The G-20 Prescription for a strong Financial System-Part I

This article is a first in a series of articles on the decisions taken by the G-20 leaders, meeting on 2nd April in London, to strengthen the financial system, both within their countries, as well as the international institutions, engaged in development work.

Key areas of reform: The key areas of reform of the financial system, from the G-20 point of view, relate to the proper regulation and supervision of the system.   To ensure transparency and accountability in the various policies and activities of the system.   To promote integrity in the operation of the system.  

And to enhance international cooperation in this area to avoid the spillover of the after effects of the policies and actions of one country on the others.

In order to accomplish the goals that they have set for themselves, the G-20 resolved to push through reforms, to improve the functioning of the financial system.   These reforms relate to the following areas.

Setting up of Financial Stability Board:  The present Financial Stability Forum, set up in 1999, to promote international financial stability through information exchange, and international co-operation in financial supervision and surveillance, would be upgraded, and mandated to play a greater role, and take on more responsibility to bring about financial stability, in its new avatar as the Financial Stability Board.   The job of the FSB would be to:

1.  Identify and examine the shortcomings and weaknesses of the financial system and to take corrective action to set right the same.
2. To initiate joint action of all the authorities responsible for maintaining financial stability by co-ordinating their activities, and to avoid any slip-ups that might lead to grave situations.
3. To keep track of market developments and advise regulatory authorities of the effects of such developments, so that they could initiate corrective action in time.
4. To come up with a code of best practices and to monitor its adherence by the players to ensure a level playing field, and to avoid complaints, and a free-for-all situation.
5. To work along with international standard setting bodies, towards a favorable outcome in regard to the stated priorities.   Further, to review the progress in achieving these goals.
6. To come up with guidelines for the setting up of and activities to be undertaken by supervisory colleges.   These are organizations, where regulators from different countries come together, to discuss how best to oversee individual institutions.
7. To identify systemically important cross-border firms, whose activities can have repercussions across borders, affecting the economic well-being of people across countries.   To monitor the activities of such firms from the regulatory and supervisory angle.
8. To manage any cross-border crisis, especially those arising out of the activities of the cross-border firms.   To provide necessary support to contingency planning aimed at dealing with such crises, as and when they occur.
9. To constantly monitor and assess the risk to the economic and financial system, on account of the various market developments, in association with the International Monetary Fund, and to report the same to the concerned authorities, like the G-20 Finance Ministers and Central Bank Governors.

The G-20 also agreed to open up the Financial Services Board to peer reviews to ensure compliance  of its mandate.   The key to financial stability being adherence to sound and internationally acceptable standards and practices.   Ensuring opennes and transparency in the operations of the Financial Services Board was also a committment made by the G-20, to achieve the goal of strengthening the financial system. 

                                                                                           To be concluded