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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




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