The Group of Seven economic powers are likely to deploy an international team to keep closer tabs on the world’s big banks as well as demanding better risk management and information disclosure across financial markets.
Finance ministers from the G7 countries have also invited the bosses of about 10 banks to discuss the global markets crisis which could cost close to $1 trillion in losses and downgrades in the value of toxic assets accrued over years of investor euphoria.
The moves to improve the behavior of banks, and supervision of financial markets more generally, are due to be announced at a meeting on Friday in Washington. They are based on a list of recommendations from the Financial Stability Forum, a body they created in response to Asian financial crises of the late 1990s.
Among the key FSF ideas, elements of which were published in the Wall Street Journal and confirmed to Reuters by a G7 source on Wednesday, is the creation by the end of this year of a team of supervisors to watch over the biggest international banks.
Ministers would dine with the bankers on Friday, the official said. “It’s an informal meeting … We will ask banks why (the crisis) occurred and what steps to take from here.”
If implemented, the plan should “minimize the possibility that the challenges we’ve faced will reoccur”, David McCormick, U.S. Undersecretary of the Treasury for International Affairs, said, according to the Wall Street Journal.
FSF recommendations include:
* By July, supervisors should improve their guidelines for the way banks plan for cash shortages. Banks should run “stress tests” to ensure they can get cash in emergencies.
* By the end of the year, teams of supervisors from major countries should be assigned to monitor the biggest banks which work across international borders.
* Banks and securities firms should publicize the risks they face from complex securities, such as those backed by subprime mortgages.
* The Basel Committee on Banking Supervision, an international body of regulators, should require banks to keep more capital in reserve to protect against failures of complex securities and off-balance-sheet investments. Banks should disclose their uses of off-balance-sheet setups to house their risky investments.
* Credit rating firms should distinguish the grades they give for regular securities, such as municipal or corporate bonds, from those they assign to more complex investments.
* Investors should take responsibility for their own due diligence to ensure credit ratings reflect the risks of their investments.