FSB unveils action plan for safer finance sector

The Financial Stability Board (FSB) has outlined proposals for creating a safer global fiscal services sector.

Appearing alongside Korea's G20 Committee to host the Financial Reform Conference in Seoul, Paul Tucker, deputy governor of financial stability at the Bank of England, outlined the FSB's contributions to the G20's effort to prevent a future economic collapse of the same extent as the one witnessed in recent years.

Mr Tucker acknowledged that the financial crisis had been "born and bred" in the western world and spread to the rest of the globe. However, he urged the emerging markets to play a part in the reforms required in the system, adding that countries needed to work together over the forthcoming months.

Many of the proposals he outlined could affect those with banking jobs in London, Hong Kong, Singapore and many other economies and included surveillance, capital markets and prudential regulators.

Speaking of the global economic crisis, Mr Tucker said that the downturn was "very obviously" not spotted in time to prevent it, despite warnings being issued concerning the accumulation of macroeconomic imbalances. "But no-one acted to make the financial system more resilient to those vulnerabilities. This was not just an intellectual failure, as is widely discussed and recognised now. It was also partly a failure of machinery," he stated.

The speaker went on to issue criticism over the way a "large handful of individual massive firms" failed due to weak balance sheets and bad management. He added that it needed to be acknowledged that if one of the globe's major firms encountered trouble today, the repercussions would be felt in "almost every country" and aside from fiscal support, little could be done to cope with such an issue. However, Mr Tucker added that banks and insurance firms were not solely to blame, as financial intermediation also goes through the institutions, investors and issuers that capital markets encourage.

Turning his attention to possible solutions, Mr Tucker revealed that the FSB has been encouraging new machinery in an attempt to survey possible threats and stave off risks, through its creation of a vulnerabilities group. He pointed to the Systemic Risk Board in Europe, the US's planned Systemic Oversight Council and the UK's macroprudential Financial Policy Committee, which will be run as part of the Bank of England, as examples of efforts in this area, noting that a similar system could be required in Asia.

Basel III was another example highlighted by Mr Tucker of improving banking regulations, but he added that the FSB is also sponsoring an exercise on the effective supervision of Systemically Important Financial Institutions (SIFIs), led by the group's Julie Dickson. He noted that the results of the exercise could shed light on how to supervise the world's largest companies effectively and may be included in an FSB code or as part of a re-draft of Basel Core Principles for Effective Supervision.

"A remarkable fact is that although the style of banking supervision varies enormously across the world, almost nothing seems to have been done to get to the bottom of the question of which approaches are the more effective," Mr Tucker explained. He added that in the US, the popular approach is to have a host of on-site examiners, while Europe has a tendency to rely on offsite analysis.

Meanwhile, another element of the Basel III framework is that minimum liquidity requirements have been introduced for the first time, news that Mr Tucker welcomed, claiming that "virtually all" economic downturns have a base in over leverage within the financial services sector and "excessive maturity mismatch". He pointed out that along with this, the Bank of England is keen to see hybrid instruments that are unable to completely absorb losses consigned to the past. He called for the markets to evaluate a bank's capital adequacy on the basis of what is made transparent on the makeup of the capital.

Mr Tucker went on to call for market discipline to be reintroduced into the financial system. He added that the single goal in this area will be for problems in institutions to be resolved in a way that does not disrupt the delivery of essential fiscal services to the wider economy and without relying on state solvency support.

The speaker next turned his attention to employees within major financial services providers. Speaking of incentives, he said that the FSB had issued a code, the "essence" of which suggests that more pay is deferred. "I would add that perhaps part of deferred compensation should be in the form of a debt contract, so that the managers and workers in large firms eventually become creditors of the firm and so they themselves have the same risks as other debt holders," he explained.

According to the BBC's business editor Robert Peston, the UK has more global SIFIs relative to the size of the country's economy than any other G20 nation. While he claimed that the G20 leaders' plan to end the "madness" of the way in which these firms - that were "rewarded during the good years for the risks being run by these banks, [but] did not pay the appropriate price when the risks went bad" - are run, he claimed that such proposals would be difficult to carry through. He suggested this is because every one of the world's major economies would need to be in tune when creating special insolvency or resolutions procedures for banks, among other issues.

Meanwhile, the Financial Times' chief regulation correspondent Brooke Matthews said the prevention of a future collapse of a SIFI - as witnessed in 2008 with the Lehman Brothers - has been one of the "thorniest regulatory issues" to arise from the economic crisis, with differences in insolvency regimes making this goal "impossible", although the FSB report suggests headway may now be being made.

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