On Friday, after an informal meeting in Brussels in anticipation of the November 15 Group of 20 summit in Washington, the Heads of State of the European Union announced agreement upon a set of principles and proposed actions to address the global financial crisis. This decision reinforced sentiments announced by the ECOFIN Council earlier last week. The announcement articulated several principles aimed at long-term solutions to the global financial crisis, including:
- No financial institution, no market segment, and no jurisdiction can escape either proportionate and adequate regulation, or oversight— Among other initiatives, hedge funds and rating agencies should be subject to greater oversight.
- The new international financial system must be based on principles of accountability and transparency— Among other measures to promote transparency, all financial transactions should be reported on a comprehensive information system, reform of prudential and accounting standards “to ensure that they do not contribute to speculative bubbles” and “arrangements conducive to excessive risk-taking must be overhauled, particularly debt securitization procedures and pay policies.”
- The new international financial system must allow risks to be assessed so as to prevent crises— specific recommendations include establishing a “college of supervisors” to promote coordination among international regulators and an early warning system to detect increases in risks and asset valuation bubbles, and reforming “multilateral surveillance … to prevent and eliminate world imbalances.”
- The IMF should be given a central role in a more efficient financial architecture, which may require “modernization” of its intervention tools.
In application of these principles, five specific approaches were recommended for consideration on November 15:
- Submit rating agencies that provide public ratings to registration, governance rules, and appropriate monitoring of their activities.
- Establish codes of conduct to avoid excessive risk taking in the financial industry, including in the area of compensation.
- Adopt a principles of convergence of accounting standards and review the application of fair value accounting to financial institutions to improve consistency with prudential rules
- Decide that no market segment, no territory, and no financial institution should escape proportionate and adequate regulation or at least oversight
- Give the IMF the initial responsibility, together with the Financial Stability Forum, of recommending measures to restore confidence and stability and give the IMF necessary resources and appropriate instruments to support countries experiencing financial difficulties.
The list of recommended actions is somewhat less extensive than the list proposed by the ECOFIN Council at its meeting on November 6.
In the meeting in Washington this week, the European Union hopes to “establish a method of working which enables regular and rapid progress to be made towards reform of the international financial system.”