- News Release 2009-035 -

Working Group 1
Summary of Report

The G-20 Working Group on Enhancing Sound Regulation and Strengthening Transparency (Working Group 1) was set up to review current efforts and make much needed recommendations that would strengthen international regulatory standards, increase transparency, and ensure all financial markets, products and participants are appropriately regulated or subject to the oversight required to prevent future financial crises.

Since the Washington Leaders' Summit, a substantial amount of progress has taken place. For example, the Financial Stability Forum has developed effective principles to ensure that the way executive compensation is determined at financial institutions does not provide incentives for excessive risk-taking that would pose a long-term concern for overall financial stability. These sound practice principles, which Working Group 1 supports, will in future require regulations to better assess compensation schemes as part of the risk management practices of financial institutions.

In addition, some international task forces have examined issues related to expanding the scope of regulation and oversight of financial entities, such as hedge funds, and increasing disclosure of risks in certain markets, such as those for structured products and complex credit derivatives. Additional initiatives were also taken in such areas as prudential oversight, accounting and risk management to address key factors behind the current crisis.

The Working Group's recommendations build on the work of various international bodies by providing an integrated vision of financial regulations around the world, and the policies that together will lead to greater financial stability. It has become clear that, despite significant progress in many areas, more needs to be done to guard against excess risk taking, to avoid regulatory gaps, and to prevent the type of escalating credit growth that fed the current crisis.

The Working Group's 25 recommendations are designed to increase confidence and stability in the financial systems of individual nations and worldwide. They recognize that strong regulation in each country, based on effective global standards, is essential to future financial stability. There must also be greater emphasis on a comprehensive and coordinated approach to regulation that would avoid the accumulation of system-wide risks.

The recommendations cover a wide range of issues—credit rating agencies, hedge funds, capital, liquidity, enforcement, and accounting standards, among others—but can be broken down into five key areas:

1. Each country's regulation of individual institutions should also include a system-wide approach that prevents the build-up of excess risks. Achieving this will require strong coordination among regulatory bodies within each country, the explicit identification of overall financial system stability as an essential part of the mandate of each country's regulators, and the development of new tools needed to address system-wide risks when they emerge. It will also require gathering financial authorities from individual nations around an international table to assess global risks and coordinate the responses.
2. Effective regulation should cover every relevant financial institution, market and investment, including private pools of capital. Large and complex financial organizations require particularly robust oversight given their size and global reach. To ensure these efforts keep up with ongoing financial innovation, regulation and oversight should be based more on what the financial institution does rather than what it is called.
3. Once the current financial crisis subsides, international standards for capital and liquidity should be strengthened. Financial institutions should build up their capital reserves in good times so they can absorb losses in bad times without putting the institution at risk.
4. The international standards for financial regulation should be coordinated to ensure a common and coherent international framework for national authorities to apply in their countries. Every G-20 nation should have its financial system undergo regular international reviews, and for greater accountability these reviews should be made public.
5. All countries should ensure that their regulatory systems better oversee a number of areas that were instrumental in accelerating the current crisis, such as executive compensation, derivatives contracts, credit rating agencies and accounting standards.

While an efficient financial system creates prosperity by transforming savings into productive investments, financial crises bring with them large costs for society. The recommendations of Working Group 1 are aimed at building a financial system that will support growth and higher living standards across the globe, while reducing the risk of financial instability.