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New Financial Order Recommendations by the Issing Committee Preparing G-20 - Washington, November 15, 2008 Otmar I s n (Chairman) sig JorgAsmussen Jan P e e Krahnen itr Klaus R g i g eln J n Weidmann es Willi White am New F n n i lA c i e t r ( h r V r i n iaca r h tcue Sot e s o ) 1 Mandate and Overview ( I . O) 2 Improving t e Framework . h 21 I c n i e (JPK) .. n e t v s 22 Transparency (JPK) .. 23 R g l t o and S p r i i n (KR) .. e u a i n uevso 24 I t r a i n l I s i u i n (KR) .. n e n t o a n t t t o s 3 Concluding remarks . Appendix ( u lt x ) F l et A1 . Overview A2 . Improving t e Framework h A 21 .. Icnie netvs A 22 .. Transparency A 23 .. R g l t o and S p r i i n euain uevso A 24 .. I t r a i n lI s i u i n n e n t o a ntttos A3 . Concluding remarks 1. Purpose of the paper - causes of the crisis I l n with t e mandate oft e committee ti paper does not d s u s problems ofmanaging t e n ie h h hs ics h p e e tcii.I r t e d a swith e r s n rss t a h r e l lements ofa f t r f n n i la c i e t r which should h l t u u e iaca r h t c u e ep o a o d ar p t t o ofp s developments. The recommendations i c u e Higher t a s a e c , proper v i eeiin a t nld: rnprny i c n i e s r c u e ,b t e r g l t o , e f c e ts p r i i n and improved i t r a i n lc o e a i n n e t v t u t r s e t r e u a i n fiin u e v s o , nentoa o p r t o among a t o i i s uhrte. The g o a cii i f n n i lmarkets i t e consequence ofadynamic i t r c i n between f c o si l b l rss n i a c a sh neato atr n t e macro and t e micro s d of t e economy. The combination ofmassive l q i i yand low i t r s h h ie h iudt neet r t sh s caused s a p i c e s s i a s tp i e ,e p c a l i t e housing s c o ofmany c u t i s I ae a h r n r a e n s e rcs se i l y n h etr onre. n an environment ofi a e n d quate r g l t o and important g i s p r i o y o e s g t i a p o r a e J euain aps n u e v s r v r i h , n p r p i t i c n i e s r c u e have promoted s o t t r i m and encouraged t eproduction ofcomplex netv tutrs hr-ems h f f n n i li s r m n s supported by hi h d g e s ofl v r g . O e a l t e s t a i ni booming iaca n t u e t , g ere eeae vr l , h iuto n f n n i lmarkets became more and more u s s a n b e I needed o l at i g rt c l a s . Th s iaca nutial. t n y rge o olpe i t i g rwas d l v r dwhen house p i e i t eUS s a t dt fl with t e e p c a i n t a ti would rge eiee rcs n h t r e o al h x e t t o h t hs c n i u f ran extended p r o oft m . otne o e i d ie 2. Recommendations 2.1. Incentives Th s s c i n d s u s s t r e major c s s ofi c n i e misalignment t a have gready c n r b t d on i eto icse he ae netv ht otiue, t emicro lvl t t e c r e t f n n i lcii.These c s s r f rt s r c u e f n n e r t n a e c e , h ee, o h u r n i a c a rss a e ee o t u t r d iac, aig gnis and management compensation. They al c n r b t d t an understatement of t u d f u t rs, l otiue o r e e a l ik g n r t n m s r c n of c e i i s r m n s We d a with t e s r c u i g of s c r t z t o eeaig ipiig rdt n t u e t . el h tutrn euiiain t a s c i n frt s n e i i h r where t e c r e t cii s a t d We then t r t t e r l of r t n r n a t o s is, i c t s e e h u r n rss t r e . u n o h oe aig a e c e , and l s y t management compensation. To t e e t n t a our recommendations r l t t gnis ad o h x e t ht eae o b t e i formation f ri v s o s i w l be covered i t e f l o i g s b e t o on t a s a e c etr n o n e t r , t il n h olwn uscin rnprny a) Rating agencies Ra i g a e c e a e t e major infor a i n p o i e f rbond i v s o s i c p t lmarkets around tn gnis r h mto rvdr o n e t r n aia t e w r d By i a p o r a e y a p y n t e r l n - s a l s e bond r t n s a d r s t t e h ol. n p r p i t l p l i g hi o g e t b i h d aig t n a d o h v l a i n of s r c u e f n n e p o ucts ( r n h s , r t n a e c e have compromised t e r auto tutrd iac rd tace) ai g g n i s hi ceiiiy I o der t r - s a l s t u t i s r c u e f n n e r t n s a number of new r l s rdblt. n r o e e t b i h rs n t u t r d i a c aig, ue should be e f r e . For ti p r o e a e c e should be s b e t d t r g l t r o e s g t nocd hs u p s , g n i s u j c e o e u a o y vrih, a b i i al m t dwa . let n i i e y R ting performance (.. t e l n a ie h o g-term saitc r l t n iiil r t n s t subsequent ttsis e a i g nta a i g o d f u t ) should be monitored by t e s p r i o s a p y n h g s a d r s of eals h uevsr, p l i g i h tnad t a s a e c and saitc. R t n performance w l be publi h d r g l r y (.. once a rnprny ttsis a i g il s e e u a l eg, ya) er. To minimize r t n s o p n , u s l c t d r t n s a e encouraged (.. by mandatory a i g h p i g n o i i e aig r eg r t n dslsr) a i g icoue. A t o i i s should con i u t re i w t e r u e of s r c u e f n n e r t n s i t e uhrte t n e o v e hi s t u t r d i a c aig n h r g l t r and s p r i o y framework und reduce t e us t t e e t n p s i l i o d r euaoy uevsr h e o h xet osbe n re t l m tt e p e s r on a e c e , eg i consumer p o e t o r g l t o . o ii h r s u e g n i s .. n r t c i n euain Furthermore, r t n f e may be l n e t r t n performance ( i h r by l n i g i t a i g es ikd o aig ete ikn t o d f u t saitc, o by l n i g i t i d v d a t a c e performance; i t e lte c s , e a l ttsis r ikn t o niiul r n h n h atr a e a e c e e s n i l y buy i t t e t a c e t e rt) An annual r p r on r t n p a t c g n i s setal n o h r n h s h y ae. eot aig rcie 2 and r t n competition by a c n r l o e s g t body may h l t monitor market i t g i y aig eta v r i h ep o nert and q a i y ult. b) Structured finance The p ooling and t a c i g of l a p r f l o r q i e s e i l p o i i n t e s r t a t e rnhn o n otois eu r s pca r v s o s o n u e ht h u d r y n r l t o s i s between borrowers and l n e s remain it c . S c r t z t o s i s e n e l i g eainhp edr nat e u i i a i n s u d d r n t e p s few y a s t p c l y d d not meet t e e r q i e e t . I o d r t r a i n uig h at e r yial i h s e u r m n s n r e o elg i c n i e , t e whereabouts of t e t a c e t a c r y most of t e rs, t e frtl s p e e , h s netvs h h r n h s ht a r h ik h is o s i c s a t be p b i knowledge. This w l e s r t a t e market can once a a n p i e i d v d a o ulc il n u e h t h g i rc niiul s c r t e p o e l ( e t e corresponding paragra under “ euiis r p r y s e h ph Transparency”. ) c) Compensation Management i c n i e have i c e s n l f c sed on s o t t r performance, d s e a d n netvs nraigy o u hr-em irgrig l n e - e m rss For i s a c , v r o s i s r m n s were used t f o t n - o d f n n i l o g r t r ik. ntne a i u n t u e t o r n e d l a iaca t a s c i n , and by c r i g out income v a s o t t r bonuses t management and emplo e s rnatos avn i hr-em o ye. S n e t e compensation system i f u n e management b h v o r a s r n e r l a c on long ic h nlecs e a i u , t o g r eine term performance of investment s r t g e i r q i e i or e t a h e e an a p o r a e taeis s e u r d n d r o c i v prpit i c n i e a i n e t New compensation models may be needed t a a l w s r k n a proper netv lgmn. h t l o tiig b l n e between long and s o t term o i n a i n i v l i g bonus and malus components. Such aac hr retto, n o v n schemes could resemble pension a n i i s r t e th n a l c s - u payments. S n e nute ahr a l-ahot ic compensation schemes should not be d c a e by government d c e , d s l s r t i v s o s w l ittd e r e i c o u e o n e t r il be ar a o a l r g l t r s r t g ( e t e corresponding paragraph under “ e s n b e e u a o y t a e y se h Transparency”.Of ) c u s , r g l t r may c n r b t t i e t f i g sound p a t c p i c p e f r compensation ore euaos o t i u e o dniyn rcie rnils o sch m s ee. 2.2. Transparency The o j c i e of an i c e s i t a s a e c i t overcome opaqueness which h s prevented betv nrae n rnprny s o a i v s o s t a s s t e r s s of f n n i l i s r m n s c r e t y The opaqueness, i t r , i t a n e t r o s e s h ik i aca n t u e t orcl. n un s o l r e e t n t e consequence ofm s l g e i c n i e i many a e s of t e f n n i lv l e c a n ag x e t h i a i n d netvs n ra h iaca a u hi. Thus, by s e i y n r l s of d s l s r , t e market w l be once a a n enabled t p i e p c f i g ue icoue h il gi o rcd f e e t a ebetween f n n i li s r m n s t k n i c n i e alignment d f e e t a si t a c u t ifrnit iaca n t u e t , a i g n e t v ifrnil n o c o n . a Structured finance: We propose t make i mandatory t a i s c r t z t o t a s c i n t e ) o t ht n euiiain rn a t o s h economic frtl s p s t o i d s r b d and isa l c t o i t e market i t e t d a a bond is o s o i i n s e c i e t loain n h s rae s c v n n , and i d s l s d t t e m r e , t e e y a o d n opaqueness ofbank p r f l ors. oeat s icoe o h a k t hrb v i i g o t o i ik D s l s r i needed f r t e market t a e u t l p i e r s s and t u induce banks t r t i icoue s o h o d q a e y r c ik hs o ean frtl s p e e , and t a p y sound banking p a t c s S n e t e s z of t e frtl s p e e is o s i c s o pl r cie. i c h ie h is o s i c a o e does not determine t e amount of r s r t i e , t e s i u a i n of any mandatory ln h ik e a n d h t p l t o r t n i n r t h s t be d s u s d c r f l y R t n a e c e and o h r info e e t o ae a o i c s e aeul. a i g g n i s te rmation p o i e s rvdr (.. a d t r ) a e supposed t r p r r g l r y on comp i n e The r v l t o of frt l s eg u i o s r o e o t eual lac. eeain is o s p e e a l c t o among market p r i i a t may even be used t e s t n i n on today’ ics loain atcpns o ae esos s i t r a km r e s nebn akt. b Compensation: We propose d s l s n , on a r g l r b s s t e i c n i e components i ) icoig e u a ai, h n e t v n management compensation schemes, and t encourage r t n a e c e ( n o h r o aig g n i s a d t e information p o i e s lk a d t r ) t r p r a f r - e e m t i t a c p u e i c n i e r v d r , ie u i o s o e o t i m l v l e r c h t a t r s n e t v a i n e t Mandatory r l s on management compensation, such a s l r c p o bonus lgmn. ue s aay a s r lmt,a e not a v c t d a t e a ee p cted t b c f r . iis r doae, s hy r xe o akie 3 c Risk map: An i t r a i n l y c o d n t d e f r i c e t n t e i s i u i n lbackground f r ) n e n t o a l o r i a e fot n r a i g h ntttoa o d a i g on ar g l rb s s ag o a f n n i lr s map i recommended. The map i v l e al rwn, e u a ai, l b l i a c a ik s novs l major i t r a i n l f n n i l i s i u i n , eg b n s i s r n e companies, hedge f n s and n e n t o a i a c a n t t t o s .. a k , n u a c ud, almajor f n n i l p o u t , eg l a s c e i i s r n e and CDS, and ABS. The d t i s of l i a c a r d c s .. o n , r d t n u a c eal such a r s r p r i g system silneed t be worked o t p s i l by a t s f r e c n i t n ik e o t n tl o u, o s b y ak oc ossig ofmarket p r i i a t ,r g l t r and a a e i s atcpns e u a o s cdmc. d Credit register: E t e a a by-product of t e r s map, o a a s a d a o e iiitv, we ) ihr s h ik r s t n - l n n t aie propose t e c e t o of ag o a c e i r g se. Such ar g s e compiles major i t r a k and h rain l b l r d t e itr eitr nebn c s o e - p c f c exposure d t t a l w i d v d a market p r i i a t , t p c l y t o e utmrseii a a o l o niiul a t c p n s yial h s i s i u i n t a a s d l v r t e raw d t , t l a n about major exposures of t e r ntttos h t lo e i e h aa o e r hi c u t r a t e . While t e v l e of such i f rmation i a p e i t d almost u i e s l y on a onepris h au no s prcae nvral n t o a lvl t e e i nothing commensurate on an i t r a i n l lvl However, even t e a i n l ee, h r s n e n t o a ee. h b s r g s e w l not be a l t p o e t eitr il b e o r vide an account oft t lbank exposures i r a t m . oa n el i e e Accounting standards a e t be r v e e . ) r o eiwd 2.3. Regulation and Supervision The e i t n r g l t r and s p r i o y system h s importantweaknesses and gaps ( e 1)and xsig e u a o y uevsr a se . s ould be reformed t avoid t e b i d u ofe c s i e l v r g i t e f t r and t reduce t e h o h ul-p xesv eeae n h uue o h system’ p o c c i a i y s r-ylclt. a) All gaps in the supervisory system should be closed: F n n i li s i u i n should be s p r i e on a flyc n o i a e b s s t u i h b t n t e scope i a c a ntttos uevsd ul o s l d t d a i h s n i i i g h f rr g l t r a b t a e o e u a o y rirg. Investment funds o e a i gi s d b n s i s r n e companies o n n f n n i l c r o a e p r t n nie a k , n u a c r o-iaca oprts should be s p r i e compr h n i e y uevsd eesvl. A l s s e i a l important f n n i li s i u i n should be s b e t d t a p o r a e s p r i i n l ytmcly iaca ntttos ujce o prpit uevso and r g l t o euain The “ n i e t s p r i i n ofhedge fu d v at e rr g l t d c e i o s needs t be s r n t e e idrc” u e v s o n s i hi e u a e r d t r o teghnd by c n o i a i g t e i formation a a l b e from d f e e tl n e s osldtn h n vial ifrn edr. The atvte ofc e i r t n a e c e should be monitored, i c u i g through t e ciiis r d t a i g g n i s nldn h implementation oft e IOSCO sr v s d code ofconduct ( e 21) h eie s e ... Market p r i i a t should u g n l implement c n r lc u t r a t c e r n f r OTC c e i atcpns rety eta o n e p r y laig o rdt d r v t v s C n r l c u t r a t c e r n would h l t monitor market developments and eiaie. e t a o n e p r y l a i g ep o reduce s t l m n rss e t e e t ik . Compliance ofo f h r - e t r with r l v n r g l t o s could be improved through an fsoecnes eeat euain “ n i e t approach i almajor f n n i lc n e s c o e a e idrc” fl iaca e t r o p r t . b) Capital requirements should be tightened after the end of the current crisis: I t o u t o ofan a d t o a o e a ll v r g r t oi a d t o t t e r s - e g t dB s lrto nrdcin d i i n l v r l e e a e a i n d i i n o h i k w i h e a e a i. A d t o a c p t lrequirem d i i n l aia ents f rS V , c n u t and o f b l n e s e ta tvte u l s t e a e o Is odis f - a a c h e ciiis n e s h y r flyc n o i a e . ul o s l d t d 4 A d t o a c p t lrequire d i i n l aia ments f rl n i gt hedge f nds and l n i g t non-cooperative o f o edn o u edn o f s o ecne s h r etr. Allowance f rl q i i yrss o i u d t ik . I a d t o , c p t lr q i e e t , p o i i n n r l s and accounting r l s should be reviewed t n d i i n aia e u r m n s r v s o i g ue ue o make t e system l s p o c c i a . h es r - y l c l c) Cooperation among t e d f e e ta t o i i s and b d e ,which a e d r c l o i d r c l h ifrn uhrte ois r iety r niety in o v d i t e s p r i i n off n n i li s i u i n , should be improved: vle n h uevso i a c a ntttos Improved information flow between n t o a s p r i o s t o t i a complete p c u e of t e ainl uevsr o b a n itr h s t a i nofc o s b r e b n s bank ho d n companies, hedge f n s and o h rinvestment iuto rs-odr ak, lig ud, te fns ud. C e t o of“g o a c l e e of s p r i o s f rc o s b r e b n s rain l b l olgs u e v s r ” o r s - o d r a k . Gre t r c n i t n yi t e r g l t o ofd f e e t f n n i le t t e ( a k n ,i s r n e a e o s s e c n h e u a i n i f r n i a c a niis b n i g n u a c , sc r t e ) euiis. Enhanced i t r c i n between i s i u i n with e p r e c i a s s i gmacro p u e t a r s s neato ntttos x eine n sesn - r d n i l ik and t o e i charge ofa s s i gm c o p u e t a rss hs n s e s n i r - r d n i l i k. 2.4. International Institutions I t r a i n li s i u i n should p a a s r n e r l i cii p e e t o . I t r a i n li s i u i n n e n t o a ntttos l y t o g r o e n rss r v n i n n e n t o a n t t t o s can h l t b i d amore robust macro-economic p l c framework, akey c n i i n f rp e e t n ep o ul oiy odto o rvnig f t r cii. u u e rss The International Monetary Fund (IMF)’s r l a an i t r a i n l “ o e s n e n t o a watchdog” should be s r n t e e . This r l t s t macro-economic i s e ,lk g o a imbalances and exchange r t s and teghnd eae o s u s ie l b l ae, t f n n i lmarkets but t e concept of“ retton Woods I ”i m s e d n . I p r i u a ,t e IMF o iaca h B I s i l a i g n atclr h sh uld r - i e tiswork towards adeeper and more comprehensive a a y i of f n n i lmarket o edrc t nlss iaca developments i t e f l o i gw y n h olwn a: A s r n e f c s on s i l v r between f n n i lmarkets and t e r a economy. togr ou ploes iaca h el An assessment ofm c o prudential rss arik . F n n i lS c o Assessment Programs (FSAPs) s iaca e t r hould become mandatory f ralIMF members o l sae. tts A a y i ofcomprehensive d t on g o a f n n i lmarket developments (sap e r q i i e f ra nlss aa l b l iaca a r-eust o g o a r s map, s e 21)i c o e c o e a i n w t t eB S l b l ik e .. n l s o p r t o i h h I . I i important t note t e l m t ofwhat can be r a o a l expected from t e IMF: ts o h iis esnby h There i an unavoidable t a e o fbetween t e n u r l t of t ework of t e IMF saf based on s rd-f h etaiy h h tf, r l s and t e p l t c li t r s si iss a e o d r . ue, h oiia n e e t f t h r h l e s The IMF does not have t e e p r i e t a ta s a d r s t e f r f n n i lm r e s h x e t s o c s t n a d etr o i a c a a k t . The IMF does not appear t be s i a l t become ag o a s p r i o f rt e l r e t o utbe o l b l u e v s r o h ags i t r a i n l f n n i li s i u i n . n e n t o a i a c a ntttos 5 The Bank for International Settlements (BIS), i c u i giscommittees, i t e s a d r s t e i nldn t s h t n a d etr n f n n i lm r e s I w l be t e key body t adopt most oft e measures proposed above ( n e iaca a k t . t il h o h udr h ufr ak eiiay t 23) However, t e BIS s f e s from al c ofl g t m c and should broaden ismembership ... ( a t c l r yi isc m i t e ) priual n t o m t e s . The Financial Stability Forum (FSF) i t e key forum t c o d n t and advocate r g l t r and sh o oriae euaoy s p r i o yr f r s But i a s s f e s from al c ofl g t m c a i i G7-dominated. uevsr eom. t lo ufr ak eiiay s t s The FSF should co t n e t be anchored a t eBIS but t e l n sbetween t e FSF and t e IMF niu o th h ik h h should be s r n t e e . A merger oft e FSF wi h t e IMF a p a s n i h r f a i l nor efcet teghnd h t h p e r e t e esbe fiin. The membership oft e FSF should e o v i l n with t e f t r enlargement oft e G7/8. h v l e n ie h'uue h The European dimension. The c r e t f n n i lcii h s a s h g l g t d t eweaknesses i t e u r n i a c a rss a l o i h i h e h n h EU’ s p r i o y framework, which remains fragmented a s uevsr long n t o a lns A reform of t e a i n l ie . h European s p r i o y framework i e s n i lt p o e t t e S n l Market and t e Euro and needs t uevsr s seta o r t c h i g e h o go beyond what i f a i l g o a l . European i s e w l not be d s u s d by t e G-20 but t e EU s esbe lbly s u s il icse h h should t k t e l a i implementing t ep o o a s p e e t d i t i n t . ae h ed n h r p s l r s n e n hs o e 3. Concluding remarks A number ofour recommendations a emore o ls s r i h f r a d and i l n with t o e by t e r r es t a g t o w r n ie hs h FSF, o h ri s i u i n ,or i d v d a a t o s On some i s e more inf t e ntttos niiul uhr. sus ormation and r s a c i eerh s n e e . This i one reason t warn a a n tpremature c n l s o s and even more a a n th s y edd s o gis ocuin gis at d c s o s The elements ofanew and b t e f n n i la c i e t r must i t r c i ap s t v way and eiin. e t r iaca r h t c u e neat n oiie support each o h r This cannot be a h e e by q i k and un te. civd uc avoidably s o t s g t d a t o s I i h r - i h e cin. t s a s important t a t e cii management —i c e s n l with t e d r t o and dimension of lo h t h rs s nraigy h uain measures- t k s i t account t eimpact on t e f t r development of f n n i lm r e s This r f r ae no h h uue iaca a k t . ees not o l t e i s r t g e f r s a ei t r e t o s i banks ec,but a s t t e c e t o f ra s a l , n y o xt t a e i s o tt n e v n i n n t. l o o h r a i n o tbe n n i f a i n r environment. o-nltoay Curre p o o a s f r s r n t e i g t e f n n i l a c i e t r a e b s c l y focused on p o i i g nt r p s l o t e g h n n h i a c a r h t c u e r a i a l rvdn b t e r l s f r p i a e a t r . Th i v r i p r a t but not enough. An a a y i of t e u d r y n e t r u e o r v t c o s is s e y m o t n , nlss h nelig c u e of t e cii show t a i would not have g i e such s g i i a t and cosdy dimensions ass h rss ht t and infcn without a macroeconomic environment of massive l q i i y and p r i t n y low i t r s rts As a iudt essed n e e t ae. consequence, sounder macro p l c e and more prudent r l s f r i d v d a a t r have t go hand oiis ue o n i i u l c o s o i hn. n ad 6 Appendix A 1. Causes of the Crisis S n e t e end oft e 1990s and t e e f e ,i t r s r t shave been low and l q i i yh g ic h h hratr neet ae iudt i h around t ew r d This was due i no s a lp r t c r e c peggingi key r g o s oft e h ol. n ml at o u r n y n ein h world economy. The i c e s n i t g a i n ofChina and o h r emerging markets i t t eworld economy nraig nerto te no h r s l e i g o a p e s r on commodity p i e .As i picked up s e d g o a i a i nl m t d eutd n lb l r s u e rcs t p e , lblzto iie t e scope ofb s n s e t i c e s p i e and r s r i e wage growth i i d s r a i e n t o s h u i e s s o n r a e rcs etand n nutilzd ain. The huge r s i l q i i yt e e o e d d not make isl fl on commodity p i e f rq i e a ie n i u d t h r f r i tef et rcs o ut w i e Nor d d t e s r t g of“ n l t o t r e i g w i s i n r n money s p l and c e i hl. i h t a e y i f a i n a g t n ”, h l t g o i g upy rdt volumes, encourage c n r lbanks t r i ei t r s rts eta o a s n e e t ae. However, t e high l v lofl q i i yd d not remain without consequences. I l d t r s n a s t h ee iudt i t e o iig se p i e around t ew r d The combination ofh g l q i i yand low i t r s r t sproduced a rcs h ol. i h iudt neet ae s r n i c n i e t choose e e r s i ri v s m n s As ar s l t e premium over s c r tog netv o v r ike n e t e t . eut h eue invest e t became e e s a l r T is t e dwas enhanced by numerous f n n i li n v t o s mns v r mle. h r n iaca n o a i n . The s c r t z t o and packaging off n n i lproducts — without t e o i i a o r t i i gany euiiain iaca h rgntr eann r s — compounded t i t e d Complex p o u t were bought w ik hs r n . rdcs orld-wide, and i p r i u a i n atclr n Europe, i Germany not l a tby i s i u i n with no v a l b s n s model oft e rown. The n es ntttos ibe u i e s hi c r i i a e i s e by t e r t n a e c e underpinned ti b h v o r etfcts s u d h aig gni s hs e a i u . Transparency had l r e ybeen ls. I had b r l e e e i t d a g o a lvl and a some s a e agl ot t a e y v r x s e t l b l ee, t tg t ep a e s themselves r t i e o l arudimentary overview oft e rown t a s c i n .A l c h lyr eand n y hi rnatos ak ofr g l t o was r v a e , e p c a l i t eUSA, where p l t c l yl v r g d i s i u i n euain e e l d seily n h oiial e e a e n t t t o s ( r d i Mac and Fannie Mae) a p i i d t er a e t t boom y t f r h r I numerous Fede m l f e h el s a e e ute. n c u t i s t e banks circumvented c p t lr g l t o s by e t b i h n new e t t e f r t e r onre h aia e u a i n salsig niis o h i atvte.The f i u eof t e o e s g tr ciiis alr h v r i h egime cannot be excused by t e f c t a t e e atvte h a t h t h s ciiis were e t r l lgl n i e y ea. This development occurred a a n tabackdrop of f n n i li c n i e which rewarded s o t gis iaca n e t v s hr term s c e s — i p r i u a t e s l ofnew f n n i lp oducts — with no r f r n e t t elo g u c s n a t c l r h ae iaca r eeec o h n t r . Ri management shortcomings w t i f n n i li s i u i n have now a s been e m sk i h n iaca ntttos lo rvae. eeld While mainta n n l q i i yand p o e t n d p s t r a e c n r lmantras ofbanking i i g iudt r t c i g e o i o s r eta r g l t o , t e problem of "market l q i i y h s been l r e yn g e t d I was b i h l euain h iudt” a agl e l c e . t ltey assumed t a i would a w y be p s i l t r f n n e s o t t r debt v a t e markets a any ht t las osbe o eiac h r - e m i h t tm. ie These f c o s combined t produce a s t a i ni which o l a s i h prod was needed t atr o iuto n n y lgt o sh k t e e t r ( n e s ) pyramid, and indeed t b i gi t p l n down. This prod was a e h nie ivre o rn t opig d l v r d by t e subprime cii i t e USA, t eimpact ofwhich frtshook t e German eiee h rss n h h is h bankingworld f r t er a o s f m l a t u aland continued t s r a . I me a t r a h o h e s n aiir o s l o ped n femt, t e e r p l sproduced by t er a e t t cii s r a t t e c u t i s t a were more o ls h s ipe h e l s a e rss p e d o h o n r e h t r es p e e t n d f ri because t e rhousing markets had been overheated f ry a s rdsie o t hi o er. I would however be t o s m l s i and indeed m s e d n t blame t e cii e t r l on t e t o ipitc ilaig o h rss n i e y h subprime t o b e and t e r a e t t m r e s As important a t i f c o i — and a important ruls h el sae a k t . s hs a t r s s a an end t t e housing-market cii i t e US i f rworldwide r c v — t e subprime s o h rss n h so e o ery h d s s e was o l t e t i g rt a sp r e o faworldwide f n n i lcii.R s s were r iatr n y h rge h t a k d f i a c a rss i k e e a u t d everywhere — t e s r a s r s premiums r s a r p l , and t e hi vlt l t oft e vlae h p e d , ik o e buty h gh oai i y h 7 e a u t o s c n r b t d t f r h ri s c r t .Access t s o t t r r f n n i gon t e markets v l a i n o t i u e o u t e neuiy o hr-em eiacn h was a r p l c t of This caused an undreamt ofl q i i ycii.With t e c l a s oft e r b u t y u f. i u d t rss h o l p e hi a s t ,t e banks’c p t lr t owas put under immense p e s r , and t e frti s i u i n had t ses h aia ai rsue h is n t t t o s o be t k n over o ’ ae r’ rescued” The s n e ofi s c r t reached apeak with t e c l a s of . es neuiy h olpe Lehman B o h r . rtes S n e t a t m , t e a t o i i si many c u t i s have t k n e e more a g e s v s e s t i c ht ie h uhrte n onre ae vr grsie tp o s a i i et e f n n i ls t a i n L q i i yi f s o s have been i c e s d government tblz h i a c a i u t o . i u d t n u i n nrae, g a a t e have been o f r d f rv r o s forms ofp i a e d b , and p b i s c o fu d have urnes fee o aiu rvt et ulc etr n s been o f r d t support t e r c p t l z t o ofb n s While we a e silav r longway from fee o h eaiaiain a k . r tl e y r s o i gt u ti t e markets and between s a e o d r , t e e e f r s do seem t have e t r n rs n h t k h l e s h s fot o improved t e f n n i ls t a i n somewhat. There have been some s g s ofagrowing h iaca i uto in w l i g e s f rbanks t l n t each o h r f rp r o s l n e t j s a few d y . Not ilnns o o ed o t e o e i d o g r han u t as s r r s n l ,however, t e e unusual iiitvshave a s r i e concerns about “moral hazard” upiigy hs nta i e lo asd l o i gf r a d okn owr. Nor can i be judged t a t eworst oft e cii i behind u .While t e f n n i ls t a i n t ht h h rss s s h iaca iuto might t m o a i y appear b t e ,t e d t r o a i ni t e r a s d of t e g o a economy i eprrl e t r h e e i r t o n h el i e h l b l s becoming i c e s n l e i e t Household consumption h s weakened s a p y p r i u a l i nraigy vdn. a hrl, atclry n c u t i s where s v n r t s fl markedly under t ei f u n e ofe s c e i c n i i n . T is onre a i g a e el h nlec a y rdt o d t o s h tendency t retrenchment seems lkl t be e a e b t d both by f l i ga s tp i e and o ie y o xcrae aln s e r c s t g t n n c e i c n i i n . Investment spending might a s fl a a n t such abackground. i h e i g rdt o d t o s l o al g i s Evidendy, a t e economy s o s both household and c r o a e b n r p c e w l rs.T s h lw, o p r t a k u t i s i l ie his i p i s f r h rl s e t f n n i li s i u i n and p t n i l y silt g t rc e i c n i i n ,with m l e u t e o s s o iaca ntttos o e t a l tl i h e r d t o d t o s f r h rimpacts on both t e r a economy and a s tp i e . I sum, t e j i tp o e s of ute h el s e rcs n h on r c s d l v r g n i both t e r a and f n n i ls c o s might silhave a s g i i a tway t r n eeeaig n h el iaca e t r tl infcn o u. The s r o s e s of t e c r e t s t a i nevidendy r i e frtt e c a l n e of f r h rp l c eiuns h u r n iuto a s s is h h l e g ute oiy a t o s t h l manage t e cii.At t e same t m , t e e c r u s a c s a s p e e tu with a cin o e p h rss h ie h s i c m t n e lo r s n s p l t c lwindow ofopportunity f rreforms d s g e t h l minimize t e s v r t off t r oiia o eind o ep h eeiy uue cie.This opportunity should not be m s e , even i ar p t t o ofr c n e e t might b r ss isd f eeiin e e t v n s e thought u l k l f r some ti e t come. Th s fc,t a we do have t means t a s g e t d niey o m o i at h t ime ht u g s e reforms can be w l r s a c e and c r f l ythought o i a v n e Impetuous a t o , el eerhd aeul ut n d a c . cin p r i u a l i motivated by t e d s r t punish t o e h l t blame f rour c r e t t o b e , atclry f h eie o hs ed o o u r n ruls could e s l prove c u t r r d c i e Well c n i e e and c e i l r f r s v l a l i aiy onepoutv. osdrd rdbe e o m , aube n t e s l e , could a s p a a s g i i a tr l i o f e t n t e moral hazard a s c a e with t e hmevs l o l y infcn oe n f s t i g h soitd h measures currendy needed f rcii management. I ti fundamental s n e cii o rss n hs e s , rss management and cii p e rss r vention should not be s e a s b t t t s but complements. e n s usiue A 2. Improving the Framework A 2.1 Incentives I ti s c i n we d s u s s v r li c n i e m n hs e t o i c s e e a n e t v isalignments t a a e t p c l f r t e i d s r . They h t r yia o h nuty alwork i t e same d r c i n namely t e u d r s i a e t e t u p o a i i y of d f u t on t e l n h ieto, h y n e e t m t h re rbblt eal h debt i s r m n s being o f r d f r sl. We satwith t e s r c u i g of t a s c i n , t e t r ntuet f e e o ae tr h tutrn rnatos h n u n t t e r l ofr t n a e c e , and l s y t management compensation. o h oe aig gnis ad o The 2007 c e i cii evolved iiily around t e subprime mortgage market i t e US, which r d t rss ntal h n h e t i e l n i g programs, o t n government s o s r d t r e i g low wealth i d v d a s S n e nald e d n fe p n o e , agtn niiul. i c p r o a income of d b o s tended t be low a w l , l n i g i t e e markets was t p c l y esnl etr o s el e d n n h s yial based on a s t v l e a o e Mortgage Backed S c r t e (MBS) o f r d an e s ways t a c s se a u ln. euiis fee ay o ces c p t l market f n i g d s i e t e low incomes of t o e t k n out m r g g s Government aia udn, ept h hs aig otae. 8 sponsored programs ( a n e Mae and F e d e Mac) p a e an important r l i market Fni rdi lyd oe n development, both i terms ofi c e s n market volume, and i terms ofpushing debtor q a i y n nraig n ult t lower lvl. Using mortgage l n i g t enhance home ownership among lower income s r t o ees edn o taa was an e p i i o j c i e of US C n r s , and government sponsored programs were e g r t xlct b e t v oges ae o c omply. S c r t z t o of mortgage l a p r f l o , and more g n r l y of al t p s of consumer and euiiain o n otois eeal l ye commercial l n i g i i g n r l a u e u way t m b l z funding f r rti and commercial edn, s n eea sfl o oiie o e al ce i , and a such a v a l a t r a i e t bank d p s t . Furthermore, p o e l d s g e rdt s i b e lentv o eois rpry eind s c r t z t o programs can a d e s s c e s u l t e d s r c i n of l n e i c n i e t a might euiiain d r s ucsfly h e t u t o e d r netv s ht be expected t go along with o t i h l a sls C r f l borrower s l c i n continuous l a o u r g t o n ae. a e u eeto, on m n t r n , t m l r s r c u i g and i t r e t o i d f u t s t a i n — al t e e e e e t of o i o i g iey etutrn n e v n i n n e a l iutos l h s l m n s prudent and e f c e t banking can be upheld i s c r t z t o t a s c i n . However, i c n i e fiin n euiiain rnatos netv alignment r q i e s c r t z t o t a s c i n t obey s e i i t c n c l r l s of s r c u i g e urs euiiain rnatos o pcfc e h i a ue tutrn, which i e s n e put a cap on t e amount of r s t a can be shed on t e m r e . Th s rl, n sec h ik h t h a k t i ue however, was not r s e t d i s c r t z t o markets i r c n y a s This l d t t e o e - r c n e p c e n euiiain n e e t er. e o h vrpiig of low q a i yMBS a i s e S m l r q a i yproblems have begun t s r a e i o h r markets a ult t su. i i a u l t o ufc n t e s w l (.. c e i c r and c r l a s and c v l t c r o a e l a s with t e fl impact lkl sil e l eg r d t a d a on, o-ie o p r t o n ) h ul iey tl y tt be s e . e o en Why d d i v s o s not respond r t o a l by i c e s n t e r q i e r s premium, t e e y i netr ainly n r a i g h e u r d ik hrb demanding an adequate compensation f r t e i c e s i r s ? One reason i,i a d t o t t e o h n r a e n ik s n diin o h i c e s n a p t t f r r s p e a l n a r s v r u l y al markets a t e t m , was t e l c of n r a i g p e i e o i k r v i i g c o s ital l t h ie h ak i f rmation on t e t u r s p o e t e of t e u d r y n l a p r f l o , i p r i u a on t e no h r e ik r p r i s h n e l i g o n otois n atclr h whereabouts of t e frt l s p s t o . One h s t r c l t a up u t l t e e r y y a s of t e h is o s o i i n a o eal h t ni h al e r h c n u y perhaps u t l 2 0 , t e s a d r s c r t z t o p a t c e t i e r t i i g t e frtl s etr, n i 0 4 h t n a d e u i i a i n r c i e n a l d e a n n h is o s p s t o . When, where, and t what e t n r t n i n s a d r s i t e i d s r were c a g n , i oiin o xet eeto tnad n h nuty hnig s sill r e yunknown. But i i consensus o tl a g l ts pinion t a t e e s a d r s have been weakened o er ht h s t n a d v t m , and t a i v s o s were i n r n of t e e changes f ralong t m . When i v s o s began t ie ht netr g o a t hs o ie netr o f c s on t e p s i i i y of such c a g s prob ou h osblt hne, ably i mid-2007, i became e i e t t a t e p i e n t v d n ht h rcs of s r c u e instru e t could no l n e be based on o i i a l a s g e r t n s Combined tutrd mns ogr r g n l y s i n d aig. w t e more g n r l r t e t from imprudent r s t k n , t i c n r b t d t t e v r u l s u ith h e e a era i k a i g hs o t i u e o h i t a h t down ofmarkets f r s r c u e p o u t . o tutrd rdcs T r i e t e i s e of t e r l of r t n a e c e (RAs) i t e e m r e s I s o t RAs have his a s s h s u h oe aig gni s n h s a k t . n hr, p a e t e r l of t u t d g t k e e s ABS market development would not have been p s i l l y d h oe rse aeepr. osbe without RAs providi q a i y a s r n e about i h r n i complex f n n i l p oducts t ng u l t s u a c neety iaca r o u s p i t c t d i v s o s Most o s r e s b l e e t a RAs were t c n c l y w l equipped t n o h s i a e netr. b e v r e i v d ht ehial e l o perform ti t s , and i p r i u a t a t e RAs r p t t o a c p t lwould s r e a a s r n ln hs a k n atclr ht h e u a i n l aia e v s t o g ie ofdefence a a n tany compromising ofr t n s a d r s We have l a n d o h r i e gis aig tnad. ere tews. Frt t e s l - i c p i i g r l of r p t t o cannot a w y be r l e upon, even under normal is , h e f d s i l n n o e euain las eid market c n i i n . This i p r i u a l t u f r h g q a i y bonds and n t s mainly because t e odtos s atclry re o i h ult oe, h i p i d d f u t p o a i i i s a e s s a l I would need v r long p r o s t v r f saitcly m l e e a l r b b l t e r o ml. t ey e i d o e i y ttsial t a r t n s a d r s have been compromised, and i t e e o e remains u c e r how a e c e ht aig t n a d t hrfr nla gnis t a c eated would be punished by t em r e . ht h h akt Second, r t n s could be gamed, ie c i n smay have been a l t outsmart t e r t n s a d r s aig .. l e t be o h aig tnad. Consider r t n s a s g e t s r c u e p o u t , lk MBA t a c e . They a e based on a i g s i n d o t u t r d r d c s ie rnhs r e t m t n t e l s d s r b t o of t e u d r y n l a p r f l o These e t m t o s r l on s i a i g h os itiuin h n e l i g o n otoi. s i a i n ey models t a a e not f l y t a s a e t t t e i d s r . However, RAs provided “customer end” ht r ul r n p r n o h n u t y t o s t t e r c i n s which a l w d banks t run p e t s s of t e r new s c r t z t o p r f l o o l o h i let loe o r-et hi euiiain o t o i s b f r s b i t n t t e RA. As arsl,l a p r f l o could be desig i away t a j s met eoe umtig o h eut o n o t o i s ned n h t ut 9 t e ciei i c u e i t e r l v n model, but may have a d t o a r s p r a n n t ciei not h rtra n l d d n h e e a t d i i n l i k e t i i g o r tra i c u e i t e model. As an e ample, c n i e i f rmation on whether frtl s t a c e a e nldd n h x osdr no is o s r n h s r r t i e o n t Although we know t a t e s l of t e s - a l d frtl s p e e l w r expected eand r o. h t h a e h o c l e is o s i c o e s p r f l o r t r s t i i not an e p i i p r of t e r t n model c r e t yi u e and i t e e o e o t o i e u n , hs s xlct a t h a i g u r n l n s, s hrfr not r f e t d i t e a s g e r t n . Hence t e i s e can r i e is p o i s by s l i g frt l s e l c e n h s i n d aig h sur as t r f t e l n is o s p e e ,without d s l s n i t t e i v s o s Note t a t e gaming argument r f r t S r c u e ics i c o i g t o h netr. ht h ees o t u t r d Finance ( F products o l , not t c r o a e bonds i g n r l The reason i t a i S , t e S) ny o oprt n eea. s ht n F h t i o i g of p r f l o composition i f a i l ( a y low c s ) w i e i i i f a i l (ifcl, alrn otoi s e s b e es, o t , h l t s n e s b e dfiut e p n i e i t e u d r y n a s tpool i an e t r c r o a i n with isf x d a s t . x e s v ) f h n e l i g se s nie o p r t o t i e ses T i d r t n shopping by i s e s a s c n r b t d t ag a u l e o i n ofr t n s a d r s among h r , aig sur lo o t i u e o r d a r s o aig t n a d s r c u e f n n e p o u t . The n g t v e f c f l o s from t e r g t of i s e s t s p r s tutrd iac rdcs e a i e fet o l w h ih sur o u p e s r t n swhich i deems t be unwelcome ( n o i i e ) t e e y e e t n p e s r on t e a e c e . aig t o uslctd, h r b x r i g r s u e h gnis I c n i e misalignment i t e i d s r i not c nfine t i a p o r a e s c r t z t o t c n q e netv n h nuty s o d o n p r p i t euiiain e h i u s and i c n i e c n l c s a r t n a e c e . I a s e t i s compensation s s e s both f r t p n e t v o f i t t a i g g n i s t l o nal ytm, o o management and f r employees and l n management, p r i u a l i t a i g and sls The o ie atclry n r d n ae. problem i an i c n i e s r c u ewhich i d c s a f c s on s o t t r p o i a i i y and an g e t s n etv tutr nue ou h r - e m rftblt, elc of l n e - e m rss Examples a e bonus payments due a, o shordy atr s l i g a mortgage o g r t r ik. r t r fe, e l n l a , o f e f ri s i g s r c u e f n n e s crte.A t r a i e compensation s s e s t a l a o n r e s o s u n t u t r d i a c euiis l e n t v y t m ht ed t a fl a p e i t o ofr s and r t r w l s r t h t e payoffa l a tp r i l yover t e lf of t e o ul p r c a i n i k e u n il t e c h t es atal h ie h u d r y n b s n s , t e e y making i performance-dependent. The g n r l i e i t add a n e l i g uies h r b t eea da s o malus component t t e compensation scheme. o h Here i als ofc n r t measures s g e t d by t e above arg m n s s it o c e e ugse h uet. 1 F r tl s p e e . is os i c s The i s e should be o l g d ( y l w t inform t e market of any change i t e s z o sur b i e b a) o h n h ie r composition of h s s a e i t e frtl s p e e This should encourage him t make a b n i g i t k n h is o s i c . o idn commitment t r t i t e frtl s p e e On t e o h r hand, i t e i s e wants t sl t e frt o e a n h is o s i c . h te f h sur o el h is l s p i i n then t e market can respond i m d a e y t e e y a l w n p i e d f e e t a i n of os o t o , h m e i t l , h r b l o i g r c ifrnito i s e with and without r c u s . sus eore 2 Rtns . aig. R g l t r o e s g t a d e s s i c n i e problems i f u a e s Frt r t n performance (.. e u a o y v r i h d r s e netvs n o r r a . is, a i g ie t e long-term saitc r l t n iiilr t n s t subsequent d f u t ) should be monitored by t e h ttsis e a i g nta a i g o eals h r g l t r , a p y n high saitcl s a d r s R ting performance r l t v t outcomes s o euaos p l i g tt s i a t n a d . a eaie o h uld be p b i h d r g l r y (.. once a y a ) Second, t minimize r t n shopp n , u s l c t d u l s e e u a l eg, er. o aig i g noiie r t n s should be encouraged (.. by mandatory r t n d s l s r ) T i d t e us of s r c u e aig eg a i g icoue. h r , h e tutrd f n n e r t n si p b i r g l t o h s t be r c n i e e ( n dropped i n c s a y i o d r t i a c aig n u l c e u a i n a o eosdrd ad f eesr) n re o l m t t e p e s r on a e c e , eg i B s l I r g l t o , o i consumer p o e t o r g l t o . ii h r s u e g n i s .. n a e I e u a i n r n r t c i n euain F u t , a e c e should be encouraged t a j s t e rr t n methodology t i n v t o s i t e orh gnis o d u t hi a i g o noain n h f n n i l i d s r , eg t f a s r c u e f n n e r t n s t r v a i c n i e alignment and frt i a c a n u t y .. o l g t u t r d i a c a i g , o e e l n e t v is l s p e e r t n i n a p r of t e r t n i f r a i n Furthermore, r t n f e should be l n e os i c e e t o s a t h aig n o m t o . a i g es ikd t r t n performance ( i h r by l n i g i t d f u t saitc, o by l n i g i t i d v d a o aig ete i k n t o e a l ttsis r ikn t o niiul t a c e performance. I t e lte c s , a e c e might be o l g d t buy i t t e t a c e t e rnh n h at r a e g n i s bie o no h rnhs hy r t (ne f c t put t e rmoney where t e rmouth i) An annual r p r on r t n p a t c and ae i fet o hi hi s. eot aig rcie r t n competition by a c n r lo e s g tbody might h l both t monitor market q a i yand t aig eta v r i h ep o ult o draw a t n i n t outst n i g a a y i a u c r a n i s ofwhich i v s o s might be u aware. teto o a d n nltcl n e t i t e netr n 3 Compensation . 10 S n e t e compensation system i f u n e management b h v o r a s r n e r l a c on long ic h nlecs e a i u , t o g r eine term performance of investment s r t g e i r q i e i o d r t a h e e i c n i e a i n e t taeis s e u r d n r e o c i v n e t v l g m n . New compensation models maybe needed t a a l w s r k n aproper b l n e between long and h t l o tiig aac s o t term o i n a i n eg bonus and malus s s e s comparable t pension a n i i s We hr r e t t o , .. ytm, o nute. propose t a t e i c n i e components i management compensation be d s l s d on a r g l r ht h n e t v n icoe eua b s s As w l r t n a e c e ( n o h r infor a i n p o i e s l k a d t r ) should be ai. el aig g n i s a d t e m t o r v d r , ie u i o s encouraged t r p r a f r - e e m t i t a c p u e i c n i e alignment i management o eot imlvl e r c ht a t r s n e t v n compensation. 2.2 T ransparency The i s e of t a s a e c i c o e y r l t d t t e i e of i c n i e a i n e t Through t e su r n p r n y s lsl eae o h d a netv lgmn. h d s l s r of a p o r a e information market p r i i a t a e a s s e t make c r e ti f r n e icoue prpit atcpns r sitd o orc neecs o , f rex n o ample, p o e tr s and r t r , and market p i i gand lqiiy I c e s d t a s a e c r j c ik eun rcn iu d t . n r a e r n p r n y i t e e o e a key requirement f r improving market f n t o a i y This being si, one h s t s hrfr o ucinlt. ad a o keep i mind t a t e e a e c r a n i s i u i n , lk r t n a e c e , where some de r e of n h t h r r e t i n t t t o s ie a i g g n i s ge s c e y i r q i e f r them t perform t e r t s p o e l . This i why t a s a e c of r t n erc s eurd o o hi a k r p r y s rnprny aig p o e s s a d s i c from r t n performance, i not recommended, i or e t a o d a gaming r c s e , s itnt aig s n dr o vi oft e s s e . h ytm Turning t t e i t r b n l q i i y cii t a s a t d i t e fl of 2 0 , we s e opaqueness of o h n e - a k i u d t rss h t t r e n h al 07 e t u r s exposures a t r s v r l y a s of d t r o a i g c e i s a d r s a t e major reason f r r e ik fe e e a e r ee i r t n rdt t n a d s h o t e n a - n v r a l c of t u t among b n s I seems t a on t e l v l of bank a s t , even h eruiesl ak rs ak. t ht h ee ses e p r s i banks and r t n a e c e were no l n e a l t p o e l a s s t e c a a t r s i s xet n aig g n i s o g r b e o r p r y s e s h hrceitc (.. t e moments) of t e u d r y n c e i rs. One r a f r t e unprecedented d g e of eg h h n e l i g r d t ik e son o h ere opaqueness was once a a n t e r s n importance of s r c u e f n n e These f n n i l g i h iig t u t r d iac. iaca i s r m n s had l s r t d s r b t o s t a co l not be p o e l a s s e without a d t o a ntuet os ae itiuin ht u d rpry sesd diinl info m t o which was not i f c r a i y a a l b e i t e m r e . I p r i u a , one im rain n at e d l v ial n h a k t n atclr portant mi s n p e e of i sig ic nformation r l t d t how t e i c n i e alignment between o i i a o and eae o h netv rgntr u t m t borrower had changed d a a i a l a l n i g s a d r s worsened a t r2 0 . T i i an liae rmtcly s e d n t n ad fe 0 5 h s s example of a market where an i c e s d d g e of d s l s r seems l k l t improve market nrae ere icoue iey o q a i yg e d . ult r a y Turning t t e market lvl t e d v s a i g impact t a a r l t v l s a l segment of t e c e i o h ee, h e a t t n h t eaiey m l h rdt m r e , t e subprime housing m r e , had on f n n i l saiiy i t e US and i Europe i akt h akt i a c a tblt n h n s n t b e We s e one reason f r t e cii e c l t o i a high d gree of i t r o n c e n s oal. e o h rss s a a i n n e necnetdes between f n n i l i s i u i n t a had escaped f n n i l saiiy o e s g t While we a e iaca ntttos ht i a c a tblt v r i h . r d u t u t a t e e w l e e be powerful e r y warning s o b f l h t h r il v r al ystems i f n n i l m r e s an n iaca a k t , improved world-wide r s o e s g t might h l t g i e c n r l bank and bank s p r i i n ik v r i h e p o u d eta uevso atvte i t e f t r . We t e e o e e v s g t e development of a f n n i l r s map, which cii i s n h u u e hrfr niae h iaca ik would be r g l r y up a e , summarizing both t e exposures of major i t r a i n l f n n i l eual d t d h n e n t o a iaca i s i u i n and anomalous market developments t a might p e a e f t r d s u t o s Such a ntttos ht r s g uue irpin. r s map would a s compile infor a i n on t e shadow banking s s e , ie on S V , hedge ik lo mto h y t m .. Is f n s CDS i or e t note e r y on any t c o i changes i t e a l c t o of r s among ud, n dr o al etnc n h loain ik f n n i li s i u i n — something t a was m s i g ti t m around iaca ntttos ht i s n hs i e I h s t be s r s e t a t e methodology f r c n t u t n such a f n n i l r s map silneeds ta o tesd ht h o osrcig iaca ik tl t be de e o e . Furthermore, f r r g l r y updating t e information i t e r s map, an o vlpd o eual h n h ik i s i u i n with a e u t l q a i i d s a f h s t be a s g e , p s i l t e IMF o t e B S A nttto d q a e y u l f e tf a o sind o s b y h r h I. c o e y r l t d t s , which can be embedded i t e concept of a f n n i l r s map, i t e l s l e a e ak n h iaca ik s h c e t o ofan i t r a i n l c e i rgsrr Such i s i u i n e i ti almajor c u t i s but t e rain n e n t o a r d t eita. ntttos xs n l onre, hy do not y t a g e a e information on c o s b r e t a s c i n . We now know t a c o s b r e e grgt r s - o d r rnatos ht r s - o d r f n n i l l n s a e abundant, and need t be c n i e e when e a u t n t e s l e c of any iaca ik r o osdrd vlaig h ovny f n n i li s i u i n The c e i r g s r ri Germany i c l e cEwden%%entrale”, and i i c r e t y i a c a nttto. r d t eita n s ald c t s urnl managed by t e Bundesbank. Although, of c u s , no r a t m r g s e can be e p c e , a h ore el i e ei t r xetd r g l r y m t i of laiiis between banks and major c r o a e may h l t m i t i eual a r x iblte oprts ep o anan t a s a e c i i t r a i n l c r o a e f n n i g i c u i gi t r a k l n i g r n p r n y n nentoa o p r t iacn, n l d n n e b n edn. Here i als ofc n r t measures s g e t d by t e above argum n s s it o c e e ugse h et. 1 We propose t make i mandatory t a i s c r t z t o t a s c i n t e economic frt l s . o t ht n euiiain r n a t o s h is o s p s t o i d s r b d and isp t n i l a l c t o i t e market i t e t d a a bond c v n n . I oiin s ecie t oeta loain n h s rae s oeat t would t e e o e be d s l s d t t e m r e . R t n i n by t e o i i a o need not and sh hrfr icoe o h akt e e t o h rgntr ould not be mandatory, o l d s l s r i needed f r t e market t s r i o t t e e y a o d n n y icoue s o h o ot t u, h r b v i i g opaqueness of bank p r f l o rs. R t n a e c e and o h r information p o i e s (.. o t o i ik a i g g n i s te r v d r eg a d t r ) a e supposed t r p r r g l r y on c m l a c . Note t a t e a l c t o of frtl s uios r o e o t eual opine ht h loain is o s p e e among market p r i i a t h s remained a s c e t d t . ics atcpns a e r t o ae 2 Furthermore, and r i e a i g s c i n A 21 we propose t d s l s on a r g l r b s s t e . etrtn e t o ., o icoe eua ai h i c n i e components i management compensation, and t encourage r t n a e c e ( n netv n o aig g n i s a d o h r in t e formation p o i e s lk a d t r ) t r p r a f r - e e m t i t a c p u e i c n i e r v d r , ie u i o s o e o t i m l v l e r c h t a t r s n e t v a nment i management compensation. Once a a n mandatory r l s on management lig n gi, ue compensation, such a s l r c p o bonus lmt, a e expec t b c f r . Rather t a m cros aay a s r iis r ted o a k i e hn i managing compensation s s e s which i lkl t produce d s o t o s i t e economy, an ytm, s ie y o itrin n h improved approach t f n n i l r g l t o needs t overcome opaqueness on c r o a e o iaca e u a i n o oprt i c n i e s r c u e , a l w n t e market t p i e d f e e t a eaccord t i c n i e a i n e t n e t v tutrs l o i g h o rc-ifrnit ing o n e t v l g m n . 3 We s g e t an i t r a i n l y c o d n t d e f r t draw up a g o a f n n i l r s map t a . ugs nen t o a l o r i a e fot o l b l iaca ik ht c u d be updated on a r g l r b s s The map would attempt t i e t f b i d n s r s e a al ol e u a ai. o d n i y u l i g tess t l major c o s b r e f n n i l i s i u i n and i al major markets ( n l d n d r v t v s and r s - o d r iaca ntttos n l icuig eiaie markets f r c e i r s t a s e ) The d t i s of such a r s r p r i g system would t k t m t o r d t i k rnfr. eal ik e o t n ae i e o work o t p s i l by a t s f r e c n i t n ofmarket p r i i a t ,r g l t r and a a e i s u, o s b y ak oc ossig atcpns e u a o s cdmc. 4 E t e a a by-product of t e r s map, o a a s a d a o e iiitv, t e c e t o of a g o a . ihr s h ik r s t n - l n nt a i e h r a i n lbl c e i r g s e might be c n i e e . Such a r g s e would compile major i t r a k and rdt eitr osdrd eitr nebn c s o e - p c f c exposure d t t a l w i d v d a market p r i i a t , t p c l y t o e utmrseii aa o lo niiul a t c p n s yial h s i s i u i n t a a s d l v r t e raw d t , t l a n about major exposures of t e rc u t r a t e . ntttos h t l o e i e h aa o e r hi o n e p r i s While t e v l e of such information i a p e i t d almost u i e s l y on a n t o a lvl t e e i h au s prcae nvral a i n l ee, h r s nothing commensurate on an i t r a i n l lvl Evidendy, even t e b s r g s e w l not be n e n t o a ee. h e t e i t r il a l t pr b e o ovide a s r e about bank exp u e i r a t m . However, such a r g s e would sil uvy os r s n e l i e eitr tl c p u e t e l n e term t e d t a h s o y shows have o t n posted t e b g e t t r a t atr h ogr r n s ht itr fe h i g s het o f n n i lsaiiy i a c a tblt. A 2.3 Regulation and Supervision The cii h s shown t a t e e i t n r g l t r and s p r i o y system h s important weaknesses rss a ht h xsig euaoy uevsr a and ga s ( e 1) I p r i u a , s p r i o s s oul t i kmore s s e a i a l and understand t e p s e .. n a t c l r u e v s r h d h n ytmtcly h n c s i yt moderate t e i h r n p o c c i a i yoff n n i lm r e s The o j c i emust be t eest o h n e e t r-ylclt iaca a k t . betv o a o d t e b i d u ofe c s i e l v r g and t reduce t e system’ p o c c i a i y vi h ul-p xesv eeae o h s r-ylclt. Consequendy, • Gaps i t e s p r i o y system should be c o e , n h uevsr lsd 12 • C p t lrequirements should be t g t n d and aia ihee • The coop eration ofd f e e ta t o i i si v l e i s p r i i n should be improved. ifrn uhrte n o v d n u e v s o a) Gaps i t e s p r i o y system have been i e t f e i t e f l o i ga e s n h uevsr d n i i d n h o l w n ra: o f b l n e s e tat v t e ofbanks f - a a c h e ci i i s i v s m n s funds ( n l d n hedge fu d and f nds t a o e a e i s d broader f n n i l netet icuig ns u ht p r t nie iaca i s i u i n ,eg i s r n e companies) n t t t o s .. n u a c cei r t n a e c e rdt ai g g n i s drvtvs eiaie ofhr cnes fsoe etr The o j c i emust be t have a s p r i o y systemwithout any gaps ( e 21) However, t e betv o uevsr s e ... h n c s a ymeasures w l d f e depending on t e n t r oft e atvte.The f l o i gmeasures eesr il ifr h a u e h ci i i s olwn should be c n i e e : osdrd R g l t r should s p r i e f n n i li s i u i n on a f lyc n o i a e b s s (s f r s e i euaos u e v s iaca ntttos ul o s l d t d a i a o e e n n B s l I t al r ee t n ) t a o d t e emergence ofunsupervised r s exposure o t i e t e a e I o ag xet o v i h ik usd h b l n e s e t . This should h l t reduce r g l t r a b t a e a a c hes ep o e u a o y rirg. Investment funds o e a i gi s d b n s i s r n e companies o n n f n n i l c r o a e p r t n nie a k , n u a c r o-iaca oprts should be s p r i e compre e s v l . uevsd hniey The “ n i e t s p r i i n ofhedge fu d v at e rr g l t d c e i o s needs t be s r n t e e idrc” u e v s o n s i hi e u a e r d t r o teghnd by c n o i a i gt einformation a a l b e from d f e e tl n e s osldtn h vial ifrn edr. The atvte ofc e i r t n a e c e sho be monitored, i c u i g through t e ciiis r d t a i g g n i s uld nldn h implementation ofacode ofconduct ( e 21) s e ... The c e t o of ac n r l s d t a i gpl t o m f rd r v t v swould h l t monitor market rain etaie r d n a f r o eiaie ep o developments and reduce s t l m n rss e t e e t ik. Compliance ofo f h r - e t r with r l v n r g l t o s c uld be improved through an fsoecnes eeat euain o “i d r c ” approach i almajor f n n i lc n e swere t c o niet fl iaca e t r o o perat (comparison with FATF) i e n t e ro e s g t . hi v r ih. b) Capital requirements under B s l 1have notbeen s f i i n t avoid t e b i d u ofe c s i e ae ufcet o h ul-p xesv l v r g , and t i does not seem l kl t improve ( n e di may worsen) under B s l 2.A eeae hs iey o ide t ae . t g t n n along t e f l o i gl n s sho be c n i e e a t rt e end oft e c r e tcii: iheig h o l w n ie uld o s d r d fe h h u r n rss I t o u t o ofan a d t o a o e a ll v r g r t oo ,p r a s 20 (s s g e t d by t e S i s nrdcin d i i n l v r l e e a e ai f e h p , a ugse h ws a t o i i s i a d t o t t e proposed r s - e g t d r t o under B s l 2 uhrte) n d i i n o h i k w i h e ais ae . A d t o a c p t lrequirements f rS V , c n u t and o f b l n e s e t atvte u l s t e a e d i i n l aia o Is odis f - a a c h e ciiis n e s h y r flyc n o i a e . ul o s l d t d A d t o a c p t lrequirements f rl n i g t hedge fu d and l n i g t non-cooperative o f d i i n l aia o edn o ns edn o f s o ecnes h r etr. Allowance f rl q i i yr s s o iudt ik I a d t o , c p t lrequire n d i i n aia ments and p o i i n n r l s s ould be reviewed t make t e system ls r v s o i g ue h o h es p o c c i a .This could be done by a t v t n one oft e f l o i g s e s during p r o s ofh g r-ylcl ciaig h o l w n tp eid ih economic growth (iei 2004-07) o h g c e i g o t : lk n r i h rdt r w h o Reduction oft e o e a ll v r g rto h v r l e e a e ai. o Grossing up (u d r pla 2 oft e c p t lrequ r m n s g v n by pla 1 n e i lr ) h a i a ieet ie ilr . o I c e s i premiums f rd p s ti s r n e nrae n o e oi nuac. The a t v t o of such s e swould lkl b n f t from being “automatic”,acc r i g t a ciain tp iey e e i odn o p e d f n drl.The e f c ofa r - e i e ue f e t ccounting r l s ( a r v l ea c u t n ) on c p t lr q i e e t u e fi-au c o n i g aia e u r m n s s ould a s be reviewed t e t b i hwhether compensating s p r i o yr q i h lo o sals u e v s r e u rement might be s nee. edd c) Cooperation among t e d f e e ta t o i i s and b d e ,which a e d r c l o i d r c l h ifrn uhrte ois r iety r niety i v l e i t e s p r i i n of f n n i li s i u i n , should be improved. The f l o i g novd n h uevso i a c a ntttos olwn p s i i i i s should be c n i e e : osblte osdrd The information flow between n t o a s p r i o s must be improved. This i e s n i lt o t i ainl uevsr s seta o b a n acomplete p c u e of t e s t a i nofc o s b r e b n s bank holding companies, hedge f n s itr h iuto rs-odr ak, ud, and o h rinvestment f n s te ud. The c e t o of “g o a c l e e ofs p r i o s f rc o s b r e banks ( l n t e l n soft e rain l b l olgs u e v s r ” o r s - o d r a o g h ie h c l e e now c e t d i t e EU); ti would fcltt t e n c s a yinformation flow a alt m s olgs rae n h hs aiiae h e e s r t l ie but a s t e p o p c s ofqu c r g l t r a t o ( n l d n t e u e ofp b i f n s i n c s a y lo h r s e t i k euaoy cin icuig h s ulc ud, f eesr) d r n d f i u tt m s u i g ifcl i e . Gre t r c n i t n yi t e r g l t o ofd f e e t f n n i le t t e ( a k n , i s r n e a e o s s e c n h e u a i n i f r n i a c a niis b n i g n u a c , s c r t e )when conducting s m l rb s n s e . euiis iia uiess. Enhanced i t r c i n between i s i u i n with e p r e c i a s s i gm c o neato ntttos x e i n e n s e s n a r -pruden tial r s s ik ( e t a b n s I t r a i n l F n n i l I s i u i n ) and b d e i c a ofa s s i gmicro cnrl a k , n e n t o a i a c a ntttos o i s n h rge s e s n p u e t a r s s ( a i n lr g l t r ) An e f c i ee r ywarning system would need t r l on r d n i l ik n t o a e u a o s . fetv al o ey t e e p r i e ofboth groups ofi s i u i n . h xets ntttos A 2.4 International Institutions As f n n i lmarkets become more g o a i n t r ,i t r a i n li s i u i n should p a a s r n e iaca l b l n au e ne n t o a ntttos ly togr r l i cii p e e t o . However, we b l e e t a t e term “ o e n rss r v n i n eiv ht h Bretton Woods I ” could be e s l I aiy misunderstood i t i c n e t The c r e t cii was not caused by t e p e a l n “f o t n ” n hs o t x . u r n rss h rv i i g laig exchange r t s s e . R t e , u d r y n t e d t p o y l c l t were enhanced by t e e f r sof ae y t m a h r n e l i g r n s o rcciaiy h fot c u t i swith l r e t a e s r l s s t r ss a p e i t o oft e rexchange rt s A c r i g y onre a g r d u p u e o eit p r c a i n h i ae . c o d n l , s r n e s r e l a c over macro-economic p l c e ,exchange r t p l c e and g o a i b t o g r uvilne oiis ae oiis l b l m alances a ed s r b e r eial. A s r n e r l f ri t r a i n li s i u i n i important because al r e number ofi d v d a t o g r o e o n e n t o a ntttos s ag niiul c u t i s cannot c o d n t complex f n n i lmarket i s e i an inter g v r m n a w y onre oriae iaca sus n -oenetl a. However, i t r a i n l s a d r - e t n f r and i f r a b d e should broaden t e rmembership nentoa tnadstig oa noml ois hi t s r n t e t e rl g t m c . One oft e key q e t o s i ti c n e ti how t make t e F n n i l o t e g h n hi e i i a y h u s i n n hs o t x s o h iaca S a i i yForum ( S ) more l g t m t and more e f c i e tblt FF eiiae fetv. C i i preve t o i t e f t r w l a s r q i e amore r b s macro-economic p l c framework. rss n i n n h u u e il l o e u r out oiy For many y a s monetary and fsa p l c e were o e - x a s o a y i many c u t i s and t u er, i cl o i i s vrepninr n onre hs c n r b t d t bubbles and t e c r e t cii.The IMF, OECD and t e European Commission otiue o h u r n rss h s o improve t e rassessment of fsa p l c e . Currenti s r m n s t c l u a e c c i a l h uld hi icl o i i s n t u e t o a c l t ylcly a j s e budget b l n e a ei s f i i n , f re a p e C n r lbanks t a focused to narrowly on dutd a a c s r nufcet o x m l . e t a ht o i f a i nt r e i gand n g e t d t e r p d growth of ofmonetary and c e i a g e a e may have nlto a g t n elce h ai rdt g r g t s 14 missed e r ys g s oft e emergence ofbubbles i f n n i la s t and h u i g P l c l o e i gi al i n h n iaca ses osn. oiy osnn n downturns h s o t n been f s e t p l c t g t n n i u s i g . a fe a t r han o i y i h e i g n p w n s The International Monetary Fund (IMF) i t el a i gi t r a i n li s i u i nwith ag o a s h e d n n e n t o a nttto lbl membership t a s p r i e t ei t r a i n l f n n i ls s e . The IMF’ r l a an i t r a i n l h t u e v s s h n e n t o a iaca y t m s oe s nentoa “ watchdog” s hould be s r n t e e . T r l t st macro-economic i s e ,lk g o a imbalance t e g h n d his e a e o s u s ie l b l s and exchange r t s and t f n n i lm r e s To ti e d t e IMF should r - i e tiswork towards ae, o iaca a k t . hs n , h edrc t adeeper and more comprehensive a a y i of f n n i lmarket developments i t e f l o i gw y nlss iaca n h olwn a: A s r n e f c s on s i l v r between f n n i lmarkets and t e r a economy i isc u t y togr ou ploes iaca h el n t onr r p r s and t e semi-annualWorld Economic Outlook. eot h An assessment ofm c o prudential r s si isc ari k n t ountry r p r s and t e s mi-annual Global eot h e F n n i lS a i i yR p r s i a c a tblt e o t . F n n i lS c o Assessment Programs (FSAPs) should become mandatory f ralIMF members iaca e t r o l s a e and be conducted on ar g l rb ss tts e u a ai. Comprehensive d t on g o a f n n i lmarket developments (sap e r q i i e f rag o a r s aa l b l iaca a r - e u s t o l b l ik map, s e 21) should be c l e t d by t eBIS and a a y e by t e IMF. C o e c o eration e .. olce h nlsd h lsr op between IMF and BIS should be encouraged i ti r s e t n hs e p c . With adeeper and more comprehensive knowledge of f n n i lmarket developments and r s s (n iaca ik i a d t o t t e Fund’ t a i i n ls r n t on macro-economics), t e IMF could become ab t e diin o h s rdtoa t e g h h etr “e r y w r e ”. al-anr However, t e e a el m t t what can be r a o a l expected from t e IMF: h r r iis o esnby h The more competences and p l t c lpower t e IMF o t i s t e g e t r t ei t r s i p l t c l oiia h b a n , h r a e h n e e t n oiia c n r l over iswork w l b . There i an unavo d b e t a e o fbetween t e n u r l t oft e oto t il e s i a l rd-f h etaiy h work oft e IMF saf based on r l s and t ep l t c li t r s s ofiss a e o d r . h tf, ue, h oiia n e e t t hrhles The IMF does not have t e e p r i e t a ta s a d r s t e f r f n n i lm r e s This t s h s h x e t s o c s t n a d etr o ia c a a k t . ak a been c r i d out s c e s u l by committees ofn t o a e p r s meeting a t e BIS ( e be o ) are ucsfly ainl xet th se l w and e s w e e Double-work should be a o d d lehr. vie. The IMF does not appear t be s i a l t become ag o a s p r i o f r t e l r e t o utbe o l b l u e v s r o h ags i t r a i n lbanks s n e t a would i t r e ew n t o a s v r i n y i c u i g t e r g tof nentoa ic ht n e f r ith a i n l o e e g t , n l d n h ih P r i m n s t approve budgetary e p n i u e i c s ofs l e c problems (more s i a l alaet o xedtrs n ae o v n y utbe s l t o : c l e e of s p r i o s s e a o e . ouin o l g s u e v s r , e b v ) F n l y a s r n e r l f r t e IMF r q i e t a t evo i g s r c u e ( u t s ofismembers i k p ial, t o g r o e o h eurs ht h t n tutr q oa) t s et under permanent r v e . The growing weight ofemerging economies w l r q i e f r h rr d c i n eiw il e u r u t e e u t o s i t eweight ofadvanced economies i t e IMF. nh n h The Bank for International Settlements (BIS) h s ac e rmandate f rg o a f n n i lsaiiy a la o l b l i a c a tblt, h s more e p r i ei r g l t r and s p r i o yi s e t a any o h ri t r a i n li s i u i n was a xets n euaoy u e v s r sus h n t e n e n t o a nttto, more s c e s u t o h r i warning e r yabout t e c r e tcii and c l e t ahuge amount of u c s f l han t e s n al h u r n rss olcs f n n i lmarket d t .These s r n t s oft eBIS should be pr s r e and used e f c i e y iaca aa tegh h eevd fetvl. Most oft e measures proposed above ( n e 23)would have t be d s u s d and a r e i t e h u d r .. o icse ged n h framework of t eBIS o one ofisc m i t e . h r t omtes However, t e BIS s f e s from al c ofl g t m c because isc r decision-making b d e and h ufr ak eiiay t oe ois committees a e dominated by G-10 c u t i s For e a ple,Japan i t e on yAsian c r onre. xm sh l ountry i n t e key “ a e Committee on Banking S p r i i n China and Mexico a e t e o l h Bsl u e v s o ”; r h ny r p e e t t v s from emerging markets on t eBIS Board t a comprises 20 members. ersnaie h ht The Financial Stability Forum (FSF), c e t di 1999 t b i g t g t e Finance M n s r e , rae n o rn oehr iitis C n r lBanks and S p r i o s from G7 c u t i s h s become t e key body t c o d n t and eta uevsr onre, a h o oriae 15 a v c t r g l t r and s p r i o yr f r s I h s worked w l f r t e G7 but a s s f e s from a d o a e euaoy uevsr eom. t a el o h lo ufr l c ofl g t m c g o a l a on y av r s a lnumber ofnon-G7 f n n i lmarket c n e s a t n a ak eiiay lbly s l e y ml iaca etr ted s o s r e s No l r e emerging economy i r p e e t di t e FSF. bevr. ag s ersne n h A key q e t o w l be how t use t e e p r i e oft e FSF e f c i e ya t e g o a lvl We b l e e u s i n il o h xets h f e t v l t h l b l ee. eiv t a t e FSF should continue t be anchored a t eBIS (where c r e t y t e S c e a i toft e FSF ht h o th u r n l h ertra h i l c t d but t a t e l n s between t e FSF and t e IMF should be s r n t e e . A merger oft e s oae) ht h ik h h teghnd h FSF wi h t e IMF a p a s n i h r f a i l nor efcet t h p e r e t e esbe fiin. However, ways t s r n t e t e l g t m c oft e FSF, without l o i gise f c i e e s need t be o t e g h n h eiiay h o s n t fetvns, o cniee. osdrd The membership of t e FSF could e o v i l n with t e f t r composition oft e G7/8. The G7 h v l e n ie h uue h h s p a e t e p i c p l s e r n r l f rt eg o a f n n i lsystem f rt r e d c d s T is i a l y d h r n i a t e i g o e o h l b l iaca o he eae. h s changing and t e meeting oft e G20 i Washington on 1 November 2008 i a c e ri d c t o of h h n 5 s la n i a i n ta. I t e G7/8 were e l r e by t e l r e temerging economies, such a C i a I d a and B a i , ht f h nagd h ags s h n , ni rsl ti s o have automatic consequences a t e “ hs h uld t h working l v l such a t e FSF, but a s t e B s l e e ”, s h lo h a e Committee on Banking R g l t o . euain The European dimension. The c r e t f n n i lcii h s a s h g l g t d t eweaknesses i t e u r n i a c a rss a l o i h i h e h n h EU’ s p r i o y framework, which remains fragmented a ongn t o a l n sd s i e t e s b t n i l s uevsr l a i n l ie e p t h u s a t a p o r s ac i v d i f n n i lmarket i t g a i nover t e ls decade and t ei c e s d importance r g e s h e e n iaca nerto h at h nrae ofc o s b r e ette.A reform of t e European s p r i o y framework i e s n i lt c e t a r s - o d r ni i s h uevsr s seta o r a e t u yi t g a e f n n i lmarket i t e EU and t p o e t t e S n l Market and t e Euro. rl n e r t d i a c a n h o rt c h ige h Although t e e i s e a e u l k l t be d s u s dby t e G-20 on 15 November, t e European h s sus r niey o icse h h e p r e c can be u e u i r v a i g t e problems and ptal i c e t n amore e f c e t ls ciixeine sfl n eeln h ifls n r a i g f i i n , e s rss prone r g l t r s s e . For example, w i e i a p a s e s n i l over t m , t e t b i h aS n l euaoy ytm h l t p e r seta, ie o sals ige Re u a o f r t el r e tc o s b r e banks i t e EU, ti seems t be i p s i l a t e g o a g l t r o h ags r s - o d r n h hs o m o s b e t h lbl l v lbecause ofp t n i lbudgetary i p i a i n and u esolved a c u t b l t i s e .The EU h s a ee oeta mlctos nr c o n a i i y sus a 5 - e rh s o yoft a s e r n s v r i n y t t eEuropean l v li n c s a y f rt e good 0ya itr rnfrig o e e g t o h ee f e e s r o h f n t o i goft e S n l M et. This w l make i much e s e ( o e s ) f r t e EU t make ucinn h i g e ark il t air n t ay o h o p o r s i alt e a e s mentioned above (. t 2 3 r l t d t t a s a e c ,i c n i e ,r g l t o r g e s n l h ra 21 o . ) e a e o r n p r n y n e t v s e u a i n and s p r i i n The EU should t e e o e t k t el a i implementing t e e p o o a s uevso. hrfr ae h ed n hs rpsl. A 3. Concluding remarks A number ofour recommendations a emore o ls s r i h f r a d and i l n with t o e by t e r r es t a g t o w r n ie hs h FSF, o h ri s i u i n ,o i d v d a a t o s On some i s e more information and r s a c i t e ntttos r n i i u l u h r . sus eerh s n e e . T i one reason t warn a a n tpremature c n l s o s and even more a a n th s y e d d his s o gis ocuin gis a t d c s o s The elements ofanew and b t e f n n i la c i e t r must i t r c i ap s t v way and eiin. e t r iaca r h t c u e neat n oiie support each o h r This cannot be a h e e by q i k and unavoidably s o t s g t d a t o s I i te. civd uc h r - i h e cin. t s a s important t a t e cii management —i c e s n l with t e d r t o and dimension of lo h t h rss nraigy h uain measures- t k s i t account t eimpact on t e f t r development of f n n i lm r e s T r f r ae no h h uue i a c a a k t . his e e s not o l t e i s r t g e f r s a ei t r e t o s i banks ec,but a s t t e c e t o f ra sa l , n y o xt taeis o tt n e v n i n n t. l o o h r a i n o tbe n n i f a i n r environment. o-nltoay P o o a s f r s r n t e i g t e f n n i l a c i e t r a e b s c l y focused on p o i i g b t e r l s r p s l o t e g h n n h iaca r h t c u e r aial r v d n e t r ue f r p i a e a t r . This i v r i p r a t but not enough. As t e a a y i of t e u d r y n c u e o r v t cos s ey motn, h nlss h nelig ass shows, t e cii would not have g i e such adimension without amacroeconomic environment of h rss and massi l q i i y and p r i t n low i t r s rts As a consequence sound macro p l c e and ve i u d t esset n e e t ae. oiis prudent r l s f ri d v d a a t r have t go hand i h n . ue o n i i u l c o s o n ad 16 17