Yesterday, the Group of Thirty (G30), a private, nonprofit, international body that aims to further understanding of international economic and financial issues, released a report entitled “Financial Reform: A Framework for Financial Stability.” Notably, the report may receive greater attention due to the fact that some members of the G30 are also key Obama advisors, including Paul Volcker (chairman of the G30 Board of Trustees), Lawrence Summers, and Timothy Geithner.
The report is structured around four core recommendations, with more finely tuned proposals under each section. The core recommendations are:
- Eliminate weaknesses in the scope of prudential regulation and subject all systemically significant financial institutions to an appropriate degree of prudential oversight.
- Improve the quality and effectiveness of prudential regulation within structures that permit greater national and international coordination.
- Strengthen institutional policies, particularly with respect to governance, risk management, capital, accounting practices and liquidity.
- Improve transparency of financial markets, products and supporting infrastructure; Align incentives with corresponding risk.
There are several notable provisions within these core principals:
- For systemically important banks, the report recommends strict capital requirements on high risk proprietary activities and higher standards of capitalization.
- For hedge funds and other private pools of capital using leverage, the report suggests registration with a regulator, publication of regular reports, and capital and liquidity standards.
- For derivatives markets, the report proposes the adoption of a formal regulatory system overseeing over-the-counter derivatives.
- In structured finance, the report recommends that banks be required to hold a significant portion of credit risk when they securitize loans.
- In accounting, the report calls for more realistic guidelines for illiquid and distressed instruments.