Home | Topics | G20

Financial Stability Board agree tighter watch over big financial firms ahead of the G20 Summit in Seoul

Printer-friendly versionPDF version

A global regulatory body said on Wednesday it had agreed a broad plan to tighten supervision of big banks and financial firms blamed for triggering the 2008-2009 financial crisis. After a day-long meeting in Seoul, the Financial Stability Board (FSB) said it had "agreed on a framework for addressing systemically important financial institutions", those deemed too big to fail. The board, created last year by the Group of 20 top world economies, represents 52 institutions from 24 countries. It said in a statement it endorsed proposals to increase the intensity and effectiveness of financial supervision. Also approved were recommendations on implementing the central clearing and trade reporting of over-the-counter derivatives, a move intended to reduce risk in the huge derivatives market. Board members additionally backed principles for reducing reliance on credit rating agencies, which came in for widespread criticism for being too close to the firms they assessed and for failing to warn of problems.

GyeonguG20 finance ministers meet in the South Korean city of Gyeongu Friday and Saturday to discuss tighter supervision of the global financial sector. The group's leaders will hold a summit in Seoul on November 11-12. On Tuesday the Basel Committee on Banking Supervision met in the South Korean capital to finalise reforms requiring big banks to strengthen their financial reserves against any future crisis. The FSB statement said these new standards "will reduce the likelihood and severity of future financial crises". FSB chairman Mario Draghi described the Basel agreement as "the conerstone of global efforts to strengthen the resilience of the financial system". He told a press conference it was "crucial" to take action on banks deemed too big to fail. All such systemically important financial institutions should build a greater capacity to absorb losses "to reflect the greater risks that these institutions pose to the global financial system," he said. Draghi also noted that FSB members endorsed principles to reduce excessive reliance by governments and financial institutions on rating agencies. He said banks, market players and institutional investors should make their own assessment of risks. "The goal of the principles is to reduce the mechanical reliance on ratings" which "can amplify pro-cyclicality and cause systemic disruption," Draghi said.

FSB Press Release:

The Financial Stability Board (FSB) met today on key elements of financial reforms ahead of the G20 Summit in Seoul. The meeting welcomed the Basel Committee’s global bank capital and liquidity standards; agreed on a framework for addressing systemically important financial institutions; endorsed recommendations for increasing the intensity and effectiveness of financial supervision; approved recommendations for implementing central clearing and trade reporting of over-th-counter (OTC) derivatives; and endorsed principles for reducing reliance on credit rating agency ratings.

The meeting also reviewed progress on other elements of the financial regulatory reform agenda, including accounting convergence, established FSB regional outreach arrangements, and discussed the future work programme.

The FSB expressed its appreciation for Korea’s support as the G20 Chair for the FSB’s reform work and its completion within the time frame set by G20 Leaders.

Key financial regulatory reforms

The meeting today focused on the following elements of the program of financial regulatory reform agreed by the G20 economies and coordinated by the FSB in the wake of the financial crisis. The FSB will remain engaged with the remaining policy development and closely monitor national implementation of these reforms in 2011 and beyond:

New bank capital and liquidity standards. The new standards developed by the Basel Committee on Banking Supervision have been designed to markedly increase the resilience of the global banking system by raising the quality, quantity and international consistency of bank capital and liquidity, constrain the build up of leverage and maturity mismatches, and introduce capital buffers above the minimum requirements that can be drawn upon in bad times. The new standards will reduce the likelihood and severity of future financial crises and create a less procyclical banking system that is better able to support long-term economic growth.

The FSB and the Basel Committee, in close collaboration with the BIS and IMF, have assessed the macroeconomic impact of the transition to the stronger capital and liquidity standards. The implementation horizon and transition arrangements have been designed to ensure that implementation does not harm the recovery. National implementation of the risk-based capital requirements by member countries will begin on 1 January 2013. Member countries will translate the capital rules into national laws and regulations before that date. From that point forward, the capital standards rise each year, reaching their new level on 1 January 2019.

Addressing systemically important financial institutions. The FSB agreed and will recommend to the G20 Leaders’ Seoul Summit for their endorsement a policy framework, work processes and timelines to address the “too big to fail” problem associated with systemically important financial institutions (SIFIs). The FSB’s work to address SIFIs is also part of the broader G20 financial reform process, and specifically follows up on the Leaders’ mandate at the Pittsburgh Summit.

The framework calls for jurisdictions to put in place:

  • Capacity to resolve national and global SIFIs without disruption to the financial system and without taxpayer support;
  • A requirement that SIFIs and initially in particular global SIFIs (G-SIFIs) have higher loss absorbency capacity to reflect the greater risks that these institutions pose to the global financial system;
  • Supplementary prudential and other requirements to reduce the probability and impact of SIFI failure;
  • Increased intensity of SIFI supervision; and
  • Updated standards for more robust core market infrastructures, including central counterparties in the OTC derivatives market.

The effectiveness and consistency of national policy measures for G-SIFIs will be subject to review by an FSB Peer Review Council.
Increasing supervisory intensity and effectiveness. The FSB endorsed recommendations to increase supervisory intensity and effectiveness. Strong supervision is a necessary complement to stronger rules. Supervisors are expected to detect problems proactively, intervene early to reduce the impact of potential stresses on individual firms and therefore on the financial system as a whole. The actions and processes endorsed cover the following elements necessary to deliver greater supervisory intensity and effectiveness:

  • Ensuring that supervisors have unambiguous mandates, sufficient independence and appropriate resources;
  • Providing supervisors with the full suite of powers necessary for effective early intervention;
  • Improving supervisory standards to reflect the complexity of financial institutions and the system as a whole; and
  • Increasing the frequency of assessments of supervisory regimes.

National authorities and standard setters will follow up on these recommendations as they make improvements to their core principles. FSB thematic peer reviews and IMF/World Bank FSAP assessments will assess national implementation. Implementing central clearing and trade reporting of OTC derivatives. The FSB approved a report containing recommendations to promote consistent implementation of the G20 commitments concerning:

  • Increasing the proportion of the market that is standardised;
  • Moving to central clearing of OTC derivatives by
  • implementing mandatory clearing requirements
  • strengthening oversight and regulation of central counterparties (CCPs) and
  • introducing robust risk management requirements for the remaining non-centrally cleared markets;
  • Trading on exchanges or electronic platforms, where appropriate, by asking IOSCO to complete an analysis by end-January 2011; and
  • Ensuring that OTC derivatives transactions are reported to trade repositories.

The FSB will assess implementation of these recommendations, and monitor progress to identify if further work on the international level is needed, on a regular basis.

Reducing reliance on CRA ratings. The FSB endorsed principles to reduce authorities’ and financial institutions’ reliance on credit rating agency (CRA) ratings. The principles cover five types of financial market activity: prudential supervision of banks; policies of investment managers and institutional investors; central bank operations; private sector margin requirements; and disclosure requirements for issuers of securities. The goal of the principles is to reduce the cliff effects from CRA ratings that can amplify procyclicality and cause systemic disruption. The principles call on authorities to do this through:

  • Removing or replacing references to CRA ratings in laws and regulations, wherever possible, with suitable alternative standards of creditworthiness assessment;
  • Expecting that banks, market participants and institutional investors make their own credit assessments, and not rely solely or mechanistically on CRA ratings.

The FSB has asked standard setters and regulators to consider next steps that could be taken to translate the principles into policy approaches tailored to specific financial sectors and market participants. As market participants need to build up their own risk management capabilities, clear milestones should be set to achieve a transition to a reduced reliance on CRA ratings over a reasonable timeframe into the medium term.

Accounting convergence. The FSB recognised progress toward improved, converged accounting standards in four main areas: impairment of financial assets; derecognition; addressing valuation uncertainty in fair value measurement guidance; and netting/offsetting of financial instruments. The FSB reaffirmed its support of standards that do not expand the use of fair value measurement recognition for lending activities, a position echoed by the comments of many investors and other stakeholders, and expressed hope that the FASB and IASB consideration of stakeholders’ comments on proposed standards will result in improved and converged approaches. More generally, the FSB encourages the IASB and FASB to continue their efforts to achieve improved converged financial instrument accounting standards by June 2011.

Outreach to non-members

The FSB is establishing regional consultative groups to strengthen the involvement of non-members in its work. The groups will bring together financial authorities from member and non-member countries to exchange views on vulnerabilities affecting financial systems and on initiatives to promote financial stability. The structure and membership of the groups is under discussion and will be finalised in time for the first meetings to take place in 2011.

Future work programme

The FSB discussed its forward work programme. In addition to the follow-up work described in the reports submitted to the G20 and monitoring implementation of overall financial regulatory reform, in cooperation with all the relevant bodies, it will focus attention on the shadow banking sector, macroprudential frameworks and emerging markets’ financial stability issues, as well as commodity derivatives markets and market integrity.

Notes to editors

The FSB has been established to coordinate at the international level the work of national financial authorities and international standard setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts.

The FSB is chaired by Mario Draghi, Governor of the Bank of Italy. Its Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements. For further information on the FSB, visit the FSB website, www.financialstabilityboard.org.

List of FSB Member institutions

Argentina: Central Bank of Argentina
Australia: Department of the Treasury, Reserve Bank of Australia
Brazil: Ministry of Finance, Central Bank of Brazil, Securities and Exchange Commission of Brazil
Canada: Department of Finance, Bank of Canada, Office of the Superintendent of Financial Institutions (OSFI)
China: Ministry of Finance, People’s Bank of China, China Banking Regulatory Commission
France: Ministry of Economy, Industry and Employment, Bank of France, Autorité des Marchés Financiers (AMF)
Germany: Ministry of Finance, Deutsche Bundesbank, Bundesanstalt für Finanzdienstleistungsaufsicht (Bafin)
Hong Kong SAR: Hong Kong Monetary Authority
India: Ministry of Finance, Reserve Bank of India, Securities and Exchange Board of India
Indonesia: Bank Indonesia
Italy :Ministry of the Economy and Finance, Bank of Italy, Commissione Nazionale per le Società e la Borsa (CONSOB)
Japan: Ministry of Finance, Bank of Japan, Financial Services Agency
Korea: Bank of Korea, Financial Services Commission
Mexico: Ministry of Finance and Public Credit, Bank of México
Netherlands: Ministry of Finance, Netherlands Bank
Russia: Ministry of Finance, Central Bank of the Russian Federation, Federal Financial Markets Service
Saudi Arabia: Saudi Arabian Monetary Agency
Singapore: Monetary Authority of Singapore
South Africa: National Treasury
Spain: Ministry of Economy and Finance, Bank of Spain
Switzerland: Swiss Federal Department of Finance, Swiss National Bank
Turkey: Central Bank of the Republic of Turkey
United Kingdom: HM Treasury, Bank of England, Fnancial Services Authority
United States: Dpartment of the Treasury, Board of Governors of the Federal Reserve System, Securities & Exchange Commission
European Central Bank
European Commission
International Financial Institutions
Bank for International Settlements (BIS)
International Monetary Fund (IMF)
Organisation for Economic Co-operation and Development (OECD)
World Bank
International Standard Setting, Regulatory and Supervisory Groupings
Basel Committee on Banking Supervision (BCBS)
International Accounting Standards Board (IASB)
International Association of Insurance Supervisors (IAIS)
International Organization of Securities Commissions (IOSCO)
Committees of Central Bank Experts
Committee on Payment and Settlement Systems (CPSS)
Committee on the Global Financial System (CGFS)

Short URL
Asymptotix on Twitter

Are the key legislative pillars such as Basel II & III, UCITS IV and Solvency II forcing you to re-examine how you identify, measure and manage risk and capital?

Asymptotix work closely with our partners to help clients develop a more proactive, systematic and integrated approach to governance and risk management to deliver proper value.

Asymptotix can offer the support you need to deliver on time. Read more...

Is the goal of your website to sell services or products, educate, or collect data?

A positive customer experience is vital to conversion, no matter what your conversion goals may be. Our designers and developers will create a positive experience to maximize your conversions and deliver the optimal return on your investment. We strive to find the perfect balance between the web site’s design and functionality.

Asymptotix implements interactive solutions for European companies. From corporate websites to social communities, our clients will tell you an investment in building a scalable online experience will deliver long-term tangible benefits.

Based in Luxembourg we can help you all over Europe. Our multi-lingual team can work with projects and speak your language! Read more...