Global Plan Annex - Declaration on Strengthening the Financial System
Declaration on Strengthening the Financial System, annex to the Global Plan on Recovery and Reform, 2 April 2009.
We, the Leaders of the G20, have taken, and will continue to take, action to strengthen regulation and supervision in line with the commitments we made in Washington to reform the regulation of the financial sector. Our principles are strengthening transparency and accountability, enhancing sound regulation, promoting integrity in financial markets and reinforcing international cooperation. The material in this declaration expands and provides further detail on the commitments in our statement. We published today a full progress report against each of the 47 actions set out in the Washington Action Plan. In particular, we have agreed the following major reforms.
Financial Stability Board
We have agreed that the Financial Stability Forum should be expanded, given a broadened mandate to promote financial stability, and re-established with a stronger institutional basis and enhanced capacity as the Financial Stability Board (FSB).
The FSB will:
• assess vulnerabilities affecting the financial system, identify and oversee action needed to address them;
• promote co-ordination and information exchange among authorities responsible for financial stability;
• monitor and advise on market developments and their implications for regulatory policy;
• advise on and monitor best practice in meeting regulatory standards;
• undertake joint strategic reviews of the policy development work of the international Standard Setting Bodies to ensure their work is timely, coordinated, focused on priorities, and addressing gaps;
• set guidelines for, and support the establishment, functioning of, and participation in, supervisory colleges, including through ongoing identification of the most systemically important cross-border firms;
• support contingency planning for cross-border crisis management, particularly with respect to systemically important firms; and
• collaborate with the IMF to conduct Early Warning Exercises to identify and report to the IMFC and the G20 Finance Ministers and Central Bank Governors on the build up of macroeconomic and financial risks and the actions needed to address them.
Members of the FSB commit to pursue the maintenance of financial stability, enhance the openness and transparency of the financial sector, and implement international financial standards (including the 12 key International Standards and Codes), and agree to undergo periodic peer reviews, using among other evidence IMF / World Bank public Financial Sector Assessment Program reports. The FSB will elaborate and report on these commitments and the evaluation process.
We welcome the FSB’s and IMF’s commitment to intensify their collaboration, each complementing the other’s role and mandate.
To strengthen international cooperation we have agreed:
• to establish the remaining supervisory colleges for significant cross-border firms by June 2009, building on the 28 already in place;
• to implement the FSF principles for cross-border crisis management immediately, and that home authorities of each major international financial institution should ensure that the group of authorities with a common interest in that financial institution meet at least annually;
• to support continued efforts by the IMF, FSB, World Bank, and BCBS to develop an international framework for cross-border bank resolution arrangements;
• the importance of further work and international cooperation on the subject of exit strategies;
• that the IMF and FSB should together launch an Early Warning Exercise at the 2009 Spring Meetings.
We have agreed to strengthen international frameworks for prudential regulation:
• until recovery is assured the international standard for the minimum level of capital should remained unchanged;
• where appropriate, capital buffers above the required minima should be allowed to decline to facilitate lending in deteriorating economic conditions;
• once recovery is assured, prudential regulatory standards should be strengthened. Buffers above regulatory minima should be increased and the quality of capital should be enhanced. Guidelines for harmonisation of the definition of capital should be produced by end 2009. The BCBS should review minimum levels of capital and develop recommendations in 2010;
• the FSB, BCBS, and CGFS, working with accounting standard setters, should take forward, with a deadline of end 2009, implementation of the recommendations published today to mitigate procyclicality, including a requirement for banks to build buffers of resources in good times that they can draw down when conditions deteriorate;
• risk-based capital requirements should be supplemented with a simple, transparent, non-risk based measure which is internationally comparable, properly takes into account off-balance sheet exposures, and can help contain the build-up of leverage in the banking system;
• the BCBS and authorities should take forward work on improving incentives for risk management of securitisation, including considering due diligence and quantitative retention requirements, by 2010;
• all G20 countries should progressively adopt the Basel II capital framework; and
• the BCBS and national authorities should develop and agree by 2010 a global framework for promoting stronger liquidity buffers at financial institutions, including cross-border institutions.
The scope of regulation
We have agreed that all systemically important financial institutions, markets, and instruments should be subject to an appropriate degree of regulation and oversight. In particular:
• we will amend our regulatory systems to ensure authorities are able to identify and take account of macro-prudential risks across the financial system including in the case of regulated banks, shadow banks, and private pools of capital to limit the build up of systemic risk. We call on the FSB to work with the BIS and international standard setters to develop macro-prudential tools and provide a report by autumn 2009;
• large and complex financial institutions require particularly careful oversight given their systemic importance;
• we will ensure that our national regulators possess the powers for gathering relevant information on all material financial institutions, markets, and instruments in order to assess the potential for their failure or severe stress to contribute to systemic risk. This will be done in close coordination at international level in order to achieve as much consistency as possible across jurisdictions;
• in order to prevent regulatory arbitrage, the IMF and the FSB will produce guidelines for national authorities to assess whether a financial institution, market, or an instrument is systemically important by the next meeting of our Finance Ministers and Central Bank Governors. These guidelines should focus on what institutions do rather than their legal form;
• hedge funds or their managers will be registered and will be required to disclose appropriate information on an ongoing basis to supervisors or regulators, including on their leverage, necessary for assessment of the systemic risks that they pose individually or collectively. Where appropriate, registration should be subject to a minimum size. They will be subject to oversight to ensure that they have adequate risk management. We ask the FSB to develop mechanisms for cooperation and information sharing between relevant authorities in order to ensure that effective oversight is maintained where a fund is located in a different jurisdiction from the manager. We will, cooperating through the FSB, develop measures that implement these principles by the end of 2009. We call on the FSB to report to the next meeting of our Finance Ministers and Central Bank Governors;
• supervisors should require that institutions which have hedge funds as their counterparties have effective risk management. This should include mechanisms to monitor the funds’ leverage and set limits for single counterparty exposures;
• we will promote the standardisation and resilience of credit derivatives markets, in particular through the establishment of central clearing counterparties subject to effective regulation and supervision. We call on the industry to develop an action plan on standardisation by autumn 2009; and
• we will each review and adapt the boundaries of the regulatory framework regularly to keep pace with developments in the financial system and promote good practices and consistent approaches at the international level.
We have endorsed the principles on pay and compensation in significant financial institutions developed by the FSF to ensure compensation structures are consistent with firms’ long-term goals and prudent risk taking. We have agreed that our national supervisors should ensure significant progress in the implementation of these principles by the 2009 remuneration round. The BCBS should integrate these principles into their risk management guidance by autumn 2009. The principles, which have today been published, require:
• firms’ boards of directors to play an active role in the design, operation, and evaluation of compensation schemes;
• compensation arrangements, including bonuses, to properly reflect risk and the timing and composition of payments to be sensitive to the time horizon of risks. Payments should not be finalised over short periods where risks are realised over long periods; and
• firms to publicly disclose clear, comprehensive, and timely information about compensation. Stakeholders, including shareholders, should be adequately informed on a timely basis on compensation policies to exercise effective monitoring.
Supervisors will assess firms’ compensation policies as part of their overall assessment of their soundness. Where necessary they will intervene with responses that can include increased capital requirements.
Tax havens and non-cooperative jurisdictions
It is essential to protect public finances and international standards against the risks posed by non-cooperative jurisdictions. We call on all jurisdictions to adhere to the international standards in the prudential, tax, and AML/CFT areas. To this end, we call on the appropriate bodies to conduct and strengthen objective peer reviews, based on existing processes, including through the FSAP process.
We call on countries to adopt the international standard for information exchange endorsed by the G20 in 2004 and reflected in the UN Model Tax Convention. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of information. We welcome the new commitments made by a number of jurisdictions and encourage them to proceed swiftly with implementation.
We stand ready to take agreed action against those jurisdictions which do not meet international standards in relation to tax transparency. To this end we have agreed to develop a toolbox of effective counter measures for countries to consider, such as:
• increased disclosure requirements on the part of taxpayers and financial institutions to report transactions involving non-cooperative jurisdictions;
• withholding taxes in respect of a wide variety of payments;
• denying deductions in respect of expense payments to payees resident in a non-cooperative jurisdiction;
• reviewing tax treaty policy;
• asking international institutions and regional development banks to review their investment policies; and,
• giving extra weight to the principles of tax transparency and information exchange when designing bilateral aid programs.
We also agreed that consideration should be given to further options relating to financial relations with these jurisdictions
We are committed to developing proposals, by end 2009, to make it easier for developing countries to secure the benefits of a new cooperative tax environment.
We are also committed to strengthened adherence to international prudential regulatory and supervisory standards. The IMF and the FSB in cooperation with international standard-setters will provide an assessment of implementation by relevant jurisdictions, building on existing FSAPs where they exist. We call on the FSB to develop a toolbox of measures to promote adherence to prudential standards and cooperation with jurisdictions.
We agreed that the FATF should revise and reinvigorate the review process for assessing compliance by jurisdictions with AML/CFT standards, using agreed evaluation reports where available.
We call upon the FSB and the FATF to report to the next G20 Finance Ministers and Central Bank Governors’ meeting on adoption and implementation by countries.
We have agreed that the accounting standard setters should improve standards for the valuation of financial instruments based on their liquidity and investors’ holding horizons, while reaffirming the framework of fair value accounting.
We also welcome the FSF recommendations on procyclicality that address accounting issues. We have agreed that accounting standard setters should take action by the end of 2009 to:
• reduce the complexity of accounting standards for financial instruments;
• strengthen accounting recognition of loan-loss provisions by incorporating a broader range of credit information;
• improve accounting standards for provisioning, off-balance sheet exposures and valuation uncertainty;
• achieve clarity and consistency in the application of valuation standards internationally, working with supervisors;
• make significant progress towards a single set of high quality global accounting standards; and,
• within the framework of the independent accounting standard setting process, improve involvement of stakeholders, including prudential regulators and emerging markets, through the IASB’s constitutional review.
Credit Rating Agencies
We have agreed on more effective oversight of the activities of Credit Rating Agencies, as they are essential market participants. In particular, we have agreed that:
• all Credit Rating Agencies whose ratings are used for regulatory purposes should be subject to a regulatory oversight regime that includes registration. The regulatory oversight regime should be established by end 2009 and should be consistent with the IOSCO Code of Conduct Fundamentals. IOSCO should coordinate full compliance;
• national authorities will enforce compliance and require changes to a rating agency’s practices and procedures for managing conflicts of interest and assuring the transparency and quality of the rating process. In particular, Credit Rating Agencies should differentiate ratings for structured products and provide full disclosure of their ratings track record and the information and assumptions that underpin the ratings process. The oversight framework should be consistent across jurisdictions with appropriate sharing of information between national authorities, including through IOSCO; and,
• the Basel Committee should take forward its review on the role of external ratings in prudential regulation and determine whether there are any adverse incentives that need to be addressed.
We instruct our Finance Ministers to complete the implementation of these decisions and the attached action plan. We have asked the FSB and the IMF to monitor progress, working with the FATF and the Global Forum, and to provide a report to the next meeting of our Finance Ministers and Central Bank Governors.