FSF issues recommendations & principles to boost global financial systems- London G-20 Summit
The Financial Stability Forum (FSF) on 2nd April 2009 has issued reports covering:
- Recommendations for Addressing Procyclicality in the Financial System;
- Principles for Sound Compensation Practices; and
- Principles for Cross-border Cooperation on Crisis Management.
The Forum has also published an update on the implementation of the recommendations contained in the FSF's April 2008 Report on Enhancing Market and Institutional Resilience.
These recommendations and principles, and the other work underway since April 2008, support key aspects of the Action Plan adopted by the G20 Leaders at their November 2008 Summit and have fed into the preparation of London Summit.
Brief descriptions of the four reports are presented below.
Addressing procyclicality in the financial system
The present crisis has demonstrated the disruptive effects of procyclicality - mutually reinforcing interactions between the financial and real sectors of the economy that tend to amplify business cycle fluctuations and cause or exacerbate financial instability. Addressing procyclicality in the financial system is an essential component of strengthening the macroprudential orientation of regulatory and supervisory frameworks.
The recommendations set out in this report mitigate mechanisms that amplify procyclicality in both good and bad times. They encompass a mix of quantitative/rules-based and discretionary measures that are interrelated and reinforce one another. They will be implemented over time once conditions in financial markets return to normal.
The recommendations are in the following three areas:
The bank capital framework. These recommendations were developed with the Basel Committee on Banking Supervision (BCBS) and are intended to mitigate the risk that the regulatory capital framework amplifies the transmission of shocks between the financial and real sectors. They include the development of countercyclical capital buffers and a supplementary non-risk based measure to contain bank leverage. An integrated package of measures covering the recommendations will be issued for consultation before the end of 2009.
Bank loan loss provisions. These recommendations reflect the view that earlier recognition of loan losses could have dampened cyclical moves in the current crisis, and that earlier identification of and provisioning for credit losses are consistent both with financial statement users' needs for transparency regarding changes in credit trends and with prudential objectives of safety and soundness. Recommended accounting and capital measures seek to achieve these objectives while encouraging sound provisioning practices and enhancing their transparency. The recommended measures result from dialogue among regulators, supervisors and accounting standard setters.
Leverage and valuation. These recommendations, which were developed with the Committee on the Global Financial System (CGFS), are intended to reduce procyclicality that has arisen from the interaction of leverage, funding mismatches and fair value accounting. They call on regulators and supervisors to obtain a clear and comprehensive picture of aggregate leverage and liquidity, and to use quantitative indicators and/or constraints on leverage and margins as macroprudential tools for supervisory purposes. Accounting standard setters are encouraged to improve approaches to valuation and financial instruments, in cooperation with prudential supervisors, so as to dampen adverse dynamics potentially associated with fair value accounting.
The FSF will monitor the implementation of these recommendations and continue to examine aspects of procyclicality in the system.
Principles for Sound Compensation Practices ...Click Here
Principles for Cross-border Cooperation on Crisis Management...Click Here
Update on the Implementation of FSF Recommendations...Click Here
Addressing procyclicality in the financial system...Click Here
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