The Financial Stability Forum (FSF), chaired by Andrew Crockett, General Manager, Bank for International Settlements, met on 3-4 September in Toronto. Members focused on a review of potential vulnerabilities in the international financial system. Emphasis was also given to:
Vulnerabilities in the international financial system
The FSF reviewed sources of potential vulnerabilities in the international financial system. Growth prospects seem somewhat weaker now than at the previous FSF meeting in March and downside risks have increased. However, going forward, moderate growth in major industrial countries was still seen as the most likely scenario.
Risk premia have risen since March. Some special factors have affected individual financial institutions. One consequence to which members drew particular attention is that the process of bank consolidation and restructuring that is under way in some countries will be more important in these circumstances. The experience of the financial sector overall supports the benefits of the considerable investments in risk management that had previously been made.
Risk premia and access to international financial markets for some emerging market economies are other elements of concern. Members reviewed the risks posed by these developments and possible measures to mitigate them.
Members agreed that the current environment and the potential for increased risk aversion call for enhanced vigilance and supervisory cooperation.
Addressing weaknesses in market foundations
The erosion of confidence in the wake of misleading financial statements and the recent series of large corporate failures has had serious and widespread repercussions on financial markets.
The FSF reviewed recent initiatives by market participants, national authorities and international standard-setters and organisations to restore market integrity and stability. Progress on these initiatives must be sustained - an area where the FSF can usefully provide encouragement. Given the international dimensions of the problems and their remedies, FSF members also underscored the importance of international and cross-sectoral consultations to ensure that these efforts are based on high level principles that are coherent across countries. 1
The FSF will report to the G-7 Finance Ministers and Governors later in September, underscoring the importance of implementation of sound market practices based on the principles that have been agreed. It will continue to monitor initiatives and, in part through its outreach activities, promote and help to coordinate reform efforts by national authorities and international standard setters in all these areas. It will focus attention on issues of coherence and opportunities to increase the efficiency, integrity and stability of financial markets. At its next meeting in March 2003, it will review again progress made and issues outstanding.
Improving transparency in the reinsurance industry
The FSF reviewed a number of concerns related to the reinsurance industry. It noted that the reinsurance industry had performed well in the face of recent shocks. However, the opaqueness of the reinsurance market and of public disclosures makes it difficult, if problems in the reinsurance industry were to arise, to assess the potential impact on the insurance sector as a whole and on financial stability more generally. It was also pointed out that some of these issues are also relevant to other parts of the insurance industry.
Members call for efforts at the national and the international level to produce data and reporting on the global reinsurance market. At the same time individual reinsurance and insurance firms should expand the frequency and enhance the quantitative and qualitative content of their public disclosures. These efforts should begin speedily. The FSF lends its full support to the work of the IAIS and others to improve industry disclosures and to develop an efficient global framework for reinsurance supervision, which could benefit reinsurers, primary insurers and policyholders, and therefore economies at large.
Offshore financial centres
The FSF re-emphasised the importance of progress by offshore financial centres (OFCs) in bringing their supervisory, regulatory, information sharing and cooperation practices up to international standards. The FSF welcomes the acceleration of the IMF's assessment program, and reiterates its expectation that all OFCs should have completed and published by 2003 assessments of their observance of international standards, along with action plans to address gaps.
In this context, members:
The FSF recognised that resource limitations can be a constraint in the implementation of standards and calls upon its members to strengthen the provision of technical assistance to promote further progress by OFCs.
The FSF will assess the overall effectiveness of its OFC initiative in 2003.
The FSF also:
The next meeting of the FSF will be held in Berlin on 24/25 March 2003.
Notes
1 In 2001, the FSF highlighted 12 widely agreed standards that underlie well functioning and stable financial markets. These standards cover broad areas such as macro-economic policy, market foundations and financial regulation and supervision. Four of these 12 essential standards - concerning corporate governance, accounting, auditing and securities regulation - are central to current reform efforts to increase investor confidence in equity markets: (see http://www.fsforum.org/standards).
2 Dublin (Ireland) participated in the pilot phase of the FSAP. Assessments conducted during the pilot phase cannot be published under IMF and World Bank policy.
For further information on the FSF, its membership and its activities, visit the FSF website at www.fsforum.org.