
FormerManagingDirector,DresdnerBank
John G. Heimann
SeniorAdvisor,FinancialStabilityInstitute
FormerU.S.ComptrolleroftheCurrency
William R. Rhodes
SeniorViceChairman,Citigroup
Chairman,President,andCEO,
CiticorpandCitibank
Ernest Stern
PartnerandSeniorAdvisor,
TheRohatynGroup
FormerManagingDirector,
JPMorganChase
FormerManagingDirector,WorldBank
David Walker
SeniorAdvisor,MorganStanley
International
FormerExecutiveDirector,Bank
ofEngland
FormerChairman,Securitiesand
InvestmentsBoard,U.K.
experts
AlanBeller,ClearyGottliebSteen&Hamilton,LLP
MayreeClark,AetosCapital
MarkWalker,ClearyGottliebSteen&Hamilton,LLP
StuartP.M.Mackintosh,TheGroupofThirty
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inTRoducTion
Marketeconomiesrequirerobustandcompetitivefinancialsystems,nationalandinterna-
tional,tointermediatebetweenthosewithfinancialresourcesandthosewithproductive
andinnovativeusesforthoseresources.Thatintermediationnecessarilyposesrisks—risk
withrespecttobridgingmaturitypreferencesofsaversandborrowersandriskwithrespect
tocreditworthiness.Theprocess,tobeeffective,dependsonmutualtrust—trustbasedon
confidenceintheintegrityofinstitutionsandthecontinuityofmarkets.Thatconfidence,
takenforgrantedinwell-functioningfinancialsystems,hasbeenlostinthepresentcrisis,in
substantialpartduetoitsrecentcomplexityandopacity.
Thecostsandeconomicimplicationsofthepresentcrisiscannotbefullyknownatthis
point,butweknowtheyaresevere,whethermeasuredintrillionsofdollars,inthelength
anddepthoftheworldwiderecession,orinthesimplehumantermsofunemploymentand
shatteredpersonalfinances.Wealsoknowthatthereisaneedforcomprehensivereform
thataddressesthemajorinstitutional,market,regulatory,policy,andinfrastructureweak-
nessesthathavebeenexposed.
Theseincludeweakcreditappraisalandunderwritingstandards;extremeandsometimes
unrealizedcreditconcentrations;misjudgedmaturitymismatches;wildlyexcessiveuseof
leverageonandoffbalancesheets,oftenimbeddedinlittle-understoodfinancialproducts;
andunwarrantedandunsustainableconfidenceinuninterruptedmarketliquidity.Gapsin
regulatoryoversight,accounting,andriskmanagementpracticesthatexaggeratedcycles,a
flawedsystemofcreditratings,andweaknessingovernancealsoneedattention.
Tosomedegree,thesefactorshavebeenevidentinother,lessdamagingperiodsoffinan-
cialcrises.Twouniquefeatureshaveworkedtogethertohelpaccountfortheextentofthe
currentmarketbreakdown.Highlyaggressiveandunbalancedcompensationpracticeshave
stronglyencouragedrisktakingoverprudence.Atthesametime,highlyengineeredfinan-
cialinstruments,intheircomplexity,obscuredtheriskanduncertaintiesinherentinthose
instruments,givingrisetofalseconfidenceandheavyuseofleveragetoenhanceprofits,as
assetpricesrose.Asthoseassetpricesbegandeclining,therisksbecameapparent,trig-
geringsalesofassets.Adownwardspiralofdeleveraginghasunderminedthestabilityof
eventhelargestfinancialinstitutionsatthecoreofthesystem,contributingtoaneconomic
contractionofglobalproportions.Authoritiesinmostcountrieshavebeenstretchedtoand
evenbeyondthelimitsoftheircapacitytorestoreliquidityandcontaintheinstability.
ThisReportisorganizedasfollows.Part1laysoutanoverviewofaprogramofreform,
theGroupofThirtyguidingprinciples,andcorerecommendations.Part2throughPart5
layoutthereasoningbehindandcontentof18specificpolicyrecommendations.Specifical-
ly,Part2reviewsthepolicyissuesrelatedtoredefiningtheboundariesofprudentialregula-
tion;Part3reviewsissuesrelatedtothestrengtheningofprudentialregulation,including
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theroleofcentralbanks,andinternationalcoordination;Part4addressesmattersrelated
toimprovinggovernance,riskmanagement,regulatorypolicies,andaccountingpolicies;
Part5concernsneededimprovementsintransparencyandfinancialinfrastructure,includ-
ingarrangementsforclearingandsettlingover-the-countertransactions;Part6provides
aconcludingcomment;andafulllistoftherecommendationsprovidedthroughoutthe
ReportcanbefoundintheAppendix.
paRT 1 An Overview of a Program for Reform
Financial ReFoRm A Framework for Financial Stability16
Recentmarket-drivenforces,combinedwiththeofficialresponses,havesetinmotion
strongpressuresforconsolidationwithinfinancialsystemsandwholesalechangesinthe
structureofsuchsystems.Thepotentialforundueconcentration,unfaircompetition,and
increasingconflictsofinterestwillrequireattention.Massiveextensionsofthescaleand
reachofgovernmentsafetynetsprotectingthefinancialsystemraisepracticalquestionsof
fairandpredictableofficialintervention,includingissuesarisingfromresultinggovernment
ownershipinterest,and,morefundamentally,questionsastotheappropriateboundaries
andexpectationsofsuchinterventionsbybothfinancialinstitutionsandtheircustomers.
Theclearimplicationisthatatleasttheverylargeandcomplexbankingorganizationsthat
nowaccountforsomuchoftheextensionsofcreditandcarrythemajorresponsibilityfor
maintainingthefinancialinfrastructurewillneedtobeheldtomorerigorousstandardsof
prudentialregulationandsupervision,withnewconstraintsonthetypeandscopeoftheir
risk-takingactivities.Confidenceincapitalmarketswillalsohavetoberestored,withmore
transparentandunderstandablemarketsandproducts.
Atthesametime,whiletherecanbelittledoubtabouttheneedformoreeffectiveof-
ficialoversight,caremustbetakennottoextendthereachofregulationstoofarortoo
deeply.Thenewfinancialsystemmustnotbecomesoentangledinrestrictionsthatitcan-
notflexiblyandefficientlysupporttheprocessoffinancialintermediationsoessentialto
economicprogress.
Areformprogramthatreflectsasensiblebalancebetweentheseconsiderationsshould
helpbringabout:
4Asystemwithclearerboundariesbetweenthoseinstitutionsandfinancialactivities
thatrequiresubstantialformalprudentialregulationforreasonsoffinancialstability
andthosethatdonot.
4Asystemwithstrongerregulatoryincentivesforholdinglarge(systemicallysignifi-
cant)institutionstothehigheststandardsofgovernanceandriskmanagement.
4Asysteminwhichthereismorescopeforusingregulatorypoliciestomitigateinher-
enttendenciestowarddestabilizingexcessesinrisktakingandriskaversion.
4Asystemwithamorerobustfailureresolutionregime,havingthepracticalcapacityto
permitorderlyclosingsoflargefinancialinstitutionsandtheadministrationofsafety
netresourcesinamannerthatreinforcesdisciplineonmanagers,shareholders,and
sophisticatedcreditors.
4Asysteminwhichthoseresponsibleforprudentialregulationandsupervisionhave
ahighdegreeofpoliticalandmarketindependence,andtheresourcesnecessaryto
supervisegiantinstitutionsandtokeepabreastofmarketinnovations.
4Asysteminwhichcentralbankresponsibilitiesforpromotingfinancialstabilityare
supportedbyadequateauthorityandcapacity.
Financial ReFoRm A Framework for Financial Stability 1�
4Asysteminwhichtherearestrongerincentivestoachievehigherlevelsofrisktrans-
parencyasregardsfinancialproducts,markets,andinstitutions.
4Asysteminwhichthereisahigherdegreeofinternationalconsistencyandcoordina-
tionasregardsregulatory,supervisory,andaccountingpoliciesandcrisisresolution
practices.
guiDing PrinCiPleS for finanCial reformTheoverallobjectiveoftheneededreformofthefinancialsystemmustbetoencourage
diverse,competitive,predominantlyprivatelyownedandmanagedinstitutionsandmar-
kets,abletoefficientlyandflexiblymeettheneedsofglobal,national,andlocalbusinesses,
governments,andindividuals.Thatbroadobjective,whetherachievedthroughthespon-
taneousforcesreleasedbythecurrentcrisisorbyconsideredpublicpolicy—mostlikelyby
acombinationofthetwo—mustalsoencompassassurancethatinstabilityinfreefinancial
marketsnotagainreachthepointofunderminingthefunctioningofnationalorinterna-
tionaleconomies.
Inrebuildingwhatisnowabrokensystemtomeetthoseneeds,certainguidingprin-
ciplesareparticularlyrelevant.Therecommendationssetoutinthisreportareresponsive
totheseprinciples.
1. the Public Sector role in Safeguarding financial Stability
Theinherentvolatilityoffreeandopenfinancialmarkets,andthedangerthatvolatility
mayoccasionallyreachcrisisproportionsthreateningeconomicstability,needstoberecog-
nizedinthedesignofthefinancialsystem.Theprimaryaimofprudentialregulationshould
betomaintainthehealthofthesystemandcontainsystemicriskby:
a. Subjectingthelargestandmostcomplexbankingorganizationsjudgedtobesystemi-
callyimportanttothehighestinternationalstandardsforongoingcloseregulation
andsupervision.
b.Requiringnon-bankfinancialinstitutionsthatarealsojudgedpotentiallytobeof
systemicimportancetobesubjecttosomeformofformalprudentialregulationand
supervisiontoassureappropriatestandardsforcapital,liquidity,andriskmanage-
ment.
c. Assuringcriticalelementsoftheinfrastructuresupportingthefinancialsystem,includ-
ingclearingandsettlementsystemsandrelatedlegalframeworks,aremadesufficient-
lyrobusttopermittheorderlyclosingoflarge,complexfinancialinstitutions.
d.Avoidingaccounting,regulatory,orotherpracticesthatmayinadvertentlyreinforce
recurrenttendenciestowardexcessiveexuberanceorriskaversion.
Financial ReFoRm A Framework for Financial Stability1�
2. fair and effective Competition
Toenhancefairandeffectivecompetition,regulatorypoliciesandapproachesshould,
insofarasfeasible,treatfinancialservicescommontodifferentinstitutionsuniformlyby
seeking:
a.Abalancebetweenthebenefitsofopenandfreecompetitionandthepotentialfor
unfaircompetitionarisingfromexplicitandimplicitgovernmentprotection,excessive
concentrationoffinancialresources,orextensiveconflictsofinterest.
b.Abalancebetweentheprotectionimplicitinaccesstocentralbankliquiditysupport
forsystemicallyimportantinstitutionsandrestrictionsonrisk-proneactivitiesor
thosethatpresentunmanageableconflictsofinterest.
3. official oversight and Crisis response
Whiletheprecisearrangementsmaydifferamongcountries,officialoversightandcrisisre-
sponserequirebuildingastrong,professionallymanagedstructureofpublicagencies,with
substantialinsulationfromparticularpoliticalorprivateinterestsbyassuring:
a. Centralbanks,giventheirtraditionalroleandconcernsforfinancialstability,their
financialresources,theirresponsibilitiesas“lender-of-last-resort,”andtheirtypically
professionalmanagementandhighdegreeofindependencewithingovernments,have
animportantroleinregulatoryrulesandoversight;
b.Inthoserareandexceptionalinstancesofcrisiswhenbudgetaryresourcesarere-
quiredorgovernmentalfundsareplacedatrisk,theresponsibilitylieswiththeap-
propriategovernmentalauthoritiestoauthorizesuchexpendituresandtoaffirmand
supportcentralbankdecisions.
c. Basiccrisisresolutionproceduresandresourcesshouldbeavailabletoofficialagencies
todealwithinstancesofinstitutionalfailuresosevereastopotentiallyimpairsystem
functioning.
4. international Consistency and Coordination
Effectiveapplicationoftheseprinciplesrequiresasubstantialdegreeofinternationalconsis-
tencyinapproachandcoordinationbymeansof:
a. Reviewingandreinforcingexistingeffortstoachievecommoncapital,accounting,
andreportingstandards.
b.Achievingaclearunderstandingofanappropriateresponsetofailuresornearfailures
ofinternationallyactiveandsystemicallyimportantfinancialinstitutions.
Financial ReFoRm A Framework for Financial Stability 1�
5. governance and risk management
Theneedforhighstandardsofinstitutionalgovernanceandriskmanagementmustbe
recognized,withemphasison:
a. Engagedandknowledgeableindependentboardsofdirectorsfocusedonlong-run
performance;
b.Acorporatecultureofgovernancethatdemandswell-balancedcompensationpolicies
andpracticesandfostersincentivesfordisciplinedriskmanagement,includingstrong
andindependentriskmanagementstaffs;
c. Regulatoryandsupervisorypoliciesthatreinforcethosepracticesandincentives.
Box 1 Key Characteristics of “Systemically Significant” institutions
Key characteristics of potentially “systemically significant” institutions are:
1. Size. The notional balance sheet is a frequently used measure, but it is not in itself sufficient. More refined measures would take into account a combination of on- and off-balance-sheet items, with appropriate risk weightings. These metrics should then be viewed relative to the size of a country’s financial markets, banking system, and economy, with some individual institutions or national banking systems posing potential for problems that exceed a home country govern-ment’s support capacity.
2. leverage. The scale of leverage being employed and the speed of potential liability contraction is a second important characteristic. Large size alone is not a sufficient determinant of potential systemic risk, if that size is supported by a combination of permanent equity and a structure of liabilities consistent with asset characteristics. It is the interaction of relatively illiquid risky assets and large amounts of short-term funding that creates the greatest potential for disruptive failures.
3. Scale of interconnectedness. This refers to the degree to which one financial firm’s potential failure will have immediate and sizeable knock-on effects on a large number of other significant financial institutions. In this regard, perhaps the two best systemic risk metrics are: the scale (size) and scope (range of markets) of over-the-counter (OTC) derivative market contracts; and the largest gross and net collateral counterparty risk exposures to particular firms. The lack of transparency in these markets—as contrasted with exchange-based clearinghouse arrange-ments—has made judging systemically significant degrees of interconnectedness particularly difficult.
4. the Systemic Significance of infrastructure Services. Certain types of infrastructure-like services provided by financial institutions to other such institutions are of systemic importance. These include highly specialized custody, clearing, settlement, and payment services, and many of the services provided by prime brokers. The nature of these services is such that they inevitably re-quire large credit linkages between service providers and users, and changes in service relation-ships are operationally complex and time-consuming.
Financial ReFoRm A Framework for Financial Stability20
Throughouttheseprinciples,aconsistentthemeistheimportanceofcontainingsystemic
riskandmaintainingcloseoversightof“systemicallyimportant”financialinstitutions.
Ifthefinancialindustryandmarketsaretooperate,asfaraspossible,accordingtothe
principlesofcompetitivemarkets,thenexitsoffirmsthatareunprofitableandineffective
mustbeaccepted.Regulationandsupervisioncannotandshouldnotpursueanobjective
ofzerofailuresevenamongthelargestplayers.Theprimaryaimofprudentialregulationis
tomaintainthehealthofthesystemasawholeandcontainsystemicrisk.Theappropriate
standardsforjudgingregulatoryeffectivenessarelimitingthepotentialforwildlydisrup-
tiveinstitutionalfailures,managingtheprocessoffailureswhentheyoccurinawaythat
reinforcesdisciplineonseniormanagementandshareholders,andcontainingthemarket
falloutfromsuchfailures.
Therearegeneralcharacteristicsthattogetherdefineafinancialinstitutionas“poten-
tiallysystemicallysignificant.”Thesearesize,leverage,scaleofinterconnectedness,andthe
degreetowhichthecompanyprovidesinfrastructureservicescriticaltothemarkets.These
characteristicsaredescribedmorefullyinBox1.
Inpractice,itissomecombinationofthesecharacteristicsthatmakeforapotential“sys-
temicallyimportant”financialinstitution.Whilethesecriteriacanbedefinedinadvancein
generalterms,itwouldnotbesensibleorprudentforregulatorstodefinethemwithstatisti-
calprecisionorinflexibly.Rather,acountry’sprudentialregulator—incooperationwithits
centralbankinthosecountrieswheretheserolesareseparate—shouldhavesufficientau-
thoritytosetandmodifycriteriausedtomakethesedeterminations.Theendresultshould
beabasisforidentifyingfirmsthatarelikelytorequirepotentialregulatoryinterventionto
managetheprocessoffailureandhencealsorequiremorepreventativeoversight.
Thecommonexpression“toobigtofail”isbothmisleadingandtoofaciletoreflectthe
realityofofficialsupportfor“failing”institutions.Inperhapsthemosttypicalscenario,
theinstitutionisinfactpermittedtofail,inthesensethatpracticallyallequityinvestments
arelost.Depositorsandoftenotherunsophisticatedcreditorsareprotected,buttheinstitu-
tionlosesitsidentitybyliquidation,merger,oreffectivepublicownership.Insomerecent
instances,supporthasbeenprovidedinawaythatnotonlyhasprotectedalltypesofcredi-
tors,buthasalsoletstockholdersretainsomeequityinterestwithahopeofrecovery,thus
moreaccuratelyfittingthedescriptionof“toobigtofail.”
Financial ReFoRm A Framework for Financial Stability 21
four Core reCommenDationSThereformproposalsdescribedinthebodyofthisreportconsistofanextensivesetof
interrelatedchangesinpolicies,practices,andmarketstandards.Thesearebestviewedin
thecontextofthefollowingfourbroadlystatedcorerecommendations,whichprovidea
frameworkfortheoverallprogramofreform:
I. Gaps and weaknesses in the coverage of prudential regulation and supervision must
be eliminated.Allsystemicallysignificantfinancialinstitutions,regardlessoftype,
mustbesubjecttoanappropriatedegreeofprudentialoversight.(Recommendations
1through5.)
II. The quality and effectiveness of prudential regulation and supervision must be
improved. Thiswillrequirebetter-resourcedprudentialregulatorsandcentralbanks
operatingwithinstructuresthataffordmuchhigherlevelsofnationalandinterna-
tionalpolicycoordination.(Recommendations6through8.)
III. Institutional policies and standards must be strengthened, with particular emphasis
on standards for governance, risk management, capital, and liquidity.Regulatory
policiesandaccountingstandardsmustalsoguardagainstprocyclicaleffectsandbe
consistentwithmaintainingprudentbusinesspractices(Recommendations9through
12.)
IV. Financial markets and products must be made more transparent, with better-aligned
risk and prudential incentives. The infrastructure supporting such markets must be
made much more robust and resistant to potential failures of even large financial
institutions.(Recommendations13through18.)
paRT 2 Redefining the Boundaries of Prudential Regulation
Financial ReFoRm A Framework for Financial Stability2�
Core reCommenDation igaps and weaknesses in the coverage of prudential regulation and supervision must be eliminated. Allsystemicallysignificantfinancialinstitutions,regardlessoftype,
mustbesubjecttoanappropriatedegreeofprudentialoversight.
Financialinstitutionsandthesysteminwhichtheyoperatedevelopinresponsetoanongo-
ingdynamictensionamongcompetitivemarketforces,innovationsthatalterthoseforces,
andlawsandregulationsthatconstrainchoices,influenceinnovations,andthenrespondto
subsequentmarketdevelopment.Whiletheincreaseddegreeofinternationalintegrationof
financialmarketshasworkedtobringaboutadegreeofconvergenceinkeycharacteristics
ofnationalfinancialsystems,thereremainanumberofsignificantdifferencesinthefinan-
cialinstitutionsstructuresacrosstheeconomicallymost-developedandemergingcountries
andinthenatureofofficialresponsetofailuresandmarketdisruptions.
Intimesoffinancialcrisis,suchaswearenowexperiencing,thesedifferencescanhave
animportantbearingonhowacrisisunfoldsandwhattypeofpolicyresponsesarere-
quired.Significantly,actionstakenbyoneormoreEuropeancountriestoprotectdeposi-
torsrapidlyinfluencedflowsoffundsinothernationaljurisdictionswithdifferentbanking
systemsandregulatoryauthorities.Becauseofanumberofdistinguishinginstitutional
characteristics,thecurrentcrisishasraisedanunusuallylargenumberofquestionswithin
theUnitedStatesastohowbesttodefinetheboundariesforprudentialregulationand
supervision.
TheU.S.financialsystemislarge,complex,andmultifaceted,withcharacteristicsdistin-
guishingitfromsystemsinothermajorcountries.Thesecharacteristics,whichhaveledto
particularchallengesinrespondingtothecurrentcrisis,are:(a)therelativesizeandimpor-
tanceofcapitalmarkets;(b)therelativesizeandimportance(untilrecently)ofstand-alone
investmentsbanks;(c)theregionalandlocalnatureofmuchofthedepositbankingsystem;
(d)thenatureoftheregulationoftheinsurancesector;(e)thesizeoffederalgovernmentdi-
rectandsponsoredinvolvementinmarket-basedcreditintermediation;and(f)thecomplex-
ityofthestructureofU.S.regulationandsupervision.(Thesecharacteristicsaredescribed
inmoredetailinBox2).
Inseveralimportantrespects,itwasproblemsatfirmsthatwereunderregulatedor
unregulatedthatbecameaflashpointforthespreadofthesubprimemortgagecrisis.At
thestartof2008,therewereeightverylargenon-bankU.S.financialfirmsthatshouldhave
beenregardedassystemicallysignificant;fiveinvestmentbanks,theworld’slargestinsur-
ancecompany,andtwoGovernment-SponsoredEnterprises(GSEs).Allofthesefirmshave
beenradicallytransformed.
TherewasalsoarunonU.S.moneymarketmutualfunds,leadingtoarushedprogram
oftemporaryfederalinsurance,backedbyanunprecedenteduseoftheresourcesofthe
Treasury’sExchangeStabilizationFund.Aseriesofcentralbankprogramshaveprovided
sizeabledirectsupporttothecommercialpaperfundingmarkets.Finally,withthecre-
Financial ReFoRm A Framework for Financial Stability 2�
Box 2 the u.S. financial System
The following describes six particular characteristics of the U.S. financial system that distinguish it from other systems.
1. the relative size and importance of capital-market-based credit intermediation channels. This in-cludes the markets for corporate debt (investment-grade and high-yield bonds and commercial paper); the markets for asset-based credit (housing, auto loans, credit cards, and many other receivables, and markets for structured credit products); the size and importance of the over-the-counter (OTC) derivatives markets; and the money market mutual funds market channel for in-termediating liquid assets and meeting liquidity needs. In the markets for housing finance, there are the additional elements of networks of mortgage brokers and originators that operate largely, if not entirely, outside the boundaries of the regulated banking system. To be sure, all these market channels require banking system backup and support, but as alternative channels to the banking system, they are very large and relatively more significant than in most other countries.
2. the (until very recently) size and relative importance of stand-alone investment banks, as distinct from commercial banks, in the market-based credit intermediation process. This is tied closely to de-velopments in point 1 above and also to the forced separation of these two parts of the industry for most of the 20th century. As the commercial bank and investment bank sectors effectively merged into direct competition—and as traditional institutional asset managers were limited in their capacity to adapt to the emergence of derivative markets and various other tools for lever-age—private pools of capital (that is, private equity funds and hedge funds) have grown to a scale and position of relative importance that is unmatched in any other large country financial system, with the possible exception of the U.K.
3. the local and regional nature of the deposit-based banking system in the united States. Until recent-ly, only one of the five largest U.S. banks operated with a nationwide deposit-taking franchise. Moreover, while limited, arrangements still exist under which non-bank financial and non-finan-cial corporations can control government-insured savings banks and state-chartered industrial banks, while being subject to minimal or even no consolidated regulation and supervision.
4. the absence of national-level regulation of the insurance segment of the u.S. financial system. This framework of state, rather than national, laws and regulations has limited the degree and ef-fectiveness of oversight of the capital market activities of large, complex affiliates of regulated insurance companies.
5. the size of direct and sponsored federal government involvement in market-based housing finance channels. This has been large, if not widely understood, reflecting the size of and political sup-port for residential mortgage financing. The combined size of the balance sheets plus off-bal-ance-sheet guarantees of the Government Sponsored Enterprises (including Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System), and the size of full faith and credit entities such as the Federal Housing Administration and the Government National Mortgage Association, represents a significant direct and indirect claim on the public sector relative to the size of the U.S. marketplace.
ationofalargefundauthorizedbyCongress,theTroubledAssetReliefProgram(TARP),
expandedprogramsofFederalDepositInsuranceCorporation(FDIC)debtguarantees,and
extensivecentralbankassetmarketsupportprograms,publicsectorfinancialsupportis
beingprovidedtothecapitalstructureofinstitutionsandacrossabroadrangeofmarkets.
Financial ReFoRm A Framework for Financial Stability26
Inresponsetothesecrisis-driveneventsandregulatoryinterventions,theUnitedStates
ismovingrapidlytoafinancialsysteminwhichasmallnumberofexceptionallylarge
bankholdingcompaniesareatthecoreofthesystem.Thesefirmsare,andpresumably
willcontinuetobe,characterizedbyascaleandcomplexitythatmarketparticipantsand
Administrationswillregardasbothtoobigandtoointerconnectedtobeallowedtodefault
oncreditorobligationsordisappear.Indeed,potentialfailurewouldbelikelytorequire
extensivegovernmentinterventionandgovernmentassistance,withfewifanydomestic
institutionscapableofacquiringthemintheirentirety.
Thesecoreinstitutionsaregainingevenlargerdominantpositionsintermsofcreditand
capitalmarketactivities,large-scalecorporatebanking,nationwidedeposittaking,and
manyothersegmentsofthecorporateandretailfinancialbusiness.Ifpermittedbylawand
regulation,thesefirmswilllikelybecomeintegratedacrossbusinesslinesandgeographies,
willmaintainapresenceasoperatorsofprivatepoolsofcapital,willdominatethecoreof
theOTCderivativemarkets,andwillstepintoanyvoidcreatedbythetruncationofthe
GSEsintermsofvariousformsofhousingfinance.
Thesedevelopmentsarewidelyviewedasportendingafurtherroundofextensivecon-
solidationintheU.S.bankingsystem.Howfastandfarthatproceedswilldependnotonly
oneconomicandmarketdevelopments,butalsoonhowgovernmentprogramsdeliberately
orotherwiseencouragemergersandonhowstatutorylimitsondepositconcentrationand
certainfunctionsareadministeredormodified.
Plainly,thesedevelopmentsposepublicpolicyissues,includingquestionsofexcessive
concentration,competitivefairness,moralhazard,andconflictsofinterest,whicharenot
new.Inthepast,theyhavebeendealtwithinapiecemealandpoorlycoordinatedfashion.
Therushofrecenteventsandthescaleofstructuralchangesthathavebeensetinmotion
addtoboththecomplexityandurgencyofdevelopingmoreappropriatepolicies.
Insum,marketforcesandcrisis-drivenactionshavemovedtheUnitedStatesperhapsbe-
yondapointofnoreturn,towardafinancialsystemwithamuchgreaterconcentrationof
financialresourcesandinfluenceinasmallnumberofextremelylargeandcomplexbanking
organizations.Inothermajorcountries,concentrationinarelativelyfewinstitutionshas
beenmorecommon.However,thechangesforcedbythisfinancialcrisis,towardfurther
consolidationinnationalbankingsystemsandrenewedimportanceofthebankingsector
relativetonon-bankfinancialandcapitalmarketsectors,areofadifferentmagnitude.
Theeventsof2008underscoretheimportanceofredefiningtheboundariesoftheofficial
“safetynet”andofprudentialregulation,strengtheningtheeffectivenessandstreamlining
thestructureoffinancialregulation,andreassessingtheroleofcentralbanksandtheeffec-
tivenessofthetoolsavailabletothem.
Financial ReFoRm A Framework for Financial Stability 2�
1. Prudential regulation and Supervision of Banking organizations
Nomatterhowrobustfailuremanagementmechanismsare,marketsarelikelytopresume
thatthelargestregulatedfinancialinstitutionswill,tosomeextent,beprotectedagainstthe
fullforceofmarketdisciplinewiththepotentialconsequenceofencouragingexcessiverisk
taking—theessenceofmoralhazard.Tocompensateforthis,andtokeeptheprobabilityof
potentialfailureofsuchinstitutionstoacceptablylowlevels,existingregulatorystandards
andsupervisoryapproacheswillneedtobeupgraded.Thenecessarycorollaryisincreased
emphasisonthequalityandlevelofregulatoryandsupervisoryresources.
RecentexperienceintheUnitedStatesandelsewherehasdemonstratedinstancesin
whichunanticipatedandunsustainablylargelossesinproprietarytrading,heavyexposure
tostructuredcreditproductsandcreditdefaultswaps,andsponsorshipofhedgefundshave
placedatrisktheviabilityoftheentireenterpriseanditsabilitytomeetsitsresponsibilities
toitsclients,counterparties,andinvestors.
Theseactivities,andthe“originate-to-distribute”model,whichfacilitatedsellingandre-
sellinghighlyengineeredpackagesofconsolidatedloans,areforthemostpartofrelatively
recentorigin.Inessence,theseactivitiesallstepawayfromthegeneralconceptofrelation-
shipbanking,restingonindividualcustomerservice,towardamoreimpersonalcapital
marketstransaction-orientedfinancialsystem.Whatisatissueistheextenttowhichthese
approachescansensiblybecombinedinasingleinstitution,andparticularlyinthosehighly
protectedbankinginstitutionsatthecoreofthefinancialsystem.
Almostinevitably,thecomplexityofmuchproprietarycapitalmarketactivity,andthe
perceivedneedforconfidentialityofsuchactivities,limitstransparencyforinvestorsand
creditorsalike.Inconcept,therisksinvolvedmightbereducedbylimitingleverageandat-
tachinghighcapitalstandardsandexceptionallyclosesupervision.
SomemembersoftheG30feelsuchanapproachcouldbesufficienttodealwiththese
risks.Inpractice,anyapproachmustrecognizethattheextentofsuchrisks,potential
volatility,andtheconflictsofinterestswillbedifficulttomeasureandcontrol.Experience
demonstratesthatunderstress,capitalandcreditresourceswillbedivertedtocoverlosses,
weakeningprotectionofclientinterests.Complexandunavoidableconflictsofinterest
amongclientsandinvestorscanbeacute.Moreover,totheextentthattheseproprietary
activitiesarecarriedoutbyfirmssupervisedbygovernmentandprotectedfromthefull
forceofpotentialfailure,thereisastrongelementofunfaircompetitionwith“free-stand-
ing”institutions.Inthelastanalysis,thereisamoreintangibleaspecthighlightedbyrecent
experience.Isitreallypossible,withallthecomplexities,risks,andpotentialconflicts,that
eventhemostdedicatedboardofdirectorsandtopmanagementcanunderstandandmain-
taincontroloversuchadiverseandcomplexmixofactivities?
Financial ReFoRm A Framework for Financial Stability2�
Thesequestionsarerelatedtotheissueofwhetherprudentialregulationandsupervision
shouldfollowfunctionalorconsolidatedlines:shouldprimarysupervisionoftradingand
securitiesactivities,hedgefunds,investmentmanagement,andotherelementsofalarge
bankingorganizationbetheresponsibilityofsecurityormarketauthoritiestofacilitate
competitiveequality,orshouldasingleregulatortakeresponsibilityforprudentialsupervi-
sionofanentirediversifiedbankingorganizationorotherinstitutionsofsystemicimpor-
tance?Iftheconsolidationofoversighttakesplaceinaninstitutionapartfromthecentral
bank,the“lastresort”funderfortroubledinstitutions,whatprinciplescanbeestablished
toencourageappropriaterelationshipsamongthevariousagenciesandwiththetreasuryor
financeministrythatcarrybroadgovernmentalresponsibilities?
Settingoutareasonableanddesirableapproachtowardtheseorganizationalandregu-
latorychallengesliesattheheartoffashioningthenewfinancialsystem.Thefollowing
recommendationssuggestsuchanapproach.
recommendation 1:
a. Inallcountries,theactivitiesofgovernment-insured,deposit-takinginstitutions
shouldbesubjecttoprudentialregulationandsupervisionbyasingleregulator(that
is,consolidatedsupervision).Thelargestandmostcomplexbankingorganizations
shouldbesubjecttoparticularlycloseregulationandsupervision,meetinghighand
commoninternationalstandards.
b.Large,systemicallyimportantbankinginstitutionsshouldberestrictedinundertak-
ingproprietaryactivitiesthatpresentparticularlyhighrisksandseriousconflictsof
interest.Sponsorshipandmanagementofcommingledprivatepoolsofcapital(that
is,hedgeandprivateequityfundsinwhichthebankinginstitutionsowncapitalis
commingledwithclientfunds)shouldordinarilybeprohibitedandlargeproprietary
tradingshouldbelimitedbystrictcapitalandliquidityrequirements.Participation
inpackagingandsaleofcollectivedebtinstrumentsshouldrequiretheretentionofa
meaningfulpartofthecreditrisk.
c. Ingeneral,government-insureddeposit-takinginstitutionsshouldnotbeownedand
controlledbyunregulatednon-financialorganizations,andstrictlimitsshouldbe
imposedondealingsamongsuchbankinginstitutionsandpartialnon-bankowners.
d.Toguardagainstexcessiveconcentrationinnationalbankingsystems,withimplica-
tionsforeffectiveofficialoversight,managementcontrol,andeffectivecompetition,
nationwidelimitsondepositconcentrationshouldbeconsideredatalevelappropriate
toindividualcountries.
Financial ReFoRm A Framework for Financial Stability 2�
2. Consolidated Supervision of non-Bank financial institutions
Recentexperienceindealingwithtroubledbutsystemicallysignificantnon-bankfinancial
institutionsinsomecountriespointstotheneedforconsolidatedregulationandsupervi-
sionofsuchinstitutions.
recommendation 2:
a. Forthosecountrieslackingsucharrangements,aframeworkfornational-levelcon-
solidatedprudentialregulationandsupervisionoverlargeinternationallyactiveinsur-
ancecompaniesshouldbeestablished.
b.Anappropriateprudentialregulatorshouldbedesignatedforthoselargeinvestment
banksandbroker-dealersthatarenotorganizedasbankholdingcompanies.
3. money market mutual funds and Supervision
Thewidespreadrunonmoneymarketmutualfundshasunderscoredthedangersofinstitu-
tionswithnocapital,nosupervision,andnosafetynetoperatingaslargepoolsofmaturity
transformationandliquidityrisk.Thesehavebeencompoundedbyprovisionoftransaction
accountservices,withwithdrawalsondemandatpar,mimickingtheservicesofregulated
commercialbanks.Aregulatorydistinctionshouldbedrawnbetweenthoseservicesthat
aremostappropriatelyhousedinregulatedandsupervisedbanks,particularlytherightto
withdrawfundsondemandatpar,andthosethatcanreasonablybeprovidedbymutual
fundsfocusedonshort-termfixed-ratecreditinstruments.
recommendation 3:
a. Moneymarketmutualfundswishingtocontinuetoofferbank-likeservices,such
astransactionaccountservices,withdrawalsondemandatpar,andassurancesof
maintainingastablenetassetvalue(NAV)atpar,shouldberequiredtoreorganize
asspecial-purposebanks,withappropriateprudentialregulationandsupervision,
governmentinsurance,andaccesstocentralbanklender-of-last-resortfacilities.
b.Thoseinstitutionsremainingasmoneymarketmutualfundsshouldonlyofferacon-
servativeinvestmentoptionwithmodestupsidepotentialatrelativelylowrisk.The
vehiclesshouldbeclearlydifferentiatedfromfederallyinsuredinstrumentsofferedby
banks,suchasmoneymarketdepositfunds,withnoexplicitorimplicitassurancesto
investorsthatfundscanbewithdrawnondemandatastableNAV.Moneymarketmu-
tualfundsshouldnotbepermittedtouseamortizedcostpricing,withtheimplication
thattheycarryafluctuatingNAVratherthanonethatispeggedatUS$1.00pershare.
Financial ReFoRm A Framework for Financial Stability�0
4. oversight of Private Pools of Capital
Theissueoftheappropriateprudentialregulatorytreatmentofprivatepoolsofcapi-
tal—morespecifically,hedgefunds—hasbeenconsideredbypolicymakersnumeroustimes
sincethecollapseofLongTermCapitalManagementin1998.Thegenerallyprevailing
viewhasbeentocontinuetorelyonacombinationof:(a)enhancedmarketdiscipline,(b)
indirectoversightviaclosescrutinyoftheregulatedintermediariestheyuseforfinancing
andoperatingservices,and(c)moralsuasiontoencouragethespreadofimprovedrisk
managementandcompliancepractices.Insomejurisdictions,suchastheU.K.,thishas
beensupplementedbyformalregulatoryoversightofthelocalmanagers—butnotthefunds
themselves—andmoreformalarrangementstodevelopbestpracticesstandards,which
havebeenencouragedbyitsrecentlycreatedHedgeFundsStandardsBoard.
Takentogether,thesemeasureshavehadsomedegreeofsuccess,intermsofbringing
aboutimprovementsinhedgefundriskmanagementandfundingpractices,andimproved
counterpartyriskmanagementpractices.Nonetheless,volatilityhasbeengreaterthan
anticipated,withinstancesofstronglyadverseconsequencesforsponsoringinstitutions,
includingsomeofsystemicimportance.
Thequestion,goingforward,iswhetherexperiencewarrantsacontinuationofthe
largelyunregulatedstatusofhedgefunds,andifnot,theextentofsuchregulation.Several
indicationspointtowardlimitedandflexibleofficialregulation.Theneedforgreatertrans-
parencysupportstheintroductionofformalauthoritytoregisterandtrackthosefunds,
intermsofsize,useofleverage,riskstyles,andotherimportantvariables.Thisauthority
shouldbeassociatedwiththejurisdictionsinwhichthefundmanagersconductamajor-
ityoftheirbusiness.Second,effortstoachievecontinuousimprovementinmarketand
counterpartydisciplinewouldbeenhancedbyformalregulatoryauthorityrelativetothe
fundsandmanagers.Third,theincreasedemphasisonfinancialstabilityinthemandates
ofprudentialregulatorsandcentralbankspointstotheneedforgreater,moresystemic
accesstoinformationcrucialtounderstandingthepotentialforgrowingriskimbalancesin
thesystem.Finally,therecanbenoassurances—especiallyifthissectorcontinuestogrow
inrelativeimportance—thatthelargest,mostcomplexfundsmightnotbecomeafuture
sourceofsignificantsystemicrisk.
Whilelesspressing,similarconsiderationsmayberelevantforlargeprivateequityfunds
operatingonthebasisofsubstantialborrowing.Incontrast,venturecapitalfunds,dealing
bytheirnaturewithsmallcompaniesandprovidingessentialcapitalandmanagerialsup-
portforentrepreneurialinnovation,needtobefreeofinhibitingoversight.
recommendation 4:
a.Managersofprivatepoolsofcapitalthatemploysubstantialborrowedfundsshould
berequiredtoregisterwithanappropriatenationalprudentialregulator.Thereshould
besomeminimumsizeandventurecapitalexemptionsfromsuchregistrationrequire-
ment.
Financial ReFoRm A Framework for Financial Stability �1
b.Theprudentialregulatorofsuchmanagersshouldhaveauthoritytorequireperiodic
regulatoryreportsandpublicdisclosuresofappropriateinformationregardingthe
size,investmentstyle,borrowing,andperformanceofthefundsundermanagement.
Sinceintroductionofevenamodestsystemofregistrationandregulationcancreate
afalseimpressionoflowerinvestmentrisk,disclosure,andsuitabilitystandardswill
havetobereevaluated.
c.Forfundsaboveasizejudgedtobepotentiallysystemicallysignificant,theprudential
regulatorshouldhaveauthoritytoestablishappropriatestandardsforcapital,liquid-
ity,andriskmanagement.
d.Forthesepurposes,thejurisdictionoftheappropriateprudentialregulatorshouldbe
basedontheprimarybusinesslocationofthemanagerofsuchfunds,regardlessof
thelegaldomicileofthefundsthemselves.Giventheglobalnatureofthemarketsin
whichsuchmanagersandfundsoperate,itisimperativethataregulatoryframework
beappliedonaninternationallyconsistentbasis.
5. government-Sponsored enterprises
ThehybridbusinessmodelofthehousingfinanceGovernment-SponsoredEnterprises
(GSEs),inwhichtheyarebothprofit-seekingprivatecompaniesandagentsofgovernment
policy,hasbeenshowntobeunworkableovertimeandparticularlyinthemidstofcrises.
Thesenseofanimplicitgovernmentbackingfacilitatedadegreeofleverageandrisktaking
thatprovedunsustainable.Thespecializedregulatoryoversightwasbothinadequateand
toosusceptibletopoliticalpressure.Thiswascompoundedbymisalignedincentivesin
bankcapitalrulesforbankstotakeonoversizedexposurestotheseGSEs.Thecompetition
fromprivatemarketfirmsfurtherinducedtheGSEstoexpandintohigherrisk-takingac-
tivitiesandlowerunderwritingstandardsintheinterestsofmaintainingadominantmarket
position.Then,inthefaceofthefallofhousingmarketprices,theGSEshadlostthecapac-
itytoprovidestrongsupportforthemortgagemarket,whichwastheirpublicmandate.In
theend,thegovernmenthadnochoicebuttointervenedirectly.
Twoimportantfinancialpolicylessonsare:(a)thecrucialimportanceofclearlysepa-
ratinggovernmentfinancialsupportfromprivateprofitseeking;and(b)theneedforany
chosenlevelofgovernmentsupporttobeexplicitandproperlyaccountedfor.Theselessons
arerelevantforotherindustriesandothercountries.
recommendation 5:
a.FortheUnitedStates,thepolicyresolutionoftheappropriateroleofGSEsinmort-
gagefinanceshouldbebasedonaclearseparationofthefunctionsofprivatesector
mortgagefinanceriskintermediationfromgovernmentsectorguaranteesorinsurance
ofmortgagecreditrisk.
b.Governmentalentitiesprovidingsupportforthemortgagemarketbymeansofmarket
purchasesshouldhaveexplicitstatutorybackingandfinancialsupport.Hybridsof
Financial ReFoRm A Framework for Financial Stability�2
privateownershipwithgovernmentsponsorshipshouldbeavoided.Intime,existing
GSEmortgagepurchasingandportfolioactivitiesshouldbespunofftoprivatesector
entities,withthegovernment,ifitdesires,maintainingacapacitytointerveneinthe
marketthroughawhollyownedpublicinstitution.
paRT � The Structure of Prudential Regulation and International Coordination
Financial ReFoRm A Framework for Financial Stability��
Core reCommenDation iithe quality and effectiveness of prudential regulation and supervision must be improved. Thiswillrequirebetter-resourcedprudentialregulatorsandcentralbanks
operatingwithinstructuresthataffordmuchhigherlevelsofnationalandinternational
policycoordination.
Box 3 the Structure of financial Supervision
The four approaches to the structure of financial supervision can be described as follows.
1. the institutional approach: In which a firm’s legal status (for example, a bank, broker-dealer, or insurance company) determines which regulator is tasked with overseeing its activity from both a safety and soundness and a business conduct perspective (for instance, as in China, Hong Kong, and Mexico).
2. the functional approach: In which supervisory oversight is determined by the business that is be-ing transacted by the entity, without regard to its legal status. Each type of business may have its own functional regulator (for instance, as in France and Italy).
(In practice, as the institutional approach has progressively become outmoded, supervisors using this structure have moved toward a functional approach, so the line between the two has become blurred.)
3. the integrated approach: In which a single, universal regulator conducts both safety and soundness oversight and conduct-of-business regulation for all the sectors of financial services business (for instance, as in Germany, Japan, and the United Kingdom).
4. the twin-peaks approach: A form of regulation by objective in which there is a separation of regula-tory functions between two regulators: one that performs the safety and soundness supervision function and the other that focuses on conduct-of-business regulation (for instance, as in Austra-lia and the Netherlands).
6. regulatory Structure
TherecentG30report,The Structure of Financial Supervision,presentsinsomedetailthe
characteristicsoffourdifferentapproachestotheorganizationoffinancialregulationand
supervision.Thefourapproachesare:institutional,functional,integrated,andtwinpeaks.
ThesedifferentapproachesaredescribedindetailinBox3.
Theconceptualprosandconsofeachapproacharesetoutintheearlierreportandwill
notberepeatedhere.Thedirectionofchangeisclear—thatis,tosomevariantofeither
thetwin-peaks(regulationbyobjective)orintegratedapproach.Eitherapproach,anda
numberofvariantsonthem,iscompatiblewiththelarge,bank-centeredstructuresthatare
emergingwithinmostcountries.
Financial ReFoRm A Framework for Financial Stability ��
Toasignificantextent,thechoiceofwhichregulatorystructuralmodeltoemployhasto
reflectabalancingofcountry-specificpreferences,withappropriateweighttoitsfounding
politicalprinciplessuchas,intheUnitedStates,theprinciplesofchecksandbalances,and
amixofFederalandStateauthority.Thereis,therefore,nosinglecorrectanswertothe
questionofwhatistheoptimalstructurefororganizingfinancialregulationandsupervi-
sion.Thereis,however,anemergingconsensusaroundanumberofkeypoints,including:
(a)theneedtosubstantiallysimplifyandconsolidateoverlycomplexstructures;(b)theem-
phasisonclarifyingandstressingguidingprinciplesofregulationratherthanarules-based
approachtoregulation;(c)theimportanceformuchgreaterlevelsofinternationalcoopera-
tionandcoordinationonsuchmattersasaccountingstandards,listingstandards,licenses
tooperateasregulatedfirms,supervisoryoversightmechanisms,and,mostimportant,
prudentialcapitalandliquiditystandards;(d)theimportanceofregulatoryarrangements
havingtheflexibilitytoadapttonewtypesofinstitutions,instruments,andmarkets;and
(e)theneedtoensurethepoliticalandmarketindependenceofnationalregulatoryauthori-
ties.Finally,thereisagrowingappreciationoftheimportanceofensuringthatcentral
bankresponsibilityforpromotingfinancialstabilityissupportedbyadequateauthorityand
capacity.
Regardlessofhowregulatoryagenciesarereorganized,prudentialsupervisorshavea
commonneedtobetterensurethatfinancialinstitutionsadequatelyprepareforandre-
spondtoperiodsoffinancialstress.Thatrolerequiresarenewedemphasisonthecomplex
natureofjudgmentsaboutthestabilityoflargebankingorganizations.Thecaliber,quality,
andintegrityofpeoplerequiredtomeetthesechallengespointstotheneedformoresub-
stantialeffortstoattract,develop,andretainindividualsfullycapableofengagingsenior
privatesectorcounterparts.
recommendation 6:
a.Countriesshouldreevaluatetheirregulatorystructureswithaviewtoeliminating
unnecessaryoverlapsandgapsincoverageandcomplexity,removingthepotentialfor
regulatoryarbitrage,andimprovingregulatorycoordination.
b.Inallcases,countriesshouldexplicitlyreaffirmtheinsulationofnationalregulatory
authoritiesfrompoliticalandmarketpressuresandreassesstheneedsforimproving
thequalityandadequacyofresourcesavailabletosuchauthorities.
7. role of the Central Bank
Acentralpolicyissueinregulatoryreorganizationishowtostriketherightbalancebe-
tweentheroleofthecentralbankandthatofothernationalregulators.Nationalgovern-
mentsmustdecidepreciselywheretostrikethatbalance.Whatisimportantistodosoin
afashionthatproperlyenablesthecentralbanktofulfillitsmainpolicymissions.Beyond
thecentralmissionofmonetarypolicy,centralbanksnormallyhavearoleinmanagingand
Financial ReFoRm A Framework for Financial Stability�6
supportingpaymentssystems,inprovidingliquiditytobanksintimesofstress,andmore
broadlyinmaintainingfinancialstability.
Recenteventsprovideimpetusforrecognizingafinancialstabilityroleforcentralbanks.
Thatcarrieswithitaneedforadequateauthorityandthetoolstocarryoutthismission.
Broaderauthoritytocollectinformationhelpfultounderstandingpotentialthreatsto
stabilityisbutoneelementofthis.Anotherishowbesttocombatthedevelopmentof
financialexcessesbeforetheybuildintofull-fledgedcrises.Morecountercyclicalregulatory
andsupervisorypoliciesareonesuchtool.Considerationofassetmarketdevelopmentsin
settingmonetarypolicieshasbeenacontroversialbutimportantdebate.
Totheextentthatexcessiveuseofleverageisarecurringsignificantcontributionto
potentialfinancialinstability,centralbanksmayconsiderthevalueofemployingcounter-
cyclicaltoolsthatworkdirectlytoavoidexcesses.Someformofbroad-basedcollateral
requirementsormargin-settingauthority,includingauthoritytosetminimuminitialand
maintenancemarginrequirementsacrossabroadrangeoffinancialassetmarketsandin-
strumentsinwhichleverageistypicallyemployed,isapossibility.Aswithanyformalrule-
makingauthority,overtime,marketpracticesandinnovationswilldeveloptoexploitgaps
andweaknesses.Anyrulethatforcesmarketparticipantstoholdmorecollateralthanthey
wouldvoluntarilycreatessomecosts.These,however,arenotreasonstoabandonconsider-
ationofexpandingthetoolsavailabletotemperextremefinancialexcessesthatpotentially
createfargreatercosts.
Animportantelementofpost-crisisreformistoconsiderwhichcrisismanagement
actionsandinnovationsdevelopedbycentralbanksshouldusefullyremainpartofpoli-
cymakers’toolkitsandwhichshouldbestrictlylimitedoreliminatedentirely.Thepoint
isthatbroadlyextendingthesafetynetmayactuallyencouragerisktakingtothepointof
facilitatingfutureexcessesandcarrycentralbanksintoareasmoreappropriatelyreserved
forpoliticalauthorities.
recommendation 7:
a. Wherenotalreadythecase,centralbanksshouldacceptaroleinpromotingand
maintainingfinancialstability.Theexpectationshouldbethatconcernsforfinancial
stabilityarerelevantnotjustintimesoffinancialcrisis,butalsointimesofrapid
creditexpansionandincreaseduseofleveragethatmayleadtocrises.
b.Incountrieswherethecentralbankisnottheprudentialregulator,thecentralbank
shouldhave:(i)astrongroleonthegoverningbodyoftheprudentialandmarkets
regulator(s);(ii)aformalreviewrolewithrespecttoproposedchangesinkeypruden-
tialpolicies,especiallycapitalandliquiditypoliciesandmarginarrangements;and(iii)
asupervisoryroleinregardtothelargestsystemicallysignificantfirms,andcritical
paymentandclearingsystems.
Financial ReFoRm A Framework for Financial Stability ��
c. Asharpdistinctionshouldbemaintainedbetweenthoseregulatedbankingorganiza-
tionswithnormalaccesstocentralbankliquidityfacilitiesandothertypesoffinancial
institutionswhoseaccess,ifany,shouldbelimitedtoextremeemergencysituationsof
criticalsystemicimportance.
d.Centralbankemergencylendingauthorityforhighlyunusualandexigentcircum-
stancesshouldbepreserved,butshouldinclude,bylaworpractice,supportbyap-
propriatepoliticalauthoritiesfortheuseofsuchauthorityinextendingsuchcreditto
non-bankinstitutions.
e. Centralbankliquiditysupportoperationsshouldbelimitedtoformsthatdonot
entaillendingagainstortheoutrightpurchaseofhigh-riskassets,orotherformsof
long-termdirectorindirectcapitalsupport.Inprinciple,thoseformsofsupportare
moreappropriatelyprovidedbydirectlyaccountablegovernmententities.Inpractice,
totheextentthecentralbankistheonlyentitywiththeresourcesandauthoritytoact
quicklytoprovidethisformofsystemicsupport,thereshouldbesubsequentapproval
ofanappropriategovernmentalentitywiththeconsequentrisktransfertothatentity.
8. international Coordination
Thereismuchthatcanbedonetoimproveinternationalregulatoryandsupervisorycoordi-
nation.Certainspecificandneededenhancementscanandshouldmoveforwardwithinthe
existingframeworkofinternationalcooperation.Themostpressingandcomplexofthose
enhancementsrelatetomakingcrisismanagementcoordinationmoreeffectiveandopera-
tionalbyagreedprotocols.Effectiveandtimelyinformationsharing,includinginformation
aboutlargeindividualinstitutionsoperatinginanumberofjurisdictions,isastart.Greater
clarityisrequiredastowhichjurisdictionoragencyhastheresponsibility,intermsofman-
agingthefailureprocess,andhowthecostsoffailureandtheburdensoffinancialsupport,
totheextentneeded,willbeshared.Inthecurrentmarketenvironment,someofthelargest
regulatedfinancialinstitutionshavegrowntoascalethatraisesquestionsastothecapac-
ityofsomehomecountryregulatorstomanageandsupportthefailureresolutionprocess.
Theseconcernswarrantearlyhigh-levelconsiderationwithininternationalpolicyforums.
recommendation 8:
a.Nationalregulatoryauthoritiesandfinanceministersarestronglyencouragedto
adaptandenhanceexistingmechanismsforinternationalregulatoryandsupervisory
coordination.Thefocusofneededenhancementsshouldbeto:(i)bettercoordinate
oversightofthelargestinternationalbankingorganizations,withmoretimelyand
openinformationsharing,andgreaterclarityonhomeandhostresponsibilities,in-
cludingincrisismanagement;(ii)movebeyondcoordinatedrulemakingandstandard
settingtotheidentificationandmodificationofmaterialnationaldifferencesinthe
Financial ReFoRm A Framework for Financial Stability��
applicationandenforcementofsuchstandards;(iii)closeregulatorygapsandraise
standards,whereneeded,withrespecttooffshorebankingcenters;and(iv)develop
themeansforjointconsiderationofsystemicriskconcernsandthecyclicalityimplica-
tionsofregulatoryandsupervisorypolicies.Theappropriateagenciesshouldstrength-
entheiractionsinmembercountriestopromoteimplementationandenforcementof
internationalstandards.
b.Giventherecurringimportanceofexcessiveleverageasacontributingfactorto
financialdisruptions,andtheincreasinglycomplexwaysinwhichleveragecanbe
employedonandoffbalancesheets,prudentialregulatorsandcentralbanksshould
collaboratewithinternationalagenciesinanefforttodefineleverageandthencollect
andreportdataonthedegreeofleverageandmaturityandliquiditymismatchesin
variousnationalsystemsandmarkets.
c. Totheextentnewinternationalregulatoryorganizationsareultimatelyneeded,the
initialfocusshouldbeondevelopingmoreformalregionalmechanisms,suchasinthe
EuropeanUnion,butwithcontinuedattentivenesstotheglobaldimensionofmost
significantfinancialmarkets.
paRT � Improving Standards for Governance, Risk Management, Capital, and Liquidity
Financial ReFoRm A Framework for Financial Stability�0
Core reCommenDation iiiinstitutional policies and standards must be strengthened, with particular emphasis on standards for governance, risk management, capital, and liquidity. Regulatorypoliciesandaccountingstandardsmustalsoguardagainstprocyclicaleffects
andbeconsistentwithmaintainingprudentbusinesspractices.
Inamarket-basedfinancialsystem,manystakeholdersareinvolved:shareholders,manag-
ersandotheremployees,clients,regulators,andthepublicatlarge.Foreachstakeholder,
costsandbenefitsandrisksandrewardsshould—asfaraspossible—bebalanced.Apre-
requisiteforthisisthatincentivesshouldbeconsistentwiththeprinciplethatrisksshould
bebornebythosewhotakethem.Themorethisconditionissatisfied—andoneroleof
publicpolicyistohelpbringthisabout—themoretheriskofsystemicinstabilityisre-
duced.Asecondprerequisiteisthatrisksmustbeastransparentaspossibletotherelevant
stakeholdersinfinancialinstitutions.Themoreopaquearetherisksbeingtaken,themore
difficultitisforstakeholderstoascertainifthereisreasonablebalancebetweenrisksand
expectedrewards.
Inlookingbackatthearrayofproblemsencounteredduringthisfinancialcrisis,there
arenumerousexamplesofmisalignedincentives,ofincentivesthatcontributetoinstabil-
ityandcyclicalityinfinancialmarkets,andofshortcomingsinthetransparencyofrisks,in
firms,inmarkets,andinstructuredproducts.
Thefirststeptowardimprovingincentivesandtransparencymustbetakenatthelevel
ofprivatesectorfirmscentraltofinancialriskintermediation.Furtherstepscanbetakenby
regulatorsandbyaccountingstandardsetters.
9. regulatory Standards for governance and risk management
Tobeeffectiveandsustainable,improvementsingovernanceandriskmanagementmust
bedrivenbyleadershipinprivatesectorfirmsincorporatedintoabusinessculturethat
promotesdisciplineandafocusonlong-runperformance.Directionforthatmuststart
atthetop,withboardsofdirectorsthatareengagedanduptothetaskofoverseeingthe
complexitiesofmodernfinancialriskmanagement.Complexitiescannotbeanexcusefor
poorlypreparedandinformedboards.Inthefirstinstance,seniormanagementhasrespon-
sibilityforprovidingboardswithtimelyinformation,and,ifnecessary,thetrainingneces-
sarytouseit.Inturn,boardsmustbepopulatedwithsufficientexpertisetoabsorbsuch
informationandactonit,ifneedbewiththebenefitofindependentoutsideadvice.Ifthese
criteriacannotbemet,theargumentforreducingthesizeandcomplexityoftheseorganiza-
tionsbecomesrelevant.
Intermsofspecificimprovementsinfirmriskmanagementpractices,leadingfirmsinthe
financialindustryhaveinrecentyearstogetherassessedtheircapacityandwillingnessto
Financial ReFoRm A Framework for Financial Stability �1
cooperateintakingcorrectivestepstoforestallcrises.Itislessclearhowdiligentfirmsand
regulatorshavebeeninfollowinguponimplementationofrecommendedimprovements.
Itisquiteclearthatwhathadbeenrecommendedbeforethismostsevereofcriseswasnot
sufficienttopreventtheerosionofdisciplineatmanyleadingfirms.Thissuggeststheneed
foramoresystematicandforcefulfollow-uponimplementationofbestpractices,bysenior
management,byboards,andbyregulators.
Finally,thiscrisishasdrivenhometheimportanceofaligningcompensationpractices
withtheincentivesandcontrolsinafirm’sriskmanagementprogram.Seniormanagement
andboardsneedtoensureaconsistencyinthatrespect,aligningpaywithlong-runshare-
holderinterestratherthanshort-termreturnsthatcannotbesustainedandentailgreater
risk.Regulatorsneedtosatisfythemselvesonthisscoreandfactormisalignedincentives
intotheiroveralljudgmentsregardingthequalityofthefirm’sriskmanagementcapabilities.
recommendation 9:
Regulatorystandardsforgovernanceandriskmanagementshouldberaised,withparticu-
laremphasison:
a. Strengtheningboardsofdirectorswithgreaterengagementofindependentmembers
havingfinancialindustryandriskmanagementexpertise;
b.Coordinatingboardoversightofcompensationandriskmanagementpolicies,with
theaimofbalancingrisktakingwithprudenceandthelong-runinterestsofand
returnstoshareholders;
c. Ensuringsystematicboard-levelreviewsandexercisesaimedatestablishingthemost
importantparametersforsettingthefirm’srisktoleranceandevaluatingitsriskpro-
filerelativetothoseparameters;
d.Ensuringtheriskmanagementandauditingfunctionsarefullyindependentand
adequatelyresourcedareasofthefirm.Theriskmanagementfunctionshouldreport
directlytothechiefexecutiveofficerratherthanthroughtheheadofanotherfunc-
tionalarea;
e. Conductingperiodicreviewsofafirm’spotentialvulnerabilitytoriskarisingfrom
creditconcentrations,excessivematuritymismatches,excessiveleverage,orunduereli-
anceonassetmarketliquidity;
f. Ensuringthatalllargefirmshavethecapacitytocontinuouslymonitor,withinamat-
terofhours,theirlargestcounterpartycreditexposuresonanenterprisewidebasis
andtomakethatinformationavailable,asappropriate,toitsseniormanagement,its
board,anditsprudentialregulatorandcentralbank;
g. Ensuringindustrywideacceptanceofandactiononthemanyspecificriskmanage-
mentpracticeimprovementscontainedinthereportsoftheCounterpartyRiskMan-
agementPolicyGroup(CRMPG)andtheInstituteofInternationalFinance.
Financial ReFoRm A Framework for Financial Stability�2
10. regulatory Capital Standards
Thebusinessofbankingisinherentlycyclical.Movementsinassetprices,collateralvalues,
assetquality,capitalmarkettransactionvolumes,andmarketliquidityallreflecteconomic
fluctuationswithconsequencesforearningsgrowthandcapitalgeneration.Regulatorypoli-
ciesandpracticescannotrepealbusinesscycles.Theycan,however,beassessedinterms
oftheimpacttheyhaveinamplifyinginstitutionalbehaviorduringthecycle.Inseekingto
temperregulatorysourcesofprocyclicality,theobjectiveshouldbetoreinforcetheprimary
aimofprudentialregulation—tomaintainthehealthofthesystemandcontainsystemic
risk.
Thereareseveralaspectsofprudentialregulatorypoliciesinwhichprocyclicalfeatures
areevident:capitalstandards,liquiditypolicies,andreservingpractices.Thesearediscussed
inthissection.Extensiveregulatorypolicyimprovementeffortsarealreadyunderway,
undertheleadershipoftheFinancialStabilityForumandtheBaselCommitteeonBanking
Supervision.
Prudentialsupervisorshaveacriticalroletoplayinensuringthatthelargestbanking
organizationsadequatelyprepareforandrespondtotheupsanddownsofcycles.Well-de-
signedandsensiblyexecutedsupervisoryprogramswillbeanessentialelementofeffective
regulatoryreformeffortstodampenprocyclicality.Astartingpointforavoidingexcessive
riskistosupporteffortsofsupervisorstoreportonandpushbackagainsterosioninrisk
standardsanddisciplineduringperiodsofeconomicexpansionandconfidence.
Inthissamevein,whenrisksarematerializingandextremepressuresmounting,itis
evenmorechallengingforsupervisorsnottooverreacttotheuseofcapital,reserve,and
liquiditybuffersthatshouldhavebeenbuiltupforuseinjustsuchcircumstances.Allthis
furtherunderscorestheimportanceoftheseagencieshavinghigh-qualityresourceswiththe
independencetocarryoutthiscomplextask.
Aparticularlydisturbingaspectofthecurrentcrisisisthespeedwithwhichlargeregu-
latedfinancialinstitutionsmovedfrombeingrepresentedaswellcapitalizedwithstrong
liquiditypositionstorequiringgovernmentinterventionsandsizeablefinancingsupportto
avoidbankruptcy.Tobesure,financialpanicscanproduceconditionsthatareunmanage-
ableforevenverystrongfinancialinstitutions,astheyallrequiremarketconfidenceto
functionproperly.Butitisalsotruethatexistinginternationalcapitalstandardshavelost
credibilitywithmarketparticipants.Itiscriticallyimportantthatmarketcredibilitybe
reestablished.
Theprincipleoftyingcapitalstandardstoestimatedriskisappropriateonlyifriskesti-
mationtechniquesaresoundandexperiencehasrevealedimportantlimitationsthatneedto
beaddressed.Considerationshouldbegiventoimprovedmethodstoidentifyandaccount
forhiddencreditconcentrations,undulyoptimisticassumptionsaboutmarketliquidity
risk,socalled“pipeline”riskinoriginate-to-distributebusinessmodels,andnoncontractual
Financial ReFoRm A Framework for Financial Stability ��
exposures,suchasthosearisingfromsponsorshipofoff-balance-sheetvehiclesandvarious
typesofinvestmentfunds.
Evenimprovedtechniquesforestimatingriskwillhaveinherentlimitations.Recognizing
thoselimitations,capitalstandardscanbemademorepracticalandlessprocyclical,byex-
pressingthemintermsofwideoperatingranges,ratherthanasminimumpointestimates.
Suchanapproachshouldencourageabuildupofcapitalduringexpansionperiods,dis-
couragingaggressivesharebuybackanddividendpolicieswhilepermittingsomereductions
intimesofstress.Regulatorswillneedtoencouragebankstointernalizethisdisciplineby
requiringcapitalmanagementpoliciestobetiedtocarefulanalysisofwhatstressscenarios
implyaboutcapitalneeds.
recommendation 10:
a. Internationalregulatorycapitalstandardsshouldbeenhancedtoaddresstendencies
towardprocyclicality.Benchmarksforbeingwellcapitalizedshouldberaised,given
thedemonstrablelimitationsofeventhemostadvancedtoolsforestimatingfirmwide
risk.
b.Thesebenchmarksshouldbeexpressedasabroadrangewithinwhichcapitalratios
shouldbemanaged,withtheexpectationthat,aspartofsupervisoryguidance,firms
willoperateintheupperendofsucharangeinperiodswhenmarketsareexuberant
andtendenciesforunderestimatingandunderpricingriskaregreat.
c. Theexistinginternationaldefinitionsofcapitalshouldbereevaluated,lookingtoward
closealignmentonnationaldefinitions.
d.Capitalandriskdisclosurestandardsshouldbereevaluatedtoprovideahigherdegree
oftransparencyofafirm’sriskappetite,itsestimatedneedsforandallocationofeco-
nomiccapital,anditsvaluationpractices.
11. Standards for liquidity risk management
Twointerrelatedsetsofliquiditystrainshavecharacterizedthecurrentfinancialcrisis.
Oneistheevaporationofactivemarketsforassetsapartfromgovernmentsecuritieswith
theconsequencethatpricediscoveryinmanymarketsbecameunreliable.Theotheris
strainsonfunding,asreflectedinthedislocationsintheinterbankfundingmarketsand
thevirtualshutdownoftermdebtfundingmarketsforevenhighlyratedfinancialinstitu-
tions.Theextentofthesestrainssuggeststhatenhancedrisk-basedcapitalstandardsareby
themselvesnotasufficientbasisforensuringfinancialstability.Standardsarealsoneeded
forliquidityrisk.
Stronger,moresystematicmeasuresneedtobetakenthatbuildontheframeworkused
forcapitalstandards.Afirststepinthisregardwastakeninearly2008withtheBasel
Committee’sPrinciplesforSoundLiquidityRiskManagement.
Financial ReFoRm A Framework for Financial Stability��
recommendation 11:
a. Base-levelliquiditystandardsshouldincorporatenormsformaintainingasizable
diversifiedmixoflong-termfundingandanavailablecushionofhighlyliquidunen-
cumberedassets.Oncesuchstandardsaredeveloped,considerationshouldbegivento
whatisthepreferredmixofseniorandsubordinateddebtinbankcapitalstructures.
b.Supervisoryguidanceforliquiditystandardsshouldbebasedonamorerefinedanaly-
sisofafirm’scapacitytomaintainampleliquidityunderstressconditions,including
evaluationofthequalityandeffectivenessofitsliquiditymanagementpoliciesand
contingencyfundingplan.
c. Liquiditydisclosurestandards,buildingonthesuggestedpracticesintheBaselCom-
mitteePrinciples,shouldcomplementthesuggestedimproveddisclosurepracticesfor
capitalandriskprofileinformation.
12. fair Value accounting
Thecurrentfinancialcrisishastriggeredanintenseandoftenfrustratingdebateconcerning
theissuesraisedbystrictapplicationoffairvalueaccounting(FVA)rulestothefinancial
statementsofregulatedfinancialinstitutions.Indistressed,illiquid,virtuallynonfunction-
ingmarketssuchashavebeenwitnessed,thelimitationsandunintendedconsequences
ofFVAruleshavebecomeapparent,seeminglycontributingtouncertaintiesanddistress.
Somerecentinterpretativeguidanceregardingtoo-rigidapplicationoftheseruleshasbeen
viewedashelpful.Butapplicationofthatguidancehasbeenunevenacrossinstitutionsand
nationalregimesandhascausedfurtherdivergence,ratherthanconvergence,betweenU.S.
andInternationalAccountingStandards,withoutresolvingthecoreissues.
Apartfromthecurrentdifficultiesindeterminingmarketprices,thereisanunderlying
tensionbetweenthebusinesspurposesservedbyregulatedfinancialinstitutions—particu-
larlythoseinwhichthebasicfunctionistointermediatecreditandliquidityriskbyfunding
illiquidloansbymeansofdemandorshort-termdeposits—andtheinterestsofinvestors
andcreditorstohavethebestpossiblecurrentinformationontheimmediatemarketvalue
ofassetsandliabilities.Thattensionhasalsobeenreflectedhistoricallyindifferentap-
proachesfavoredbyprudentialandsecurityregulators.
Thedirectionuntilrecentlyhasbeentoseektoresolvethattensionbyforcingasmuch
oftheaccountingandvaluationofallassetsandliabilitiesaspossibleintoanaccounting
modeldesignedanddevelopedtoaddressmarketvaluesofliquidtradeableinstruments.
Theextenttowhichthisrepresentsa“forcedfit”hasbecomeveryapparentinthecurrent
crisis.Onedramaticresulthasbeentheabilityofdistressedinstitutionstoincreasetheir
reportedearningsbymarkingtomarketofcertainoftheirownliabilitiesasthecreditrisk
ontheirdebthasincreased.Anotherproblemisvaluationsonilliquidassetsthatsometimes
Financial ReFoRm A Framework for Financial Stability ��
havelimitedrelationshiptoexpecteddiscountedcashflows.
Thewayforwardisnottoabandonappropriateconsiderationoffairvalueprinciples
buttoseekabetterprinciples-basedbalancebetweenthelegitimateneedsofinvestorsfor
usefulcurrentfinancialinformationandthebusinessmodeloftheregulatedfinancialinsti-
tutions.
Astartingpointistorecognizetherelevanceforsoundinternalriskmanagementof
trackingthebestavailableinformationonthechangesinvalueofafinancialfirm’sassets
andliabilities.Marketpricingvalidated,ifpossible,byindependentappraisalisoneimpor-
tantrequirement.Butitisnotnecessarilytheonlyoneforevaluatingriskandprofitability
intheabsenceofmarketliquidityandwhentheintrinsicvalueofcontinuingcustomer
relationshipisarelevantconsideration.
Anotherpracticalconsiderationistheresponsibilityofprudentialregulatorsandsuper-
visorstothemselvesmonitor,evaluate,anddisciplinevaluationpractices.Theirconcerns
mustbetojudgethenatureandextentoftherisksinvolvedandtoconsidertheadequacy
ofreserveprovisionstoabsorbpotentiallosses,mattersthatcannotbefullyencompassed
inmarkingtomarketinallcircumstances.
Insum,theaccountingprinciplesandapproachesapplicabletoregulatedfinancialinsti-
tutionswhoseprimarypurposeistointermediatecreditandliquidityriskneedstobebetter
alignedwiththefirm’sbusinessmodel.Apuremark-to-marketaccountingmodelisgener-
allypreferredfortradingactivitiesandmostelementsofmarketrisk.Variationsonthecur-
rentintent-basedaccountingmodelapplicabletobankingorganizationsareabetterplace
tostartforthesetypesofintermediaries.Morerealisticguidelinesforaddressingvaluation
issuesforilliquidinvestmentsinthesetypesofportfolios—includingguidanceonhowto
treatintent-basedchangesandmovementsintheseinstrumentsbetweenaccounts—isalsoa
betterstartingpointforfirmswiththisbusinessmodel. Rigorinthestandardsforalterna-
tivemethodsofvaluation(includingimpairments)andforevaluatingintent(andabilityto
carrythatintentthrough)isessentialtoserveinvestorneeds.
Moregenerally,therecanandshouldbeanimprovedlevelofdisclosureandtranspar-
encyaroundregulatedfirms’riskprofiles,riskreporting,andvaluationpractices.Themore
flexibilityregulatedfirmsandtheirregulatorshavetoapplyappropriatereasonablevalua-
tionpracticestoriskportfolios,thegreateristheburdenonthemtoprovidefull,fair,and
timelydisclosuresofinformationrelatedtotheirvaluationpractices.
Finally,safetyandsoundnessconsiderationsrequirethatregulatedfirmsmaintainfull
andadequatereservesforspecificexpectedcreditlossesoverthelifeofcreditexposures,
andgeneralvaluationreservestodealwithcyclicalandliquidityrisksinrelevantpartsof
theirportfolios,includingderivativeportfolios.Tensionsinthisregardbetweenaccounting
rulesandsafeandsoundbankingpracticesshouldberesolvedinawaythatpromotessafe-
tyandsoundness,withfullandcompletetransparencyanddisclosureofresultingreserves.
Financial ReFoRm A Framework for Financial Stability�6
recommendation 12:
a. Fairvalueaccountingprinciplesandstandardsshouldbereevaluatedwithaviewto
developingmorerealisticguidelinesfordealingwithless-liquidinstrumentsanddis-
tressedmarkets.
b.Thetensionbetweenthebusinesspurposeservedbyregulatedfinancialinstitutions
thatintermediatecreditandliquidityriskandtheinterestsofinvestorsandcreditors
shouldberesolvedbydevelopmentofprinciples-basedstandardsthatbetterreflectthe
businessmodeloftheseinstitutions,applyappropriaterigortovaluationandevalu-
ationofintent,andrequireimproveddisclosureandtransparency.Thesestandards
shouldalsobereviewedby,andcoordinatedwith,prudentialregulatorstoensure
applicationinafashionconsistentwithsafeandsoundoperationofsuchinstitutions.
c. Accountingprinciplesshouldalsobemademoreflexibleinregardtotheprudential
needforregulatedinstitutionstomaintainadequatecredit-lossreservessufficientto
coverexpectedlossesacrosstheirportfoliosoverthelifeofassetsinthoseportfolios.
Thereshouldbefulltransparencyofthemannerinwhichreservesaredeterminedand
allocated.
d.AsemphasizedinthethirdreportoftheCRMPG,underanyandallstandardsof
accountingandunderanyandallmarketconditions,individualfinancialinstitutions
mustensurethatwhollyadequateresources,insulatedbyfail-safeindependentdeci-
sion-makingauthority,areatthecenterofthevaluationandpriceverificationprocess.
paRT � Improving Transparency and Incentives, and Strengthening the Financial Infrastructure
Financial ReFoRm A Framework for Financial Stability��
Core reCommenDation iV financial markets and products must be made more transparent, with better-aligned risk and prudential incentives. the infrastructure supporting such markets must be made much more robust and resistant to potential failures of even large financial institutions.
13. restoring Confidence in Securitized Credit markets
Priortothecurrentcrisis,ameaningfulportionofthecreditextensionprocesshadmi-
gratedawayfromtraditionalloanoriginationandretentionbyindividualbanksorother
financialinstitutionsthathavedirectknowledgeofandrelationshipswithborrowers,to
onewherefinancialinstitutionshavereliedoneachothertooriginateloansthatarethen
parceledoutandsharedamongabroadgroupofotherwiseunrelatedentities.Onecon-
sequencehasbeenthatthelossofconfidenceexperiencedduringthiscrisishasextended
beyondspecificinstitutionstoincludealossofconfidenceinentiresectorsoftheworld’s
capitalmarkets.
Prominentinthisregardhasbeenthecompletedryingupofnewdebtissuanceinvirtu-
allyallsegmentsoftheasset-backedsecuritiesmarkets.Thishasextendedwellbeyondthe
marketsforcomplexstructuredcollateralizeddebtobligations(CDOs)andcollateralized
loanobligations(CLOs)toincludeso-calledplainvanillaasset-backedreceivablestransac-
tions.
Theprimaryfactorscontributingtothislossofconfidencehavebeentheexcessive
complexityoftheseinstrumentsandthelackoftransparencythathascharacterizedthese
markets.Anadditionalcontributingfactorhasbeenflawsexposedintheworkingsofthe
“originate-to-distribute”businessmodelfollowedinthecapitalmarketunitsofvirtually
alllargebankingorganizations.Thoseflawsinclude:(a)anerosionincreditunderwrit-
ingstandards,basedonatransactionratherthanarelationshipandretentionapproachto
creditrisk;(b)concentrationsofpipelinecreditrisk,basedonoverlyoptimisticassumptions
regardingmarketliquidityandredistributioncapabilities;and(c)retentionofwhatturned
outtobebadlystructuredandgrosslyoverratedtranchesofstructuredproducts,inorder
todrivenewdealflow.Theextenttowhichtheoriginate-to-distributemodelwillsurvive
thepresentcrisisisinquestion.Whatisclearisthatitshouldnotcontinueasamajorele-
mentinfinancewithoutaconcertedefforttoremedytheflawedapproaches.Someofthe
flawscanbeaddressedinthestrengtheningofregulatorycapitalandliquiditystandards.
Othersneedtobeaddressedaspartofbroadereffortstoreduceriskandrestoreinvestor
confidenceinthesemarkets.
Theplanned2010implementationofnewinternationalaccountingstandardsforcon-
solidationofvarioustypesofoff-balance-sheetvehiclesmayimpactsecuritizationmarkets.
Manyofthosevehicles—particularlyso-calledStructuredInvestmentVehicles(SIVs)—were
createdinparttogetaroundexistingaccountingrulesandregulatorycapitalstandards.
Financial ReFoRm A Framework for Financial Stability ��
Oncethesetypesofvehiclesareforcedbackontobalancesheetsandbackintoregulatory
capitalcalculations,theymaybephasedoutofexistence,suggestingtheyservednosustain-
ableeconomicpurposeotherthanleveragedarbitrageofthoserules.
Incontrasttotheabove,off-balance-sheettrustvehiclesthatareusedtosupportthe
issuanceoftraditionalasset-backedsecuritizationsmustbevieweddifferently.Account-
ingstandardsettersshouldgivefurtherconsiderationtotheusefulnessofthesetypesof
truststructuresbeingtreatedfullyason-balance-sheetitemsandwhatthismightimplyfor
thefuturefunctioningofmarketsforthesetypesofasset-backedsecurities.Afulldiscussion
ofhowpendingaccountingchangesarelikelytoimpactthereportingandbalancesheet
treatmentofthesetypesofentitiesisbeyondthescopeofthisreport.(Ausefulreviewis
providedonpages38–52oftheCRMPGIIIreport.)Totheextentthesevehiclesalsoland
backonfinancialinstitutionbalancesheets,thereneedstobeearlyresolutionoftheimpact
thismayhaveontheusefulnessofleverageratiosasaregulatorycapitalmetric,andthe
potentialunevenuseofthatmetricacrossdifferentnationalregulatoryregimes.
Sincemostofthesecuritizedcapitalmarketshavebecomeinternationalinscope,efforts
toreopenthemusingnewprinciplesfortransparency,riskunderwriting,andaccounting
arebestapproachedonacoordinatedbasis,particularlybetweenauthoritiesintheUnited
KingdomandtheUnitedStates,wheremostofthisactivityhasbeencentered.
recommendation 13:
a. MarketSupervision:Extensiveinnovationinthecapitalmarketsandtherapidgrowth
ofsecuritizationmakeitimperativethatsecuritizedandotherstructuredproductand
derivativesmarketsbeheldtoregulatory,disclosure,andtransparencystandardsat
leastcomparabletothosethathavehistoricallybeenappliedtothepublicsecurities
markets.Thismayrequirethatabroaderrangeofmarketsbemonitored,thatthere
beadequatetransparencyastotransactionvolumesandholdingsacrossallproducts,
andthatbothcreditandleverageelementsofeachproductbethoroughlyunderstood
andmonitored.
b.CreditUnderwritingStandards:Thehealthyredevelopmentofsecuritizedcreditmar-
ketsrequiresarestorationofmarketconfidenceintheadequacyandsustainabilityof
creditunderwritingstandards.Tohelpachievethis,regulatorsshouldrequireregu-
latedfinancialinstitutionstoretainameaningfulportionofthecreditrisktheyare
packagingintosecuritizedandotherstructuredcreditproducts.
c. Off-Balance-SheetVehicles:Pendingaccountingrulechangesfortheconsolidation
ofmanytypesofoff-balance-sheetvehiclesrepresentapositiveandneededimprove-
ment.Itisimportant,beforetheyarefullyimplemented,thatcarefulconsiderationbe
giventohowtheserulesarelikelytoimpacteffortstorestoretheviabilityofsecuri-
tizedcreditmarkets.
Financial ReFoRm A Framework for Financial Stability�0
14. rating agency reforms
Numerousissuesandquestionshavebeenraisedaboutproblemsarisingfromthepre-cri-
sisoperationsoftheNationallyRecognizedSecuritiesRatingsOrganizations(NRSROs),
particularlyfocusingontheratingsattachedtocomplexsecuritizedinstruments.Theyin-
cludepotentialconflictsinherentintheissuerpaybusinessmodels;limitsonratingagency
accountability;theusefulnessofratingsthatonlyratecreditdefaultprobabilities,tothe
exclusionofmanyotherimportantriskfactors;andexcessiveregulatoryandinvestorreli-
anceonNRSROratings.Issueshavealsobeenraisedabouttheneedformorecompetition
andforbetterregulation.
Inmanyfinancialinstitutionsthenumberandqualityofpersonneldevotedtocredit
analysishasfailedtokeeppacewiththeincreasedcomplexityofindividualsecuritiesand
portfoliosofcreditinstruments.Overtime,afocusonprofitabilitywithinfinancialinstitu-
tionshasledmanyinvestorsandintermediariesto“outsource”thescreeningofcredits,and
inmanycases,theentirecreditevaluationfunction,tothetraditionalratingsagencies.
RegulatorybodieshavealsoreliedoncreditratingsfromNRSROsasanimportantinput
inassessingtheadequacyofnetcapital.Infact,creditratingshavebecome“hardwired”
inavastspectrumofrules,regulations,andinvestmentguidelinesaffectingcapitalrequire-
ments,disclosurerequirements,portfolioconstruction,andahostofotheractivitiesunder-
takenbybanks,broker-dealers,corporations,andotherissuers,pensionfunds,insurance
companies,professionalmoneymanagers,andotherinvestors.
Unfortunately,however,theeconomicmodelthatsupportstheratingagenciesisdriven
notbytheseusersbutbyissuerswhoselectandpayfortheratings.Therearenodirect
economicconsequencesforpoorcreditresearchoraratingthatfailstopredictanevent
ofdefault,becausethepayer,theissuer,isnotharmedineitherevent.Manyissuersare
believedtohave“shopped”amongthetraditionalprovidersforhigherratings,lendinga
perversenegativeconsequencetoregulatoryattemptstoincreasecompetition.
Inaddition,theratingagenciesarenotheldlegallyaccountableforthequalityoftheir
work.Sincethereisnocontractualrelationshipbetweenthosewhorelyonratings(inves-
tors)andtheprovidersofratings,thereisnolegalrecourse.Theagencieshave,todate,
escapedaccountabilityforthequalityoftheirratingsinthecourts.IntheUnitedStatesthey
havesuccessfullyarguedthattheirratings/opinionsaresubjecttoprotectionundertheFirst
Amendment.
Amodelwherebycreditresearchandsummaryratingsarepaidforbyinvestorsrather
thanissuershasbeenusedattimesinthepastandwouldbesuperiortothecurrentmodel.
Somesubscriptionmodelsforcreditresearchandsummaryratingshavebeguntoemerge.
However,thecurrentmodelsmakeitdifficultforproviderstobepaidbasedonvalue
added,bothbecausetheyhavetocompetewiththe“free”ratingsprovidedbythetradi-
tionalissuers,andbecauseitisdifficultforthemtodiscoverandmonitorhowextensively
Financial ReFoRm A Framework for Financial Stability �1
theirintellectualpropertyisbeingdeployed.Considerationoughttobegiventoalternative
approaches.
Whiletherehasbeensubstantialinnovationinthedevelopmentofstructuredproducts
ratedbythetraditionalagencies,therehasbeenlittleinnovationinthemeasurementtech-
niquesincorporatedintheratingsthemselves,includingriskmeasuresrelatedtoliquidity,
volatility,spreadrisk,andotherriskfactorsrelevanttomarketvaluations.
Althoughmanypracticechangeshavebeenannouncedand/orproposedbythe
NRSROs,theEuropeanCommission,andtheSecuritiesandExchangeCommission(SEC),
itisnotclearthatthesechangesgofarenoughtoaddresstheunderlyingincentiveprob-
lems.Thethree-partrecommendationsetoutbelowisintendedtoaddressmoredirectlythe
needtoimprovethealignmentofincentivesforthethreepartiestotheratingprocess—the
issuer,theinvestor,andtheratingserviceprovider.
recommendation 14:
RegulatorypolicieswithregardtoNRSROsandtheuseofratingsshouldberevised,pref-
erablyonaninternationallycoordinatedbasis,toachievethefollowing:
a. Usersofriskratings,mostimportantlyregulatedusers,shouldbeencouragedtore-
storeoracquirethecapacityforindependentevaluationsoftheriskofcreditproducts
inwhichtheyareinvesting.
b.RiskratingsissuedbytheNRSROsshouldbemademorerobust,toreflecttherisk
ofpotentialvaluationlossesarisingnotjustfromdefaultprobabilitiesandlossin
theeventofdefault,butalsofromthefullrangeofpotentialriskfactors(including
liquidityandpricevolatility).
c. Regulatorsshouldencouragethedevelopmentofpaymentmodelsthatimprovethe
alignmentofincentivesamongtheprovidersofriskratingsandtheirclientsandusers,
andpermituserstoholdNRSROsaccountableforthequalityoftheirworkproduct.
infrastructure Developments
Theeventsof2008haveunderscoredtheimportanceofastronginfrastructureforthe
financialsystem—onethatkeepspacewiththeinnovationsandnewmarketsthatarepart
ofmodernfinance.AsFederalReserveBoardChairmanBenBernankehaspointedout,
thereareboth“hardware”elements(thatis,systemsforexecution,clearingandsettle-
ment,andsoforth)and“software”elements(thatis,statutory,regulatory,andcontractual
frameworks)totheinfrastructure.Significantweaknesseshavebeenexposedinboththese
aspectsofthesystem’sinfrastructure.
Thefinalthreerecommendationsthatfollowcoverthreeareasforinfrastructureim-
provement:OTCmarketchanges,legalresolutionmechanismsforfinancialinstitutions,
andinfrastructureinsupportoftransparencyinthemarketsforstructuredproducts.
Financial ReFoRm A Framework for Financial Stability�2
15. oversight of Credit Default Swaps (CDS) and over-the-Counter (otC) markets
ThiscrisishasexposedseriousshortcomingsintheinfrastructureinsupportoftheOTC
derivativesmarkets.Whilesomeofthoseshortcomingsmaybeviewedasconductof
businessormarketintegrityissues,severalproblemshavereachedascalethathasraised
systemicdisruptionissues.Theseproblemsincludetradeconfirmationbacklogs,lackof
transparencyontransactionreportingandpricing,contractcloseoutprocedures,valuation
practicesandcollateraldisputes,anddirectandindirectcounterpartycreditissues.Most
oftheseissueseitherdonotariseoraregenerallywellmanagedwithintheexchange-based
derivativemarkets.
Underpressurefromvariousregulatorybodies,theleadingfirmsinthesemarketshave
beenworkingcloselyonacomprehensiveprogramtoaddresstheseinfrastructureweak-
nesses.Prominentwithinthatprogramareeffortstoestablishacentralcounterpartyclear-
ing(CCP)arrangementforthecreditderivativesmarketandcoordinatedeffortstogreatly
Box 4 regulation of the otC Derivatives markets
The following five points outline the nature and scope of proposed regulation of the over-the-counter (OTC) derivatives markets.
1. The appropriate national regulator should have the authority to promulgate rules applicable to market participation to promote sound practices and mitigate systemic risk in relation to credit default swaps (CDSs) and other OTC derivatives, including rules regarding sound risk manage-ment practices, trade reporting and confirmation standards, appropriate counterparty collateral requirements, contract closeout practices, and other measures needed to achieve market trans-parency.
2. Persons subject to regulation would include: those engaged in making two-sided markets in CDS or other OTC derivatives or who are engaged in the business of providing credit protection through CDS and whose activities reach a systemically significant threshold (to be established by the regulator), nonintermediaries whose OTC derivatives portfolios reach a systematically signifi-cant threshold (to be established by the regulator), and an OTC derivatives clearinghouse.
3. A professional intermediary in OTC derivatives would be required to be already regulated as a bank or must register with the regulator as a professional intermediary.
4. The regulator should promulgate rules requiring the reporting of large positions in OTC deriva-tives and related large counterparty credit exposure by both intermediaries and nonintermediar-ies.
5. The regulator should promulgate rules with respect to multilateral clearing organizations that clear OTC derivatives transactions other than on a securities or futures exchange to ensure the financial integrity of such clearing organizations and to mitigate systemic risk, promote reliable clearance and settlement, sound risk management practices, and market transparency.
Financial ReFoRm A Framework for Financial Stability ��
reducethegrosssizeofoutstandingcontractsthroughbilateralcompressionarrangements.
Significantprogresshasbeenmadeonthesefronts.Furtherprogresstowardstandardiza-
tionanduseofCCPmechanismsshouldbeencouraged,ifneedbewith
regulatorycapitalrequirementsthatbearmoreheavilyoninstrumentsthatarenotcleared
throughaCCP.
Whiletheseeffortsmaywellresultinadequatesolutionstothemostpressingexisting
problems,thebroaderpolicyquestionsregardingtheappropriateregulatorystatusofthese
marketsremainopen.Formostofthepast30years,themarketsdevelopedinsomething
ofaregulatoryvacuum,beingregardedlegallyasneithersecuritiesnorfuturescontracts.
Innovationswerewidespreadandthemarketsgrewexplosively,suggestingthat,beyond
servingavaluablerisktransferfunction,alargespeculativeelementhasemerged.
Asthesemarketshavegrownincomplexityandsizetodwarftheverycashmarketsto
whichtheyarerelated,thescaleofinfrastructure,credit,valuation,andtransparencyprob-
lemshaveloomedlarge.Pressureoncentralbanksandotherregulatorstodealwiththese
problemshasgrown.
Ithaslongbeenrecognizedthattheverysameeconomicriskcanbetakenonortrans-
ferredbyacombinationofsecurities,futurescontracts,orOTCderivatives.Yet,depending
ontheinstrumentused,vastlydifferentrules,oversightarrangements,andinfrastructure
supportmechanismsapply.WhilethismayhavemadepublicpolicysensewhentheOTC
derivativesmarketswereintheirearlystagesofdevelopment,thejustificationnolonger
exists.Thetimehascometoharmonizestandardsandpracticesacrosstheseinstrument
markets.Thetimehasalsocometomovebeyondmoralsuasionandenlightenedmarket
self-interesttoensurethatmarketpracticesdevelopinatimely,healthy,andcomprehensive
fashion.ApossiblesystemofregulationshouldincludetheelementslistedinBox4.
recommendation 15:
a. Much-neededplannedimprovementstotheinfrastructuresupportingtheOTC
derivativesmarketsshouldbefurthersupportedbylegislationtoestablishaformal
systemofregulationandoversightofsuchmarkets.
b.Giventheglobalnatureofthemarket,itisessentialthattherebeaconsistentregula-
toryframeworkonaninternationalscale,andnationalregulatorsshouldshareinfor-
mationandenterintoappropriatecooperativearrangementswithauthoritiesofother
countriesresponsibleforoverseeingactivities.
16. a resolution mechanism for financial institutions
Marketdisciplineworksbestinasysteminwhichfailurescanhappenwithoutbeinga
sourceofmajordisruptionandcontagion.Thatcanonlyhappenwithlarge,complexfinan-
cialfirmsiftheinfrastructureandrelatedmarketmechanismsthathavetooperateinthe
Financial ReFoRm A Framework for Financial Stability��
faceoffailuresarerobust,transparent,andpermittimelybutnotforcedactionsonthepart
ofcreditorsandothercounterpartiestoprotecttheirinterest.
IntheUnitedStates,existinglegalmechanismsformanagingbankfailures,whilenot
perfect,haveproventobeworkable.Theproblemshaveariseninthecontextofpotential
andactualfailuresoflargenon-bankfinancialinstitutions.Specifically,theinterventionto
preventthefailureofBearSterns,thebankruptcyfilingsofLehmanBrothers,andother
interventionsdemonstratethatthereisaneedtoestablishaneffectivefailureresolution
regimeforlargenon-bankfinancialinstitutions.Partofthatcanbeaddressedbyimprove-
mentstotheinfrastructureoftheOTCderivativesmarkets.Partofitcanalsobeaddressed
byclosingthegapsinconsolidatedprudentialoversightoflargeregulatednon-bank
financialinstitutions.Buttobefullyeffective,thelegalregimesthatoperateoncefailureis
triggeredshouldbemodified,withaviewtoplacingprimaryimportanceonthecapacity
oftheauthoritiestotakeactionstoprotectthehealthofthesystem.Arelatedconcernis
thegeneralframeworkforhandlingqualifiedfinancialcontractsintheUnitedStates,which
mustbereconsideredinlightofrecentevents.
Insomecountries,alegalframeworktoprovidefortheorderlyclosingofregulated
banksisnotyetfullyinplace,letaloneaframeworkforsystemicallysignificantnon-
bankfinancialinstitutions.Adesirableframeworkshouldprovidefor:(a)continuityof
operationsandserviceaccessfordepositorsandotherclients,(b)appropriatediscretion
forreceiversformanagingpaymentpriorities,(c)discretiontoimposecostappropriately
withinthecapitalstructureandonexecutivemanagementtoreducemoralhazard,and(d)
appropriatefinancialflexibilityfortheregulator/receivertoprovidefortimelytransferof
financialassetsandliabilitiesandpromptaccessofclientstoproperlysegregatedassetsand
accounts.
Afurthercomplicationthatmustbeconsidered—bothintheUnitedStatesandother
jurisdictions—relatestoapotentialfailureofalarge,leveragedhedgefundorgroupof
relatedfunds,wherethefundsinquestionaredomiciledinanoffshorecenter.Thebank-
ruptcyandgovernanceregimesofsuchcentersmaybeatoddswiththepublicinterestof
thecountriesinwhosemarketsthefundsactuallyoperateintermsofcontainingtheimpact
offailuresonthesystem.Oncesuchfundsandmanagersarebroughtunderaformalregu-
latorysystem,theappropriatenationalregulatorshouldrequireananalysisofthisissue
forthelargestfunds.Theregulatorshouldhavetheauthoritytorequirethemanagerofthe
fundsinquestiontomodifyexistinglegalarrangementstoprovideforanacceptablelegal
regimeforgovernanceandpotentialbankruptcyliquidations.
recommendation 16:
a. Incountrieswherethisisnotalreadythecase,alegalregimeshouldbeestablishedto
provideregulatorswithauthoritytorequireearlywarning,promptcorrectiveactions,
andorderlyclosingsofregulatedbankingorganizations,andothersystemically
Financial ReFoRm A Framework for Financial Stability ��
significantregulatedfinancialinstitutions.IntheUnitedStates,legislationshould
establishaprocessformanagingtheresolutionoffailednon-depositoryfinancial
institutions(includingnon-bankaffiliateswithinabankholdingcompanystructure)
comparabletotheprocessfordepositoryinstitutions.
b.Theregimefornon-depositoryfinancialinstitutionsshouldapplyonlytothosefew
organizationswhosefailuremightreasonablybeconsideredtoposeathreattothe
financialsystemandthereforesubjecttoofficialregulation.
c. Aregulatorybodyhavingpowerscomparabletothoseavailablefortheresolution
ofbankinginstitutionsshouldbeempoweredtoactasareceiverorconservatorof
afailednon-depositoryorganizationandtoplacetheorganizationinliquidationor
takeactiontorestoreittoasoundandsolventcondition.
d.Thespecialtreatmentaccordedtovariousformsoffinancialcontractsundercurrent
U.S.lawshouldbeexaminedinlightofrecentexperience,withaviewtowardresolv-
ingclaimsunderthesecontractsinamannerleastdisruptivetothefinancialsystem.
17. improving transparency of Structured Product markets
Disclosurestandardsinasset-backedandotherstructuredfixed-incomemarketsneedto
bereexaminedandenhanced.Publicinterestinensuringadequatedisclosuretotheinves-
torsintheprivateorwholesalemarketsforasset-backedandotherstructuredfixed-income
productsshouldberecognizedbyregulators.Atpresent,informationthatislikelytobe
significantisnotgenerallyavailable,andthisneedstobeaddressed.
Onceappropriatenewdisclosurestandardshavebeenagreed,thisinformationshould
beprovidedinamannerthatiscomparableandfacilitatesanalysisovertimeandacross
transactions.Satisfyingthisobjectivewillrequirethatinformationbepresentedinamore
consistentandstructuredformatthaniscurrentlythecase.Atpresent,financialinforma-
tionforcorporateissuersisprovidedinasubstantiallystructuredmannerunderthecontent
andpresentationrequirementofgenerallyacceptedaccountingprinciples.However,there
arenoanalogouscontentandpresentationrequirementsforasset-backedandotherstruc-
turedproducts.
recommendation 17:
a. Thedisclosureanddisseminationregimeforasset-backedandotherstructuredfixed-
incomefinancialproducts(includingsecuritiesandotherfinancialproducts)inthe
publicandprivatemarketsshouldbeenhanced.
b.Theappropriatenationalregulatorshould,inconjunctionwithinvestors,determine
whatinformationismaterialtoinvestorsintheseproductsandshouldconsideren-
hancingexistingrulesoradoptnewrulesthatensuredisclosureofthatinformation,
forbothasset-backedandsyntheticstructuredproducts.
Financial ReFoRm A Framework for Financial Stability�6
c. Theappropriatenationalregulatorshouldconditiontransactionsintheprivateand
wholesalemarketsonsatisfactionofappropriateinformationdisclosurestandards.
18. Sharing market activity and Valuation information
Publicpolicyconsiderationshavegenerallysupportedtheimportanceofcompetingchan-
nelsfortradingexecutioninfinancialmarketssubjecttosomebasicminimumpublic
marketstandards.Exchange-basedexecutionmechanisms,andbroadlycomparableelec-
tronicexecutionfacilities,aretypicallycharacterizedbyhighdegreesoftransparencyand
pricediscovery.Lesserstandardsapplyinvarioussegmentsoftheover-the-countermarkets,
insomecasestosuchadegreethatthemarketsarebetterdescribedasopaqueratherthan
transparent.
recommendation 18:
Effortstorestoreinvestorconfidenceintheworkingsofthesemarketssuggestaneedtore-
visitevaluationsofthecostsandbenefitsofinfrastructureinvestmentsthatwouldfacilitate
amuchhigherleveloftransparencyaroundactivitylevels,tradedprices,andrelatedvalua-
tions.Partofthecostsofsuchchangesistheimpactonfirm-specificconcernsregardingthe
privatenatureoftheirmarketactivity.Theseconcerns,anddirectinvestmentcosts,needto
beweighedagainstthepotentialbenefitsofhigherlevelsofmarkettransparency.
paRT 6 Concluding Comment
Financial ReFoRm A Framework for Financial Stability��
Intheyearahead,policymakerswillbefacedwithanextraordinarysetofchallenges.The
financialcrisishasyettofullyrunitscourse.Financialmarketsandinstitutionshaveyetto
reengageinahealthyprocessofriskintermediation.Realeconomiesaroundtheworldare
experiencingsharpcontraction,whichislikelytoleadtoadditionalcreditdefaults.Gov-
ernmentsandcentralbanksarestretchingtotheirlimitswithprogramstostabilizeboth
financialsystemsandrealeconomies.
Initiativestoaddresstheseimmediatechallengesmusttakeprecedenceovereventhe
mostpressingagendasforfinancialregulatoryreform.Moreover,untilthefullcostsofthe
currentcrisisareknown—includingthefinancialcostsfromitseconomicfallout—therewill
notbeclarityontheextentofneededreformsandasensibletimetableforimplementing
themandforrollingbackofgreatlyextendedsafetynets.
Theviewsandrecommendationssetforthhererepresentanassessment,atoneparticu-
larpointinthecrisis,astotheneededelementsofacomprehensivefinancialreformplan.
Thesesuggestionsfocusprimarilyonfinancialstabilityconsiderationsanddonotcoverin
anydetailotherpotentialneededchangesinbusinesspractice,inmarketoradministrative
structure,orincompetitionpolicies.
Thisreportshouldbereadincombinationwiththepriorextensiveprivatesectorand
publicsectorreformproposalsreferredtoinourreport.Policymakersshouldhavean
extensivesetofproposalsforframingtheissuesinvolvedintheneededcomprehensive
overhaulofthenationalandinternationalfinancialsystemsandsuggestingappropriatere-
form.ThesereformsarelikelytobemoreextensiveandimportantthananysincetheGreat
Depression.
��
appendix
liSt of reCommenDationS
Core reCommenDation igaps and weaknesses in the coverage of prudential regulation and supervision must be eliminated. Allsystemicallysignificantfinancialinstitutions,regardlessoftype,
mustbesubjecttoanappropriatedegreeofprudentialoversight.
Prudential regulation and Supervision of Banking organizations
recommendation 1:
a. Inallcountries,theactivitiesofgovernment-insureddeposit-takinginstitutionsshould
besubjecttoprudentialregulationandsupervisionbyasingleregulator(thatis,con-
solidatedsupervision).Thelargestandmostcomplexbankingorganizationsshould
besubjecttoparticularlycloseregulationandsupervision,meetinghighandcommon
internationalstandards.
b.Large,systemicallyimportantbankinginstitutionsshouldberestrictedinundertak-
ingproprietaryactivitiesthatpresentparticularlyhighrisksandseriousconflictsof
interest.Sponsorshipandmanagementofcommingledprivatepoolsofcapital(that
is,hedgeandprivateequityfundsinwhichthebankinginstitutionsowncapitalis
commingledwithclientfunds)shouldordinarilybeprohibitedandlargeproprietary
tradingshouldbelimitedbystrictcapitalandliquidityrequirements.Participation
inpackagingandsaleofcollectivedebtinstrumentsshouldrequiretheretentionofa
meaningfulpartofthecreditrisk.
c. Ingeneral,government-insureddeposit-takinginstitutionsshouldnotbeownedand
controlledbyunregulatednon-financialorganizations,andstrictlimitsshouldbe
imposedondealingsamongsuchbankinginstitutionsandpartialnon-bankowners.
d.Toguardagainstexcessiveconcentrationinnationalbankingsystems,withimplica-
tionsforeffectiveofficialoversight,managementcontrol,andeffectivecompetition,
nationwidelimitsondepositconcentrationshouldbeconsideredatalevelappropri-
atetoindividualcountries.
Consolidated Supervision of non-Bank financial institutions
recommendation 2:
a. Forthosecountrieslackingsucharrangements,aframeworkfornational-levelcon-
solidatedprudentialregulationandsupervisionoverlargeinternationallyactiveinsur-
ancecompaniesshouldbeestablished.
Financial ReFoRm A Framework for Financial Stability60
b.Anappropriateprudentialregulatorshouldbedesignatedforthoselargeinvestment
banksandbroker-dealersthatarenotorganizedasbankholdingcompanies.
money market mutual funds and Supervision
recommendation 3:
a. Moneymarketmutualfundswishingtocontinuetoofferbank-likeservices,such
astransactionaccountservices,withdrawalsondemandatpar,andassurancesof
maintainingastablenetassetvalue(NAV)atparshouldberequiredtoreorganizeas
special-purposebanks,withappropriateprudentialregulationandsupervision,gov-
ernmentinsurance,andaccesstocentralbanklender-of-last-resortfacilities.
b.Thoseinstitutionsremainingasmoneymarketmutualfundsshouldonlyofferacon-
servativeinvestmentoptionwithmodestupsidepotentialatrelativelylowrisk.The
vehiclesshouldbeclearlydifferentiatedfromfederallyinsuredinstrumentsofferedby
banks,suchasmoneymarketdepositfunds,withnoexplicitorimplicitassurancesto
investorsthatfundscanbewithdrawnondemandatastableNAV.Moneymarketmu-
tualfundsshouldnotbepermittedtouseamortizedcostpricing,withtheimplication
thattheycarryafluctuatingNAVratherthanonethatispeggedatUS$1.00pershare.
oversight of Private Pools of Capital
recommendation 4:
a. Managersofprivatepoolsofcapitalthatemploysubstantialborrowedfundsshould
berequiredtoregisterwithanappropriatenationalprudentialregulator.There
shouldbesomeminimumsizeandventurecapitalexemptionsfromsuchregistration
requirement.
b.Theprudentialregulatorofsuchmanagersshouldhaveauthoritytorequireperiodic
regulatoryreportsandpublicdisclosuresofappropriateinformationregardingthe
size,investmentstyle,borrowing,andperformanceofthefundsundermanagement.
Sinceintroductionofevenamodestsystemofregistrationandregulationcancreate
afalseimpressionoflowerinvestmentrisk,disclosure,andsuitabilitystandardswill
havetobereevaluated.
c.Forfundsaboveasizejudgedtobepotentiallysystemicallysignificant,theprudential
regulatorshouldhaveauthoritytoestablishappropriatestandardsforcapital,liquid-
ity,andriskmanagement.
d.Forthesepurposes,thejurisdictionoftheappropriateprudentialregulatorshouldbe
basedontheprimarybusinesslocationofthemanagerofsuchfunds,regardlessof
thelegaldomicileofthefundsthemselves.Giventheglobalnatureofthemarketsin
whichsuchmanagersandfundsoperate,itisimperativethataregulatoryframework
beappliedonaninternationallyconsistentbasis.
Financial ReFoRm A Framework for Financial Stability 61
government-Sponsored enterprises (gSes)
recommendation 5:
a.FortheUnitedStates,thepolicyresolutionoftheappropriateroleofGSEsinmort-
gagefinanceshouldbebasedonaclearseparationofthefunctionsofprivatesector
mortgagefinanceriskintermediationfromgovernmentsectorguaranteesorinsurance
ofmortgagecreditrisk.
b.Governmentalentitiesprovidingsupportforthemortgagemarketbymeansofmarket
purchasesshouldhaveexplicitstatutorybackingandfinancialsupport.Hybridsof
privateownershipwithgovernmentsponsorshipshouldbeavoided.Intime,existing
GSEmortgagepurchasingandportfolioactivitiesshouldbespunofftoprivatesector
entities,withthegovernment,ifitdesires,maintainingacapacitytointerveneinthe
marketthroughawhollyownedpublicinstitution.
Core reCommenDation iithe quality and effectiveness of prudential regulation and supervision must be improved. Thiswillrequirebetter-resourcedprudentialregulatorsandcentralbanks
operatingwithinstructuresthataffordmuchhigherlevelsofnationalandinternational
policycoordination.
regulatory Structure
recommendation 6:
a.Countriesshouldreevaluatetheirregulatorystructureswithaviewtoeliminatingun-
necessaryoverlapsandgapsincoverageandcomplexity,removingthepotentialfor
regulatoryarbitrage,andimprovingregulatorycoordination.
b.Inallcases,countriesshouldexplicitlyreaffirmtheinsulationofnationalregulatory
authoritiesfrompoliticalandmarketpressuresandreassesstheneedforimproving
thequalityandadequacyofresourcesavailabletosuchauthorities.
role of the Central Bank
recommendation 7:
a. Wherenotalreadythecase,centralbanksshouldacceptaroleinpromotingand
maintainingfinancialstability.Theexpectationshouldbethatconcernsforfinancial
stabilityarerelevantnotjustintimesoffinancialcrisis,butalsointimesofrapid
creditexpansionandincreaseduseofleveragethatmayleadtocrises.
b.Incountrieswherethecentralbankisnottheprudentialregulator,thecentralbank
shouldhave:(i)astrongroleonthegoverningbodyoftheprudentialandmarkets
Financial ReFoRm A Framework for Financial Stability62
regulator(s);(ii)aformalreviewrolewithrespecttoproposedchangesinkeypruden-
tialpolicies,especiallycapitalandliquiditypoliciesandmarginarrangements;and(iii)
asupervisoryroleinregardtothelargestsystemicallysignificantfirms,andcritical
paymentandclearingsystems.
c. Asharpdistinctionshouldbemaintainedbetweenthoseregulatedbankingorganiza-
tionswithnormalaccesstocentralbankliquidityfacilitiesandothertypesoffinancial
institutionswhoseaccess,ifany,shouldbelimitedtoextremeemergencysituationsof
criticalsystemicimportance.
d.Centralbankemergencylendingauthorityforhighlyunusualandexigentcircum-
stancesshouldbepreserved,butshouldinclude,bylaworpractice,supportbyap-
propriatepoliticalauthoritiesfortheuseofsuchauthorityinextendingsuchcreditto
non-bankinstitutions.
e. Centralbankliquiditysupportoperationsshouldbelimitedtoformsthatdonot
entaillendingagainstortheoutrightpurchaseofhigh-riskassets,orotherformsof
long-termdirectorindirectcapitalsupport.Inprinciple,thoseformsofsupportare
moreappropriatelyprovidedbydirectlyaccountablegovernmententities.Inpractice,
totheextentthecentralbankistheonlyentitywiththeresourcesandauthoritytoact
quicklytoprovidethisformofsystemicsupport,thereshouldbesubsequentapproval
ofanappropriategovernmentalentitywiththeconsequentrisktransfertothatentity.
international Coordination
recommendation 8:
a. Nationalregulatoryauthoritiesandfinanceministersarestronglyencouragedto
adaptandenhanceexistingmechanismsforinternationalregulatoryandsupervisory
coordination.Thefocusofneededenhancementsshouldbeto:(i)bettercoordinate
oversightofthelargestinternationalbankingorganizations,withmoretimelyand
openinformationsharing,andgreaterclarityonhomeandhostresponsibilities,in-
cludingincrisismanagement;(ii)movebeyondcoordinatedrulemakingandstandard
settingtotheidentificationandmodificationofmaterialnationaldifferencesinthe
applicationandenforcementofsuchstandards;(iii)closeregulatorygapsandraise
standards,whereneeded,withrespecttooffshorebankingcenters;and(iv)develop
themeansforjointconsiderationofsystemicriskconcernsandthecyclicalityimplica-
tionsofregulatoryandsupervisorypolicies.Theappropriateagenciesshouldstrength-
entheiractionsinmembercountriestopromoteimplementationandenforcementof
internationalstandards.
b.Giventherecurringimportanceofexcessiveleverageasacontributingfactorto
financialdisruptions,andtheincreasinglycomplexwaysinwhichleveragecanbe
employedonandoffbalancesheets,prudentialregulatorsandcentralbanksshould
Financial ReFoRm A Framework for Financial Stability 6�
collaboratewithinternationalagenciesinanefforttodefineleverageandthencollect
andreportdataonthedegreeofleverageandmaturityandliquiditymismatchesin
variousnationalsystemsandmarkets.
c. Totheextentnewinternationalregulatoryorganizationsareultimatelyneeded,the
initialfocusshouldbeondevelopingmoreformalregionalmechanisms,suchasinthe
EuropeanUnion,butwithcontinuedattentivenesstotheglobaldimensionofmost
significantfinancialmarkets.
Core reCommenDation iiiinstitutional policies and standards must be strengthened, with particular emphasis on standards for governance, risk management, capital, and liquidity. Regulatorypoliciesandaccountingstandardsmustalsoguardagainstprocyclicaleffects
andbeconsistentwithmaintainingprudentbusinesspractices.
regulatory Standards for governance and risk management
recommendation 9:
Regulatorystandardsforgovernanceandriskmanagementshouldberaised,withparticu-
laremphasison:
a. Strengtheningboardsofdirectorswithgreaterengagementofindependentmembers
havingfinancialindustryandriskmanagementexpertise;
b.Coordinatingboardoversightofcompensationandriskmanagementpolicies,with
theaimofbalancingrisktakingwithprudenceandthelong-runinterestsofand
returnstoshareholders;
c. Ensuringsystematicboard-levelreviewsandexercisesaimedatestablishingthemost
importantparametersforsettingthefirm’srisktoleranceandevaluatingitsriskpro-
filerelativetothoseparameters;
d.Ensuringtheriskmanagementandauditingfunctionsarefullyindependentand
adequatelyresourcedareasofthefirm.Theriskmanagementfunctionshouldreport
directlytothechiefexecutiveofficerratherthanthroughtheheadofanotherfunc-
tionalarea;
e. Conductingperiodicreviewsofafirm’spotentialvulnerabilitytoriskarisingfrom
creditconcentrations,excessivematuritymismatches,excessiveleverage,orunduereli-
anceonassetmarketliquidity;
f. Ensuringthatalllargefirmshavethecapacitytocontinuouslymonitor,withinamat-
terofhours,theirlargestcounterpartycreditexposuresonanenterprisewidebasis
andtomakethatinformationavailable,asappropriate,toitsseniormanagement,its
board,anditsprudentialregulatorandcentralbank;
Financial ReFoRm A Framework for Financial Stability6�
g. Ensuringindustrywideacceptanceofandactiononthemanyspecificriskmanage-
mentpracticeimprovementscontainedinthereportsoftheCounterpartyRiskMan-
agementPolicyGroup(CRMPG)andtheInstituteofInternationalFinance.
regulatory Capital Standards
recommendation 10:
a. Internationalregulatorycapitalstandardsshouldbeenhancedtoaddresstendencies
towardprocyclicality.Benchmarksforbeingwellcapitalizedshouldberaised,given
thedemonstrablelimitationsofeventhemostadvancedtoolsforestimatingfirmwide
risk.
b.Thesebenchmarksshouldbeexpressedasabroadrangewithinwhichcapitalratios
shouldbemanaged,withtheexpectationthat,aspartofsupervisoryguidance,firms
willoperateattheupperendofsucharangeinperiodswhenmarketsareexuberant
andtendenciesforunderestimatingandunderpricingriskaregreat.
c. Theexistinginternationaldefinitionsofcapitalshouldbereevaluated,lookingtoward
closealignmentonnationaldefinitions.
d.Capitalandriskdisclosurestandardsshouldbereevaluatedtoprovideahigherdegree
oftransparencyofafirm’sriskappetite,itsestimatedneedsforandallocationofeco-
nomiccapital,anditsvaluationpractices.
Standards for liquidity risk management
recommendation 11:
a. Base-levelliquiditystandardsshouldincorporatenormsformaintainingasizable
diversifiedmixoflong-termfundingandanavailablecushionofhighlyliquidunen-
cumberedassets.Oncesuchstandardsaredeveloped,considerationshouldbegivento
whatisthepreferredmixofseniorandsubordinateddebtinbankcapitalstructures.
b.Supervisoryguidanceforliquiditystandardsshouldbebasedonamorerefinedanaly-
sisofafirm’scapacitytomaintainampleliquidityunderstressconditions,including
evaluationofthequalityandeffectivenessofitsliquiditymanagementpoliciesand
contingencyfundingplan.
c. Liquiditydisclosurestandards,buildingonthesuggestedpracticesintheBaselCom-
mitteePrinciples,shouldcomplementthesuggestedimproveddisclosurepracticesfor
capitalandriskprofileinformation.
Financial ReFoRm A Framework for Financial Stability 6�
fair Value accounting
recommendation 12:
a. Fairvalueaccountingprinciplesandstandardsshouldbereevaluatedwithaview
todevelopingmorerealisticguidelinesfordealingwithlessliquidinstrumentsand
distressedmarkets.
b.Thetensionbetweenthebusinesspurposeservedbyregulatedfinancialinstitutions
thatintermediatecreditandliquidityriskandtheinterestsofinvestorsandcreditors
shouldberesolvedbydevelopmentofprinciples-basedstandardsthatbetterreflectthe
businessmodeloftheseinstitutions,applyappropriaterigortovaluationandevalu-
ationofintent,andrequireimproveddisclosureandtransparency.Thesestandards
shouldalsobereviewedby,andcoordinatedwith,prudentialregulatorstoensure
applicationinafashionconsistentwithsafeandsoundoperationofsuchinstitutions.
c. Accountingprinciplesshouldalsobemademoreflexibleinregardtotheprudential
needforregulatedinstitutionstomaintainadequatecreditlossreservessufficientto
coverexpectedlossesacrosstheirportfoliosoverthelifeofassetsinthoseportfolios.
Thereshouldbefulltransparencyofthemannerinwhichreservesaredeterminedand
allocated.
d.AsemphasizedinthethirdreportoftheCRMPG,underanyandallstandardsof
accountingandunderanyandallmarketconditions,individualfinancialinstitutions
mustensurethatwhollyadequateresources,insulatedbyfail-safeindependentdeci-
sion-makingauthority,areatthecenterofthevaluationandpriceverificationprocess.
Core reCommenDation iV financial markets and products must be made more transparent, with better-aligned risk and prudential incentives. the infrastructure supporting such markets must be made much more robust and resistant to potential failures of even large financial institutions.
restoring Confidence in Securitized Credit markets
recommendation 13:
a. MarketSupervision:Extensiveinnovationinthecapitalmarketsandtherapidgrowth
ofsecuritizationmakeitimperativethatsecuritizedandotherstructuredproductand
derivativesmarketsbeheldtoregulatory,disclosure,andtransparencystandardsat
leastcomparabletothosethathavehistoricallybeenappliedtothepublicsecurities
Financial ReFoRm A Framework for Financial Stability66
markets.Thismayrequirethatabroaderrangeofmarketsbemonitored,thatthere
beadequatetransparencyastotransactionvolumesandholdingsacrossallproducts,
andthatbothcreditandleverageelementsofeachproductbethoroughlyunderstood
andmonitored.
b.CreditUnderwritingStandards:Thehealthyredevelopmentofsecuritizedcreditmar-
ketsrequiresarestorationofmarketconfidenceintheadequacyandsustainabilityof
creditunderwritingstandards.Tohelpachievethis,regulatorsshouldrequireregu-
latedfinancialinstitutionstoretainameaningfulportionofthecreditrisktheyare
packagingintosecuritizedandotherstructuredcreditproducts.
c. Off-Balance-SheetVehicles:Pendingaccountingrulechangesfortheconsolidation
ofmanytypesofoff-balance-sheetvehiclesrepresentapositiveandneededimprove-
ment.Itisimportant,beforetheyarefullyimplemented,thatcarefulconsiderationbe
giventohowtheserulesarelikelytoimpacteffortstorestoretheviabilityofsecuri-
tizedcreditmarkets.
rating agency reforms
recommendation 14:
RegulatorypolicieswithregardtoNationallyRecognizedSecuritiesRatingOrganizations
(NRSROs)andtheuseofratingsshouldberevised,preferablyonaninternationallycoordi-
natedbasis,toachievethefollowing:
a. Usersofriskratings,mostimportantlyregulatedusers,shouldbeencouragedtore-
storeoracquirethecapacityforindependentevaluationsoftheriskofcreditproducts
inwhichtheyareinvesting.
b.RiskratingsissuedbytheNRSROsshouldbemademorerobust,toreflecttherisk
ofpotentialvaluationlossesarisingnotjustfromdefaultprobabilitiesandlossinthe
eventofdefault,butalsofromthefullrangeofpotentialriskfactors(includingliquid-
ityandpricevolatility).
c. Regulatorsshouldencouragethedevelopmentofpaymentmodelsthatimprovethe
alignmentofincentivesamongtheprovidersofriskratingsandtheirclientsandusers,
andpermituserstoholdNRSROsaccountableforthequalityoftheirworkproduct.
the oversight of Credit Default Swaps (CDS) and over-the-Counter (otC) markets
recommendation 15:
a. Much-neededplannedimprovementstotheinfrastructuresupportingtheOTCderiva-
tivesmarketsshouldbefurthersupportedbylegislationtoestablishaformalsystem
ofregulationandoversightofsuchmarkets.
Financial ReFoRm A Framework for Financial Stability 6�
b.Giventheglobalnatureofthemarket,itisessentialthattherebeaconsistentregula-
toryframeworkonaninternationalscale,andnationalregulatorsshouldshareinfor-
mationandenterintoappropriatecooperativearrangementswithauthoritiesofother
countriesresponsibleforoverseeingactivities.
a resolution mechanism for financial institutions
recommendation 16:
a. Incountrieswherethisisnotalreadythecase,alegalregimeshouldbeestablishedto
provideregulatorswithauthoritytorequireearlywarning,promptcorrectiveactions,
andorderlyclosingsofregulatedbankingorganizations,andothersystemicallysignif-
icantregulatedfinancialinstitutions.IntheUnitedStates,legislationshouldestablish
aprocessformanagingtheresolutionoffailednon-depositoryfinancialinstitutions
(includingnon-bankaffiliateswithinabankholdingcompanystructure)comparable
totheprocessfordepositoryinstitutions.
b.Theregimefornon-depositoryfinancialinstitutionsshouldapplyonlytothosefew
organizationswhosefailuremightreasonablybeconsideredtoposeathreattothe
financialsystemandthereforesubjecttoofficialregulation.
c. Aregulatorybodyhavingpowerscomparabletothoseavailablefortheresolution
ofbankinginstitutionsshouldbeempoweredtoactasareceiverorconservatorof
afailednon-depositoryorganizationandtoplacetheorganizationinliquidationor
takeactiontorestoreittoasoundandsolventcondition.
d.Thespecialtreatmentaccordedtovariousformsoffinancialcontractsundercurrent
U.S.lawshouldbeexaminedinlightofrecentexperience,withaviewtowardresolv-
ingclaimsunderthesecontractsinamannerleastdisruptivetothefinancialsystem.
improving transparency of Structured Product markets
recommendation 17:
a. Thedisclosureanddisseminationregimeforasset-backedandotherstructuredfixed-
incomefinancialproducts(includingsecuritiesandotherfinancialproducts)inthe
publicandprivatemarketsshouldbeenhanced.
b.Theappropriatenationalregulatorshould,inconjunctionwithinvestors,determine
whatinformationismaterialtoinvestorsintheseproductsandshouldconsideren-
hancingexistingrulesoradoptnewrulesthatensuredisclosureofthatinformation,
forbothasset-backedandsyntheticstructuredproducts.
c. Theappropriatenationalregulatorshouldconditiontransactionsintheprivateand
wholesalemarketsonsatisfactionofappropriateinformationdisclosurestandards.
Financial ReFoRm A Framework for Financial Stability6�
Sharing market activity and Valuation information
recommendation 18:
Effortstorestoreinvestorconfidenceintheworkingsofthesemarketssuggestaneedtore-
visitevaluationsofthecostsandbenefitsofinfrastructureinvestmentsthatwouldfacilitate
amuchhigherleveloftransparencyaroundactivitylevels,tradedprices,andrelatedvalua-
tions.Partofthecostsofsuchchangesistheimpactonfirm-specificconcernsregardingthe
privatenatureoftheirmarketactivity.Theseconcerns,anddirectinvestmentcosts,needto
beweighedagainstthepotentialbenefitsofhigherlevelsofmarkettransparency.
6�
membeRs oF The gRoup oF ThiRTy
Paul A. VolckerChairmanoftheBoardofTrustees,GroupofThirtyFormerChairman,BoardofGovernorsoftheFederalReserveSystem
Jacob A. FrenkelChairman,GroupofThirtyViceChairman,AmericanInternationalGroupFormerGovernor,BankofIsrael
Geoffrey L. BellExecutiveSecretary,GroupofThirtyPresident,GeoffreyBell&Company,Inc.
Montek S. Ahluwalia DeputyChairman,PlanningCommissionofIndiaFormerDirector,IndependentEvaluationOffice,InternationalMonetaryFund
Abdulatif Al-HamadChairman,ArabFundforEconomicandSocialDevelopmentFormerMinisterofFinanceandMinisterofPlanning,Kuwait
Leszek BalcerowiczChairmanoftheBoard,BruegelProfessor,WarsawSchoolofEconomicsFormerPresident,NationalBankofPolandFormerDeputyPrimeMinisterandMinisterofFinance,Poland
Jaime CaruanaFinancialCounsellor,InternationalMonetaryFundFormerGovernor,BancodeEspañaFormerChairman,BaselCommitteeonBankingSupervision
Domingo CavalloChairmanandCEO,DFCAssociates,LLCFormerMinisterofEconomy,Argentina
E. Gerald CorriganManagingDirector,GoldmanSachsGroup,Inc.FormerPresident,FederalReserveBankofNewYork
Andrew D. CrockettPresident,JPMorganChaseInternationalFormerGeneralManager,BankforInternationalSettlements
Guillermo de la Dehesa RomeroDirectorandMemberoftheExecutiveCommittee,GrupoSantanderFormerDeputyManagingDirector,BancodeEspañaFormerSecretaryofState,MinistryofEconomyandFinance,Spain
�0
Mario Draghi Governor,Bancad’ItaliaChairman,FinancialStabilityForumMemberoftheGoverningandGeneralCouncils,EuropeanCentralBankFormerViceChairmanandManagingDirector,GoldmanSachsInternational
Martin Feldstein ProfessorofEconomics,HarvardUniversityPresidentEmeritus,NationalBureauofEconomicResearchFormerChairman,CouncilofEconomicAdvisers
Roger W. Ferguson, Jr.ChiefExecutive,TIAA-CREFFormerChairman,SwissReAmericaHoldingCorporationFormerViceChairman,BoardofGovernorsoftheFederalReserveSystem
Stanley FischerGovernor,BankofIsraelFormerFirstManagingDirector,InternationalMonetaryFund
Arminio Fraga NetoPartner,GaveaInvestimentosFormerGovernor,BancodoBrasil
Timothy F. GeithnerPresidentandChiefExecutiveOfficer,FederalReserveBankofNewYorkFormerU.S.UndersecretaryofTreasuryforInternationalAffairs
Gerd HäuslerMemberoftheBoardofDirectorsandSeniorAdvisor,RHJInternationalFormerCounsellorandDirector,InternationalCapitalMarketsDepartment, InternationalMonetaryFundFormerManagingDirector,DresdnerBank
Philipp Hildebrand ViceChairmanoftheGoverningBoard,SwissNationalBankFormerPartner,MooreCapitalManagement
Mervyn King Governor,BankofEnglandFormerProfessorofEconomics,LondonSchoolofEconomics
Paul KrugmanProfessorofEconomics,WoodrowWilsonSchool,PrincetonUniversityFormerMember,CouncilofEconomicAdvisors
Guillermo Ortiz MartinezGovernor,BancodeMexicoFormerSecretaryofFinanceandPublicCredit,Mexico
Tommaso Padoa-SchioppaFormerMinisterofEconomyandFinance,ItalyFormerChairman,InternationalAccountingStandardsCommitteeFormerMemberoftheExecutiveBoard,EuropeanCentralBankFormerChairman,CONSOB
�1
Kenneth Rogoff ThomasD.CabotProfessorofPublicPolicyandEconomics,HarvardUniversityFormerChiefEconomistandDirectorofResearch,IMF
Tharman Shanmugaratnam MinisterofFinance,SingaporeFormerManagingDirector,MonetaryAuthorityofSingapore
Lawrence Summers CharlesW.EliotUniversityProfessor,HarvardUniversityFormerPresident,HarvardUniversityFormerU.S.SecretaryoftheTreasury
Jean-Claude TrichetPresident,EuropeanCentralBankFormerGovernor,BanquedeFrance
David WalkerSeniorAdvisor,MorganStanleyInternational,Inc.FormerChairman,MorganStanleyInternational,Inc.FormerChairman,SecuritiesandInvestmentsBoard,UK
Zhou Xiaochuan Governor,People’sBankofChinaFormerPresident,ChinaConstructionBankFormerAsst.MinisterofForeignTrade
Yutaka YamaguchiFormerDeputyGovernor,BankofJapanFormerChairman,EuroCurrencyStandingCommission
Ernesto ZedilloDirector,YaleCenterfortheStudyofGlobalization,YaleUniversityFormerPresidentofMexico
Senior memBerS
William McDonoughViceChairmanandSpecialAdvisortotheChairman,MerrillLynchFormerChairman,PublicCompanyAccountingOversightBoardFormerPresident,FederalReserveBankofNewYork
William R. RhodesSeniorViceChairman,CitigroupChairman,PresidentandCEO,CiticorpandCitibank
Ernest SternPartnerandSeniorAdvisor,TheRohatynGroupFormerManagingDirector,JPMorganChaseFormerManagingDirector,WorldBank
Marina v N. WhitmanProfessorofBusinessAdministration&PublicPolicy,UniversityofMichiganFormerMember,CouncilofEconomicAdvisors
�2
emerituS memBerS
Lord Richardson of Duntisbourne, KGHonoraryChairman,GroupofThirtyFormerGovernor,BankofEngland
Richard A. DebsAdvisoryDirector,MorganStanleyFormerPresident,MorganStanleyInternationalFormerCOO,FederalReserveBankofNewYork
Gerhard FelsFormerDirector,InstitutderdeutschenWirtschaft
Wilfried GuthFormerSpokesmenoftheBoardofManagingDirectors,DeutscheBankAG
Toyoo Gyohten President,InstituteforInternationalMonetaryAffairsFormerChairman,BankofTokyo
John G. HeimannSeniorAdvisor,FinancialStabilityInstituteFormerUSComptrolleroftheCurrency
Erik HoffmeyerFormerChairman,DanmarksNationalbank
Peter B. KenenSeniorFellowinInternationalEconomics,CouncilonForeignRelationsFormerWalkerProfessorofEconomics&InternationalFinance, DepartmentofEconomics,PrincetonUniversity
Jacques de LarosièreConseiller,BNPParibasFormerPresident,EuropeanBankforReconstructionandDevelopmentFormerManagingDirector,InternationalMonetaryFundFormerGovernor,BanquedeFrance
Shijuro OgataFormerDeputyGovernor,BankofJapanFormerDeputyGovernor,JapanDevelopmentBank
Sylvia OstryDistinguishedResearchFellowMunkCentreforInternationalStudies,TorontoFormerAmbassadorforTradeNegotiations,CanadaFormerHead,OECDEconomicsandStatisticsDepartment
��
publicaTions oF The gRoup oF ThiRTy since 1��0
SPeCial rePortSTheStructureofFinancialSupervision:ApproachesandChallengesinaGlobalMarketplace G30 Financial Regulatory Systems Working Group. 2008
Global Clearing and Settlement: Final Monitoring Report Global Monitoring Committee. 2006
Reinsurance and International Financial Markets Reinsurance Study Group. 2006
Enhancing Public Confidence in Financial Reporting Steering & Working Committees on Accounting. 2004
Global Clearing and Settlement: A Plan of Action Steering & Working Committees of Global Clearing & Settlements Study. 2003
Derivatives: Practices and Principles: Follow-up Surveys of Industry Practice Global Derivatives Study Group. 1994
Derivatives: Practices and Principles, Appendix III: Survey of Industry Practice Global Derivatives Study Group. 1994
Derivatives: Practices and Principles, Appendix II: Legal Enforceability: Survey of Nine Jurisdictions Global Derivatives Study Group. 1993
Derivatives:PracticesandPrinciples,AppendixI:WorkingPapers Global Derivatives Study Group. 1993
Derivatives: Practices and Principles Global Derivatives Study Group. 1993
Clearance and Settlement Systems: Status Reports, Autumn 1992 Various Authors. 1992
Clearance and Settlement Systems: Status Reports, Year-End 1990 Various Authors. 1991
Conference on Clearance and Settlement Systems; London, March 1990: Speeches Various Authors. 1990
ClearanceandSettlementSystems:StatusReports,Spring1990 Various Authors. 1990
rePortSSharingtheGainsfromTrade:RevivingtheDohaRound Study Group Report. 2004
KeyIssuesinSovereignDebtRestructuring Study Group Report. 2002
ReducingtheRisksofInternationalInsolvency A Compendium of Work in Progress. 2000
Collapse:TheVenezuelanBankingCrisisof‘94 Ruth de Krivoy. 2000
��
TheEvolvingCorporation:GlobalImperativesandNationalResponses Study Group Report. 1999
InternationalInsolvenciesintheFinancialSector Study Group Report. 1998
GlobalInstitutions,NationalSupervisionandSystemicRisk Study Group on Supervision and Regulation. 1997
LatinAmericanCapitalFlows:LivingwithVolatility Latin American Capital Flows Study Group. 1994
DefiningtheRolesofAccountants,BankersandRegulatorsintheUnitedStates Study Group on Accountants, Bankers and Regulators. 1994
EMU After Maastricht Peter B. Kenen. 1992
Sea Changes in Latin America Pedro Aspe, Andres Bianchi and Domingo Cavallo, with discussion by S.T. Beza and William Rhodes. 1992
The Summit Process and Collective Security: Future Responsibility Sharing The Summit Reform Study Group. 1991
Financing Eastern Europe Richard A. Debs, Harvey Shapiro and Charles Taylor. 1991
The Risks Facing the World Economy The Risks Facing the World Economy Study Group. 1991
tHe William taYlor memorial leCtureSThe Credit Crisis: The Quest for Stability and Reform E. Gerald Corrigan. 2008
Lessons Learned from the 2008 Financial Crisis Eugene A. Ludwig. 2008
Two Cheers for Financial Stability Howard Davies. 2006
Implications of Basel II for Emerging Market Countries Stanley Fisher. 2003
Issues in Corporate Governance William J. McDonough. 2003
Post Crisis Asia: The Way Forward Lee Hsien Loong. 2001
Licensing Banks: Still Necessary? Tommaso Padoa-Schioppa. 2000
Banking Supervision and Financial Stability Andrew Crockett. 1998
Global Risk Management Ulrich Cartellieri and Alan Greenspan. 1996
The Financial Disruptions of the 1980s: A Central Banker Looks Back E. Gerald Corrigan. 1993
��
oCCaSional PaPerS78.TheG30atThirty Peter B. Kenen. 2008
77.DistortingtheMicrotoEmbellishtheMacro:TheCaseofArgentina Domingo Cavallo, Joaquín Cottani. 2008
76. Credit Crunch: Where Do We Stand? Thomas A. Russo. 2008
75. Banking, Financial, and Regulatory Reform Liu Mingkang, Roger Ferguson, Guillermo Ortiz Martinez. 2007
74. The Achievements and Challenges of European Union Financial Integration and Its Implications for the United States Jacques de Larosiere. 2007
73. Nine Common Misconceptions About Competitiveness and Globalization Guillermo de la Dehesa. 2007
72. International Currencies and National Monetary Policies Barry Eichengreen. 2006
71. The International Role of the Dollar and Trade Balance Adjustment Linda Goldberg and Cédric Tille. 2006
70.TheCriticalMissionoftheEuropeanStabilityandGrowthPact Jacques de Larosiere. 2004
69.IsItPossibletoPreservetheEuropeanSocialModel? Guillermo de la Dehesa. 2004
68.ExternalTransparencyinTradePolicy Sylvia Ostry. 2004
67.AmericanCapitalismandGlobalConvergence Marina v. N. Whitman. 2003
66.Enronetal:MarketForcesinDisarray Jaime Caruana, Andrew Crockett, Douglas Flint, Trevor Harris, Tom Jones. 2002
65.VentureCapitalintheUnitedStatesandEurope Guillermo de la Dehesa. 2002
64.ExplainingtheEurotoaWashingtonAudience
Tommaso Padoa-Schioppa. 2001
63.ExchangeRateRegimes:SomeLessonsfromPostwarEurope Charles Wyplosz. 2000
62.DecisionmakingforEuropeanEconomicandMonetaryUnion Erik Hoffmeyer. 2000
61.ChartingaCoursefortheMultilateralTradingSystem: TheSeattleMinisterialMeetingandBeyond Ernest Preeg. 1999
60.ExchangeRateArrangementsfortheEmergingMarketEconomies Felipe Larraín and Andrés Velasco. 1999
59.G3ExchangeRateRelationships:ARecapoftheRecord andaReviewofProposalsforChange Richard Clarida. 1999
�6
58.RealEstateBoomsandBankingBusts:AnInternationalPerspective Richard Herring and Susan Wachter. 1999
57.TheFutureofGlobalFinancialRegulation Sir Andrew Large. 1998
56.ReinforcingtheWTO Sylvia Ostry. 1998
55.Japan:TheRoadtoRecovery Akio Mikuni. 1998
54.FinancialServicesintheUruguayRoundandtheWTO Sydney J. Key. 1997
53.ANewRegimeforForeignDirectInvestment Sylvia Ostry. 1997
52.DerivativesandMonetaryPolicy Gerd Hausler. 1996
51.TheReformofWholesalePaymentSystemsandImpactonFinancialMarkets David Folkerts-Landau, Peter Garber, and Dirk Schoenmaker. 1996
50.EMUProspects Guillermo de la Dehesa and Peter B. Kenen. 1995
49.NewDimensionsofMarketAccess Sylvia Ostry. 1995
48.ThirtyYearsinCentralBanking Erik Hoffmeyer. 1994
47.Capital,AssetRiskandBankFailure Linda M. Hooks. 1994
46.InSearchofaLevelPlayingField:TheImplementation oftheBasleCapitalAccordinJapanandtheUnitedStates Hal S. Scott and Shinsaku Iwahara. 1994
45.TheImpactofTradeonOECDLaborMarkets Robert Z. Lawrence. 1994
44.GlobalDerivatives:PublicSectorResponses James A. Leach, William J. McDonough, David W. Mullins, Brian Quinn. 1993
43.TheTenCommandmentsofSystemicReform Vaclav Klaus. 1993
42.Tripolarism:RegionalandGlobalEconomicCooperation Tommaso Padoa-Schioppa. 1993
41.TheThreatofManagedTradetoTransformingEconomies Sylvia Ostry. 1993
40.TheNewTradeAgenda Geza Feketekuty. 1992
39.EMUandtheRegions Guillermo de la Dehesa and Paul Krugman. 1992
38.WhyNow?ChangeandTurmoilinU.S.Banking Lawrence J. White. 1992
37.AreForeign-ownedSubsidiariesGoodfortheUnitedStates? Raymond Vernon. 1992
��
36.TheEconomicTransformationofEastGermany:SomePreliminaryLessons Gerhard Fels and Claus Schnabel. 1991
35.InternationalTradeinBankingServices:AConceptualFramework Sydney J. Key and Hal S. Scott. 1991
34.PrivatizationinEasternandCentralEurope Guillermo de la Dehesa. 1991
33.ForeignDirectInvestment:TheNeglectedTwinofTrade DeAnne Julius. 1991
32.InterdependenceofCapitalMarketsandPolicyImplications Stephen H. Axilrod. 1990
31.TwoViewsofGermanReunification Hans Tietmeyer and Wilfried Guth. 1990
30.EuropeintheNineties:ProblemsandAspirations Wilfried Guth. 1990
29.ImplicationsofIncreasingCorporateIndebtednessforMonetaryPolicy Benjamin M. Friedman. 1990
28.FinancialandMonetaryIntegrationinEurope:1990,1992andBeyond Tommaso Padoa-Schioppa. 1990
Group of Thirty1726 M Street, N.W., Suite200Washington, DC 20036ISBN I-56708-146-0
30
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