Financial Stability Forum holds its sixth meeting

The Financial Stability Forum (FSF), chaired by Andrew Crockett, General Manager, Bank for International Settlements, held its sixth meeting on 6-7 September 2001 in London.

The FSF reviewed how key financial systems and markets are responding to the world economic slowdown. Members generally considered that most major markets and financial institutions, which had earlier built up strong financial positions, have absorbed well the financial strains associated with the slowdown. In addition, many of the efforts in recent years to strengthen the international financial system are helping to mitigate contagion effects. Nevertheless, the interaction of slower economic growth and possible financial vulnerabilities called for vigilance, especially if slow growth persists, as pressures tend to build over time. Members agreed that continued intense supervisory oversight and co-operation will be important.

The FSF reviewed the actions taken so far to address the concerns raised in the March 2000 FSF Report on Offshore Financial Centres (OFCs). There are signs of progress but more is required. FSF members re-iterated the importance of OFCs disclosing assessment results and their plans for addressing areas that need improvement. Such disclosures provide a useful means for OFCs to demonstrate their commitment to and progress towards meeting international standards, and help facilitate the timely provision of technical assistance.

The FSF encourages further efforts by OFCs to improve their supervisory and co-operation practices, including participation in the IMF assessment program, and will continue to monitor progress closely. FSF members encouraged the IMF to complete its assessment program as soon as possible. It called on its members to strengthen the provision of assistance to promote further progress by OFCs in implementing standards. The FSF also welcomed the proposal of the Basel Committee on Banking Supervision to set up a contact group with offshore supervisors. The FSF will review these issues in March 2002.

The FSF looked forward to the review scheduled for March 2002 that will consider how far the implementation of the FSF's March 2000 recommendations have been effective in addressing the concerns relating to Highly Leveraged Institutions. It agreed that the background work, which should take into account changes in market circumstances, for undertaking this review should start promptly.

The FSF discussed progress in providing incentives to foster the implementation of standards, drawing on a report of the Working Group, chaired by Axel Nawrath, Director-General, the Federal Finance Ministry of Germany. While progress is being made, the FSF encouraged market practitioners to take further account of a jurisdiction's observance of standards in their investment and lending decisions. Technical assistance is needed to support implementation effectively and efficiently.

The FSF Working Group headed by Jean Pierre Sabourin, President of the Canada Deposit Insurance Corporation, which had been asked to develop guidance for the benefit of countries establishing or reforming a deposit insurance system, submitted its final report to the FSF. The FSF welcomed the development of such guidance, noting that it had drawn on an extensive consultative process and would be adaptable to a broad range of country circumstances, settings and structures. FSF members considered that it would be particularly useful when moving from a situation where there may be an implicit or blanket guarantee to a system of explicit limited coverage.

The FSF welcomed the work of the Joint Forum in comparing approaches to risk management and capital regulation across the banking, insurance and securities sectors. FSF members highlighted a number of potential issues related to the increased use of mechanisms for risk transfer, including across financial sectors, and looked forward to the conclusions from the comprehensive work set in train by members to explore further the supervisory and systemic implications of these financial market innovations. It will return to these issues at the next meeting.

The FSF also:

• welcomed the work of the Joint Forum in comparing the three sets of Core Principles for effective banking and insurance supervision and securities regulation, which should help facilitate countries' implementing these Principles by clarifying their similarities and differences and ensuring a coherent framework, as appropriate.

• considered developments and issues in e-finance - notably the issue of financial related top level domains - drawing on a report of its Contact Group on E-Finance, headed by John D. Hawke, US Comptroller of the Currency.

• welcomed the work set in train by the Basel Committee on Banking Supervision and its Core Principles Liaison Group to develop guidance on dealing with weak banks. There is a strong demand for such guidance, not least from EMEs and IFIs.The guidance will aim to provide practical advice on identifying bank problems early and methods to deal with them. The FSF looked forward to the progress made in developing such guidance at its next meeting.

• discussed a range of other international financial issues, including those relating to accounting and provisioning for financial institutions, market dynamics, and large and complex financial institutions.

The next meeting of the FSF is scheduled to be held in Hong Kong SAR in March 2002.

The FSF was established in February 1999 to promote international financial stability through enhanced information exchange and international co-operation in financial market supervision and surveillance. It brings together on a regular basis national authorities responsible for financial stability in significant international financial centres, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSF is chaired by Andrew Crockett, General Manager of the Bank for International Settlements, in a personal capacity.

For further information on the FSF, its membership and its activities, please visit the FSF website at www.fsforum.org.

The full press release, including the executive summaries of the two working group reports, is available on the FSF website.