Group of Thirty (G30) Calls for Urgent Action to Strengthen System-Wide Financial Regulation and Supervision

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The G30, an organization of eminent global finance leaders, today released - "Enhancing Financial Stability and Resilience: Macroprudential Policy, Tools and Systems for the Future," - which aims to build political support for macroprudential initiatives ahead of the Summit of the Group of 20 in Seoul, Korea, in early November.

The G30, an organization of eminent global finance leaders, today released - "Enhancing Financial Stability and Resilience: Macroprudential Policy, Tools and Systems for the Future," - which aims to build political support for macroprudential initiatives ahead of the Summit of the Group of 20 in Seoul, Korea, in early November.

"Decisions to strengthen macroprudential policy, system-wide regulation and supervision now need to be supported at the highest political levels," said Dr. Jacob Frenkel, Chairman and CEO of the Group of Thirty, on the publication of a major new study.

The G30, an organization of eminent global finance leaders, today released - "Enhancing Financial Stability and Resilience: Macroprudential Policy, Tools and Systems for the Future," - which aims to build political support for macroprudential initiatives ahead of the Summit of the Group of 20 in Seoul, Korea, in early November. The G30 broadly defines macroprudential policy as being focused on the stability of the financial system as a whole, rather than on individual institutions or certain economic measures in isolation.

The report stressed that robust macroprudential policy frameworks will be required to secure financial system stability and help avoid crises. It is imperative that those in charge of macroprudential policies be given clear mandates and the necessary political independence to develop system-wide action plans, to apply preventive medicine, and to act effectively when they observe the emergence of severe risks to the system as a whole. The report also seeks to clarify the role that market discipline and decision makers in the private sector can play in strengthening the resilience of the system.

Dr. Frenkel, former Governor of the Bank of Israel, and the Chairman of JP Morgan Chase International, pointed out, "Public confidence in the resilience of the financial system depends on early detection of potential crises. In the U.S. for example, vigorous debate continues over the causes of the recent financial crisis. We have no doubt its severity would have been reduced had more effective macroprudential policies been in place. We are now seeking support for far-reaching and urgent recommendations."

The report defines the concept of macroprudential policy, identifies tools and institutional structures that can be used for its implementation, and offers recommendations for the policymaking community on enhancing the stability of the financial system. The authors also propose that public officials empower systemic financial regulators with new tools to enhance economic stability and potentially lessen the severity of any future economic crises.

The report has been developed by a working group headed by Roger W. Ferguson Jr., former Vice Chairman of the U.S. Federal Reserve Board and the President and CEO of TIAA-CREF. "While regulators have used some tools similar to those we recommend today, we now know that to be most effective enhanced capabilities must be employed by a regulator with a specific mandate to consider the overall welfare of the financial system," said Mr. Ferguson. "As we have seen, a focus on individual institutions and markets, absent a systemic view, cannot ensure financial stability and resilience."

Jaime Caruana, a member of the working group and General Manager of the Bank for International Settlements, stated, "This is an important addition to the debate. As you can see from the recommendations made in this report, the recently agreed Basel III standards for bank capital and liquidity are going to provide a very good anchor for macroprudential policy frameworks."

Paul Tucker, a member of the Group of 30 working group and Deputy Governor of the Bank of England, Financial Stability, emphasized, "These are important recommendations that deserve further international debate, at what is a key juncture for many countries that are in the process of developing macroprudential frameworks. Authorities must in the future have the tools to require enhancements in the resilience of our capital markets and banking systems as they evolve. And they need to be equipped to lean against stability-threatening exuberance in financial cycles."

The Right Tools for the Job
The report proposes that public officials empower systemic financial regulators with new tools to enhance economic stability and potentially lessen the severity of future economic downturns. The toolkit would address leverage, liquidity, credit, and supervision:

  •     Leverage: via higher capital requirements, counter-cyclical capital buffers, stress tests, and the monitoring of gross leverage;
  •     Liquidity: via liquidity buffers, core funding ratios, or capital surcharges on liquidity;
  •     Credit: via adjustable loan-to-value ratios; and
  •     Supervision: via more effective oversight of market infrastructure and business conduct.

Carrying Out the New Mandate
The Group of Thirty report underscores that policy action to deal with future crises will not be easy and it may be controversial. Robust action, which could, for example, constrain banking activities, notably during a boom, can be politically difficult and unpopular, but may, on occasion, be necessary.

Ideally, the power to act should be vested in a single institution in each country. But regardless of the location, the report stresses that the independence of the macroprudential supervisor must be balanced by transparency and accountability to ensure legitimacy. The macroprudential supervisor should operate under a clearly articulated mandate provided by the country's political leadership. That mandate needs to provide for the authority and discretion necessary to carry out the macroprudential policy goals. "Discretion is essential as it is difficult to define in advance the location and severity of the next financial crisis," added Mr. Ferguson.

Dr. Frenkel concluded, "To achieve our goals macroprudential policymakers need a dialogue with other agencies on monetary, fiscal and related issues. They must improve understanding of and their ability to react as markets evolve."

For further information on this report please visit: http://www.group30.org

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