American Banks are stressed-Part III

This is the third in a series of articles on the stress tests conducted on the top nineteen financial institutions in the U.S. recently.

Supervisory Capital Assistance Proram(SCAP): The SCAP is a joint program of the Board of Governors of the Federal Reserve System, the Federal Reserve Banks, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of Currency.

As discussed earlier, the basic purpose of the SCAP is to assess the additional requirements of capital of the targetted nineteen financial institutions, officially called the large Bank Holding Companies(BHCs), to enable them to cruise along comfortably, regardless of the chaos around them.   To impart necessary strength to these institutions, through capital increment, to enable them to stand up to the market forces, and come out on top, even in the worst possible scenarios.  To build a sort of financial fortress, that can withstand all kinds of attacks from the market forces. 

The SCAP has two scenarios in mind, when it considers the needs of the BHCs for additional capital. One is the present state of affairs, and the other, a situation even worse. These two scenarios are presently applicable to a time frame of two years, viz. 2009 and 2010, which is essentially a short-term exercise. Apparently, the U.S. Government is constrained to address the immediate needs of businessess, industry, and the consumers, in general, given the surprising  speed with which the system started disintegrating.   Until recently, these very institutions were being held up to the world at large, as a shining example of the success of free markets.

The parameters under consideration for implementation of the SCAP relate to the estimated losses, revenues, and reserve needs of the BHCs. The idea is to calculate the effects of the various levels of economic, and financial distress, on the BHCs, and to decide which of them would need fresh injection of capital, to withstand the worst possible scenario. This fresh injection of capital would act as a buffer that would absorb the shock of the actual materialization of the above scenario.   The buffer capital would take care of the losses that might be sustained by the institutions the next year.  

The fresh infusion of the capital would also enable the Banks to function normally, and thus, contribute towards stabilizing the system. The sight of American Banks going about their jobs in a cool, calm, and methodical fashion, amidst a disorderly and chaotic market situation, is what the American Government would like to see emerge from the SCAP.

The goal of the SCAP appears to be to make the American Banks immune to the economic and financial turbulence, and fashion them into instruments, that would actually reduce and eliminate such turbulence, through their overwhelming capacity to deal with such situations.

                                                                                                                  To be concluded.

 

 

 

 

American Banks are stressed-Part II

This is the second in a series of articles on the stress tests carried out by supervisory authorities, on the nineteen big financial institutions in the United States.

Stress Tests:  The purpose of the stress tests  is to determine the additional capital required by the targetted financial institutions, to continue to play their designated role, as financial intermediaries, even in the face of dire economic conditions, resulting in higher than expected losses.

The Fed Reserve, is, in fact, convinced, that most American Banks have more than the required level of capital.   Such comfortable level of capital, may,  in the normal course, be considered very conservative.   And in times of economic boom, such levels of capital would be considered a burden, and affecting the profitability of the institution.   But the times now are far from normal.  

The continuing recession is battering the life out of Corporate America, and American Banks and Financial Institutions are caught in the maelstrom of economic and financial disintegration, with the weaker among them blown away, as it were, and the stronger ones just about surviving.   The sight of tottering giants of the American financial world, that were not long ago, held up as an example of corporate excellence and success, to the rest of the world, has saddened and angered the American public no end.

The massive infusion of capital by the American Government, that caused a lot of heart burning, and resentment, among the American tax payers, has somewhat stabilized the Banking system.   However, the very fact, that the Government had to intervene, to save the Banks,that were until recently considered invincible, has led to diminishing public confidence in these institutions.   And expert opinion is divided about the propriety of infusing public money into failing Banks, that should be allowed to die a natural death and replaced by more robust organizations.

As a matter of fact, perhaps, for the first time, there is a serious debate on the chances of survival of Capitalism itself!   The American public is unable to comprehend, how such venerable institutions, that made them proud of being American, could fall like nine pins.  

Though official announcements on the state of the American economy are cautiously optimistic, practically, the American Government has decided to take no chances, when it comes to the Financial Institutions, and their ability to lend, even in the worst case scenario.   As a matter of fact, no one is really sure when the good times would return, and one could, perhaps, go back to one’s bad old ways!

The crisis has left the American financial system badly shaken, and unable to perform to its peak capability, further adding to the all-round deterioration in the financial system.   Public sentiment is so badly affected, that Banks are unable to find equity partners, even at throwaway prices, for once prized stocks.

It is to address this situation, that the American Government decided to initiate the Supervisory Capital Assessment Progam.

                                                                                             To be concluded.

American Banks are stressed-Part I

Introduction:  The U.S. Federal Reserve, alongwith other supervisory authorities recently carried out what are called as “stress tests” on nineteen of the top American Financial Institutions, that are said to hold upto two thirds of the assets, and one half of the loans held by the American banking system.

What are these stress tests about?   Why these tests?   What is the purpose behind these tests?   What does the American Government hope to achieve with these tests?   In a series of articles on this subject, we shall study these issues, one by one.

Background:  The present economic crisis, triggered, in good part, by Bank failures, has smashed the myth  of the invincible American Banking Behemoth.

In order to address this realilty, and to take suitable steps, not only to revive the industry, but to prevent the crisis from recurring, the American Government initiated several steps.   The stress tests for the American Banking industry is one such initiative.

Who is being tested:  The stress tests are restricted to the nineteen largest financial institutions in the U.S., with an asset base of USD 100.00 billion each.   These nineteen institutions form the core of the U.S. financial industry, and their health is a reliable indicator of America’s financial health.   The American Government decided that these nineteen institutions are too important and critical to America’s well-being, and hence cannot be allowed to fail.   These institutions are expected to be all-weather warriors, able to keep fighting fit, till the end, and come out victorious.

Why the tests:  The stress tests are said to be designed to identify Banks, among the nineteen tested, that might need further infusions of capital, to withstand further economic downturn.   What the Fed Reserve wants to know is, if these nineteen biggies of the American Banking Industry have enough cash reserves, to address their current needs, as well as in the worst case scenario, where there would be further loan defaults, coupled with economic contraction.

The Fed Reserve is looking for clear cut and satisfactory answers to this key question.   Perhaps, it does not want to be misled by the industry “experts” and “specialists”, about the health of the U.S. Banks, and wants to make sure of it.

Another important purpose of these tests is to restore dwindling public confidence, in the American banking industry, on account of the failure of some of the largest names in American banking.   The apparent ease with which these giants fell by the wayside, in the current crisis, is something the tax paying public is unable to comprehend.   And the sight of the American Banks greedily lapping up the billions of tax payers’ dollars, to reward themselves with bonuses and other benefits has truly shattered the confidence of the American public.

The American Government, sensing the public mood, has acted swiftly to address the various issues dogging the American Banks, especially in relation to the current crisis, and to initiate corrective action to save them.

                                                                                      To be concluded.

Tax Havens

In the wake of the economic crisis gripping much of the world today, so called tax havens have come into sharp focus, for their contributory role in the present crisis.

What is a tax haven?  A tax haven may be an independent country, or a dependency, or overseas territory, of a country, or a principality.   The general term applied to this goegraphical entity is “jurisdiction”.   It is a place where there are either no taxes like Municipal Tax, Wealth Tax, Sales Tax, VAT, etc, or the rates of these taxes are so low, as to attract people, especially non-residents from other countries to take advantage of these laws. at the cost of the home country.

For example, say an American national working for an oil company, in the Middle East, repatriates his earnings to the U.S., and is liable to pay certain tax on it.   However, by parking these funds in Switzerland, he does not pay any tax at all.  Hence the gentleman may be tempted to open a numbered account in a Swiss Bank, including one operating in the Middle East, and then transfer his earnings to that Bank.   In the process, the U.S. Government loses taxes on these funds, apart from the fact that these funds mights have, otherwise been invested in the United States, and generally speaking, contributed to the well being of America.

Another feature of a tax haven is that, they do not disclose the financial information relating to accounts maintained with their Banks, and Financial Institutions, to foreign tax and other authorities.   This presents the home country authoritites, problems in tracking illegal transfers of money, tax avoidance, stashing of ill-gotten wealth etc.   The tax havens actively discourage sharing of information relating to financial transactions of their overseas clients, through administrative practices and legislation that is aimed at protecting the privacy of such clients, even though such practices may cause harm and loss to the home countries, that is, the countries, to which the clients of the tax havens belong.

A third feature of tax havens is the lack of transparency in the legal and administrative processes, that makes it difficult for countries with a proper tax framework, to deal with such jurisdictions.   These countries find themselves at a disadvantage, vis a vis, the tax havens, on account of the obvious differences in approach to the issue of taxes on the one hand, and the concept of accountability and transparency on the other.

Tax havens, typically, do not engage in due diligence of their foreign clients, in respect of their identities, source of funds, etc, before establishing a relationship with them.   Further, they do not require overseas companies to have a local presence or even to have local introductions.   Practically, everything is “arranged” for a price.

Often, tax havens advertise themselves as such, through the media.   One can come across advertisements of tax havens, in financial journals in different countries.   It is not uncommon to encounter an advertisement of a tax haven in a particular edition of a journal, carrying  critiques of tax havens!

Future of Tax Havens:  It is difficult to predict the future of tax havens at this time.   Definitely, they are under pressure to “reform”.   The present economic cisis has led to several countries, notably the United States, coming out strongly against these jurisdictions, and acting to discourage their activities.

It remains to be seen what eventually happens to the tax havens given the complexities of the system.

LIBOR

Introduction:  LIBOR stands for London Interbank Offered Rate.   It is the rate at which Banks lend funds to each other in the London Interbank Market. It is published daily by the British Bankers Association (BBA)

Origin:  London is considered to be the largest interbank money market in the world, after New York.   As such, it has led the international financial markets in many respects, in terms of products and services.   Because of the availability of  high level of expertise in Banking and Finance, excellent communication facilities, a free market, apart from political stability, the London Interbank market grew tremendously, bringing in its wake, many new innovations in Banking and finance.

Alongwith New York, London gained prominence as an international financial center, and most of the big players in the banking and finance fields invariably have representation in these two markets.   Some of the most innovative market instruments that owe their origin to New York and London like Interest Rate Swaps, Forward Rate Agreements, Options, etc., became quite popular, and necessitated certain regulation to bring about uniformity in their operations, and to bring about stability to the market.

It is in this context that, the BBA, in association with the Bank of England, came up with certain standards for interest rate swaps transactions, called the BBAIRS, in 1985, which also included the ground rules for fixing of the BBA interest settlement rates, that later on evolved into the LIBOR in 1986.

How LIBOR is fixed:  The actual calculation of the LIBOR is done by Thomson Reuters, the financial information services company, and is published by the BBA everyday between 11.00 am and before noon, London time.   Libor is calculated for ten currencies viz US Dollar, Canadian Dollar, Australian Dollar, New Zealand Dollar, Pound Sterling, Euro, Japanese Yen, Swiss Franc, Swedish Krona, andDanish Krone.

Each currency has a panel of contributor Banks, who convey the interbank deposit rate offered by them, for maturities betweeen overnight and one year.   Thomson Reuters, then fix the LIBOR on the basis of the average of these rates.

Scope of LIBOR:  The LIBOR is the benchmark rate used by Bankers and others, for reference purposes, and not the final quoted rate.   For instance, say, an exporter approaches his Bank to have his export documents negotiated, his Banker would quote a rate that would comprise of the LIBOR, plus his margin.  Similarly a Bank lending funds to another in the interbank market would qoute a rate equal to LIBOR plus its margin.

LIBOR is commonly used as a benchmark rate for various financial instruments like:

1. Interest rate swaps, which is an agreement between two parties to exchange one stream of future interest payments for another, based on a specified principal amount.
2. Futures contracts, which is a contract to buy or sell a particular financial instrument, at a pre-determined rate in future.
3. Inflation swaps, which is a derivative product to hedge against inflation linked risks.
4. Syndicated loans, which are loans extended by a group of lenders to a single borrower.

Apart from the above, it is also applied to floating rate notes, variable rate mortgages, currencies, etc.

Criticism:  The LIBOR has come in for criticism from various quarters, for its unsuitability to various situations and instruments.   Notably the Wall Street Journal, came out with a study that suggested that Banks that had relied on LIBOR, would have presented an incorrect picture of their financial health.   This could give them undue leverage in raising funds from the market at competitive rates.

However, the BBA countered this criticism, justifying the reliability of LIBOR, even in times of financial crisis, as the one now underway.   Further the findings of the International Monetary Fund and the Bank for International Settlements, in this regard, were also supportive of the reliability of the LIBOR.

For the present, though, the LIBOR does not appear to be at risk of being dumped, and continues to be the reference rate in all the major currency markets of the world.

Rule in Clayton’s Case

Introduction:  It is one of the most important legal decisions relating to Banking laws, that established the principle of the order of  application of credits against debits, in running accounts, like Overdraft, etc.

The Case:  The Clayton’s case refers to the case of Devaynes Vs Noble in the year 1816.   Mr. Clayton had an account with a Banking firm, of which Mr.Devaynes was a partner.   As it so happened,  Mr. Clayton withdrew more than the available balance in his account, thereby creating a overdraft.  

Subsequently, he repaid the same, and then deposited further amounts in his account, as part of his operations in the said account.   In the meantime, Mr.Devaynes died, but the Banking firm, in which he was one of the partners, continued to operate as usual.   Later on, the firm was declared bankrupt.

At that point of time, Mr.Clayton sought to withdraw money from his account, which was declined, in view of the declared bankruptcy of the firm.   The matter then went to court, with Mr. Clayton laying claim to his monies from the estate of the deceased partner of the Banking firm, Mr. Devaynes.   The Court, however ruled against him, laying down, what came to be known as, “the Rule in Clayton’s Case”. 

The Court held that the first credit in a account would go towards adjusting the first debit in the said account, and so on.   In the case of a Banking firm, under partnership constitution, upon the death of one partner, credits made by a customer in his account would become the responsibility of the remaining partners, and could not be repaid out of the estate of the deceased partner.

This principle of first in first out, uphelf by the English Court in 1816, is still in vogue, despite criticism from certain quarters about its fairness and relevance.   However, there are certain exemptions to the rule.

For instance, a case where the Clayton’s rule does not apply, relates to a Trust Account, wherein the Trustee commits breach of trust, by mixing up his personal funds with those of the Trust, and proceeds to utilize such funds for his personal expenses.   In a case like this, it is assumed that the amount deposited by the fraudulent trustee would go towards adjusting the withdrawal made by him for his personal benefit, irrespective of the order of such credits and debits.   The Trustee holds a fiduciary position in a transaction of this nature.

The Rule in Clayton’s Case is a landmark judgement in the application of Banking laws, and is extremely useful in tracing claims whera fraud is commited in an account by a person, in a fiduciary position, and also where an account is used for stashing away ill-gotten wealth.

For example, a thief deposits various sums of monies he stole, into his Bank account, on different dates, and then withdraws certain amounts on different dates.   The thief is caught, and the Police receive five claims for the balance of credit lying in the thief’s account.   In a case like this, the Court would apply the Clayton’s rule, in settling the rights of the five claimants.

Banks scrupulously follow this rule in dealing with cases of insolvency, bankruptcy, death etc., of their borrowers, and other account holders, especially in partnership accounts.

Banks follow a simple procedure of stopping the operations in such accounts, where the Clayton’s rule is applicable.   And in case of joint accounts, a seperate account is opened in the names of the surviving account holders.

Check Truncation System

Introduction:  Check truncation is the reduction of the number of steps involved in the processing of checks, either through the local check clearance system, or the national one.   Essentially, it involves the electronic transmission of the image of the check, instead of the check in its physical form, from the point of origin to its destination.

How check truncation works:  Consider the case of a Bank customer, Mr. Muhammad Ali, having an account with Bank A, who issues a check for USD 10,000.00, favoring Mr.Grave Thomson, a customer of Bank B, both of the Banks located in the same city.

 In the normal course, Mr.Thomson would deposit this check at his Bank, and his Bank, in turn, would forward the check physically to Bank A, through the local check clearance system.   Bank A, would then, honor the check, subject to it being in order, and the Drawee’s account having sufficient balance to pass the check.   Bank B would get the advice of realization of this check, through the normal clearnace system, and then afford firm credit to Mr.Thomson’s account, enabling him to withdraw the relative amount.

Now, where the check truncation practice is in vogue, in the above example, Mr. Thomson would still deposit the check of USD 10,000.00 at his Bank.   However, his Banker, instead of forwarding the check to the Drawee Bank physically, would only transmit the electronic image of the check.  

The Drawee Bank, in turn, would honor the check in the same fashion, as in the manual system, and the transaction comes to its logical conclusion, with the drawer’s account being debited, and the beneficiary’s account credited, with the proceeds of the said check.

Benefits of Check Truncation:  The following are the major benefits of the check truncation system.

1. It is fast:  An electronic image travels faster than a check in its physical form, between two Banks, and hence the processing of the check is also fast.
2. It is safe:  Electronic transmission of the check is safer, as there is no risk of loss or misplacement of the check.
3. It is secure:  The level of transaction security is enhanced in electronic transmission as the scope of malpractice with physical checks like deliberate mis-sorting, replacement, tampering with checks, etc., is either eliminated or minimized.
4. It is economical:  The cost of transferring checks in physical form is more expensive compared to electronic transmission.
5. It is user-friendly:  All parties connected with the processing of checks beneift from its user-friendly properties.   For instance, reconciliation, the bane of check processing, is a breeze with electronic processing of checks.
6. It is efficient:  Elimination of human handling of checks also eliminates the typical human errors, associated with repetitive and tedious jobs.
7. It is effective:  The entire system of check clearance is streamlined in its electronic version, making it  an effective way of dealing with millions of instruments on a daily basis.
8. No geographical limitations:  Electronic clearance systems can cover a larger geographical area with ease and convinience, whereas, physical transfer of checks can be carried out over a limited area, on account of the time and safety factors.
9. Better customer service:  Electronic clearance enhances customer service through faster and more efficient service.
10. Eliminates manipulative practices:  Electronic check processing eliminates the leverage of ‘float’ by the drawers’ of the checks.   Float is the time between the presentation of a check and its eventual payment.

As can be seen, there are several benefits of the check truncation system, both for the customers, as well as the Bankers.   It is one of the areas of successful technological innovations in Banking, that has enhanced customer service, as well as contributing to the growth of Bank’s business.

G-20 Commitment to Developing World-Part II

This is the second and concluding article on the financial commitments made by the G-20, at their London Meeting on the 20d of April, to counter the effects of the global economic crisis.

The G-20 agreed to support the Multilateral Development Banks in the following ways:

1. To increase lending to low income countries, to the tune of USD 300.00 billion, an increase of USD 200.00 billion, over the existing limits.
2. To increase the capacity of the MDBs, so that it results in enhancing their own capacity to increase lending to to meet the growing demands.
3. The Asian Development Bank (ADB) would get a shot of capital infusion at 200% over and above the existing capital.
4. A similar need for increase in the capital requirements of other MDBs, such as the African Development Bank, and the European Bank for Reconstruction and Development would be reviewed, and a decision taken accordingly.
5. The G-20 would support efforts of the MDBs to leverage private capital through deployment of guarantees, bond insurance, and bridging finance.
6. To provide a sum of USD 250.00 billion in trade finance in the next two years.   This would be achieved through a combination of the International Finance Corporation program of Global Trade Liquidity Pool, and private sector financing.  Further, the G-20 members would voluntarily contribute 3to 4 billion to the IFC pool.
7. Export credit and Investment agencies would be roped in to provide tade financing, project financing, etc.,  working in concert with the MDBs.

The G-20 expressed its confidence in the ability of the International Financial Institutions(IFIs) to tackle the current crisis, and also to meet the needs of the emerging markets and developing countries.

Some of the major steps initiated/to be initiated by the IFIs to counter the threat of the ongoing global economic and financial crisis, and which has the support of the G-20 are:

1. The IMF has launched a new and more flexible financing option called the Fexible Credit Line, meant for countries with strong fundamentals, and policies, and also a track record of implementing  such policies.   It is a renewable credit line, with no ongoing conditins, and a longer repayment period.   Mexico is among the first countries to avail of this facility.
2. The IMF would address the issue of countries’ Balance of Payments financing needs, and the underlying causes of it.   Of special concern would be the withdrawal of external capital flows to the Banking and Corporate sectors.
3. The programs initiated by the the IFIs  viz. Vulnerability Framework, Infrastructure Crisis Facility and Rapid Social Response Fund would get practical support from the G-20 members by way of volunatry contributions.
4. The present lending limits for individual countries, by the World Bank, would be increased, to enable the larger countries access more funds, as per their requirements.   This would contribute to the stability and recovery in the respective countries.
5. Many low income IDA (International Development Assistance) countries that have sustainable debt positions, and also sound economic and financial policies, are facing problems on account of loss of access to capital markets.   Such countries should be given temporary access to non-concessional lending of the IBRD.

The G-20 called upon the IFIs to cooperate and coordinate with each other, in their developmental activities, for better results.   Further, the developing countries, including the poorest of them, must have more say in the functioning of the IFIs.

It remains to be seen how many of the above resolutions of the G-20 would be actually implemented, and how many of such implemented resolutions would beget the intended results.

                                                                                                 Concluded

G-20 Commitment to Developing World-Part I

This is the first in a two part series of articles on the financial commitments made by the G-20, to the emerging markets and developing economies, in their meeting, in London, on the 2nd of April, in the wake of the global economic crisis.

The G-20 leaders met on the 2nd of April to chart out a course of action, to save the world as it were, from the economic and fnancial crisis that is gripping it, and threatens the established world order.

One of the significant steps taken by the G-20 leaders, was the actual commitment to fund various developmental activities in the emerging markets, and developing countries, to counter the effects of the economic crisis in which the poorer nations are more at risk.

However, it should be noted that the question of individual contributions of the G-20 members, to the overall funding, was not spelt out in their meeting.   How much money would be made available to the international financial institutions, and other such developmental institutions, by each member is not clear.

The G-20 resolved:

1. To support and protect the economies of the emerging markets, and developing countries, by ensuring free flow of capital to them.
2. To provide necessary funding in the order of USD 850.00 billion to the International Financial Institutions (IFIs), to carry out the above task.
3. The IFIs would promote counter-cyclical funding to increase demand and spur growth.
4. Banks would be recapitalized to address the issue of risk management and prudential regulation.
5. Infrastructure would receive priority, as it is the base for developmental process.
6. To enhance world trade by providing funds for trade financing.
7. To provide Balance of Payment support to countries that are facing the problem of depletion of foreign exchange resources.
8. Debt rollover would be another measure to be encouraged to provide relief to countries unable to service their debts in time.
9. To ensure adequate funding to countries for various developmental activities, so that they do not divert funds from important social support activities related to health, education, etc.

In order to achieve the above goals, the G-20 has made financial commitments to International Financial Institutions, like the IMF and the World Bank, which in turn, would carry out the mandate of the G-20 in this regard.  

The following is a list of the financial commitments made by the G-20:

1. To make immediate contribution to the tune of USD 250.00 billion to the IMF, by the G-20 member countries.
2. To pump in an additional USD 250.00 billion, through the New Arrangements to Borrow, and to club the entire amount of USD 500.00 billion under this new program.
3. If necessary, the IMF would resort to market borrowing, to raise resources necessary to meet the demands.   This would be in addition to the existing programs of resource mobilization underway.
4. Concessional lending to low income countries through the IMF would be doubled from the present level.
5. Another source of funds would be the sale of IMF gold, which is expected to fetch, together with surplus income, an amount of USD 6.00 billion.   This money would go to support the poorest of the countries.
6. In order to increase global liquidity, an amount of USD 250.00 billion would be allocated through the mechanism of Special Drawing Rights.
7. Of the above amount of USD 250.00 billion, USD 100.00 billion would be allocated to emerging markets and developing countries.
8. The Fourth Amendment to the IMF charter would be expeditiously ratified, that would ensure a equitable distribution of the SDRs among member countries.
9. The next quota review would be completed by January 2011, in order to sustain the IMFs ability to meet the growing needs for financing, especially from emerging markets and developing countries.

                                                                                             To be concluded

The G-20 Prescription for a Strong Financial System-Part V

This is the fifth and concluding part of the series of articles on the outcome of the G20 Meeting in London, on 2nd April, 2009 to tackle the challenge of the current global economic crisis.

In this concluding article on the above subject, we examine the sixth and seventh reforms adopted by the G-20 to achieve the goal of bringing financial stability around the world.

Accounting Standards:  The G-20 committed itself to improve accounting standards for the financial institutions.   Valuation of financial instruments would henceforth reflect their liquidity, i.e., the ease with which the investor could encash them;   the investors’ holding horizon, that is, the period of investment in various instruments etc., apart from the existing system of fair value accounting.

The G-20 agreed upon the following steps to be taken in order to imporve accounting standards.

1. To simplify accounting procedures for financial instruments.   The unnecessarily complicated accounting procedures adopted for various instruments, for example, financial derivatives, need to be simplified.
2. Provisioning norms for loan-loss items to be strengthened, by taking cognizance of additional information, relevant to the process.
3. To improve accounting standards for provisioning for loans.
4. To improve accounting standards for off balance sheet items like interest rate swaps, options etc.
5. To address the issue of valuation uncertainty while setting accounting standards.
6. To bring about clarity and consistency in the application of valuation standards, at the goobal level, in co-operation with the concerned supervisory authorities.
7. To move towards one set of global accounting standards, that would help achieve the goal of improving accounting standards.
8. To promote the involvement of stakeholders, apart from prudential regulators, and emerging markets in the accounting standards setting process, to the extent possible, to bring about more transparency to the process.   To this end , the International Accounting Standards Board constitution would be reviewed to accomodate the above reforms.

Credit Rating Agencies:  This is the final reform adopted by the G-20 meeting in London to strengthen the financial system, to bring about its stability, and prevent the crisis situation now faced, that threatens to tear apart the global financial system.

The G-20, perhaps,  felt that the Credit Rating Agencies shoud be subject to more regulation, in view of the fact that many of the Banks and that fell by the wayside, in fact, enjoyed good credit rating.   In order to address this issue, the G-20 resolved that:

1. Credit Rating Agencies, being market participants, must be subject to proper oversight.
2. Credit Rating Agencies, whose ratings of Banks andFinancial Institutions are relied upon, by the regulators, would have to register themselves with the authorities, and would be subject to regulatory oversight.
3. This process would be consistent with the Code of Conduct Fundamentals of the International Organization of Securities Commissions(IOSCO).
4. The IOSCO would be the co-ordinating agency for compliance of the above reform.
5. The quality of the rating process would be improved by ensuring that such rating agencies adhere to a code of conduct, in regard to the issue of conflict of interest.   The rating process of the rating agencies should be transparent, and regulatory authorities should ensure the same, by taking necessary steps.
6. Credit Rating Agencies should be more forthcoming and transparent in respect of their rating process of structured products, and disclose their own track record of such ratings.   They should also disclose the underlying information and details, on which they relied in giving the rating.
7. The oversight regime across jurisdictions must be consistent and provide for sharing of information between them.
8. The Basel Committee should address the issue of external ratings in prudential regulations, and take appropriate steps in this regard.

                                                                                                      Concluded

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