Financial Stability Forum Recommends Actions to Enhance Market and Institutional Resilience

12 April 2008

The Financial Stability Forum (FSF) today presented to the G7 Finance Ministers and central bank Governors a report making recommendations for enhancing the resilience of markets and financial institutions. The recommended actions are in five areas:

The full report is available on the website of the FSF A summary of the recommendations is attached.

Public sector and private sector initiatives are underway in these areas. The FSF will facilitate coordination of these initiatives and oversee their timely implementation, thus preserving the advantages of integrated global financial markets and a level playing field across countries. To restore confidence in the soundness of markets and institutions, it is essential that steps are taken now to enhance the resilience of the global system. At the same time, the FSF recognises the strains under which the financial system is currently operating and will pursue implementation in a way that avoids exacerbating stress in the short term. The FSF will report on progress in June followed by a fuller follow-up report in September. The FSF will continue to closely monitor implementation thereafter.

Notes to editors

In October 2007, the G7 Finance Ministers and central bank Governors asked the FSF to undertake an analysis of the causes and weaknesses that have produced the turmoil and to set out recommendations for increasing the resilience of markets and institutions going forward and to report in April 2008.

The findings and recommendations in this report are the product of an intensive collaborative effort of the main international bodies and national authorities in key financial centres. They draw on a large body of coordinated work, comprising that of the Basel Committee on Banking Supervision (BCBS), the International Organization of Securities Commissions (IOSCO), the International Association of Insurance Supervisors (IAIS), the Joint Forum, the International Accounting Standards Board (IASB), the Committee on Payment and Settlement Systems (CPSS), the Committee on the Global Financial System (CGFS), the International Monetary Fund (IMF), the Bank for International Settlements (BIS) and national authorities in key financial centres. Insights have been gained, as well, from private sector market participants.

The FSF brings together 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. It was established by the G7 Finance Ministers and central bank Governors in 1999 to promote international financial stability through enhanced information exchange and international cooperation in financial market supervision and surveillance. The FSF is chaired by Mario Draghi, Governor of the Bank of Italy. The FSF's Secretariat is based at the Bank for International Settlements in Basel, Switzerland.

For further information on the FSF, its membership and other publications, visit the FSF website at

For the preliminary and interim versions of this report published in October 2007 and February 2008, visit the FSF website at and



FSF Report on Enhancing Market and Institutional Resilience
Summary of the recommendations1

II. Strengthened prudential oversight of capital, liquidity and risk management

Basel II provides the appropriate framework for supervisors to incentivise and monitor the process by banks and securities firms to address the weaknesses that the turmoil has revealed. Its implementation should proceed with priority. But, to improve resilience, elements of Basel II need to be strengthened. A fundamental review of supervisory liquidity guidelines is also taking place.

It is especially important to strengthen the prudential framework for securitisation and off-balance sheet activities. Initiatives are also required to make the operational infrastructure for over-the-counter (OTC) derivatives more robust.

1. Capital requirements

Supervisors, working through the Basel Committee, will enhance the Basel II capital treatment of structured credit and off-balance sheet activities.

2. Liquidity Management

The turmoil demonstrated the central importance that effective liquidity risk management practices and high liquidity buffers play in maintaining institutional and systemic resilience in the face of shocks.

3. Supervisory oversight of risk management, including of off-balance sheet entities

Firms' boards and senior management must strengthen risk management practices according to the lessons they have learned from the turmoil. Supervisors for their part will act to monitor the progress of banks and securities firms in strengthening risk management and capital planning practices.

The Basel Committee will issue further guidance for supervisory review over the course of 2008 and 2009 in a number of areas, as described below.

Individual jurisdictions will also issue strengthened guidance on these issues.

4. Operational infrastructure for OTC derivatives

Market participants should act promptly to ensure that the settlement, legal and operational infrastructure underlying OTC derivatives markets is sound.

III. Enhancing transparency and valuatio n

This period of market turmoil and illiquidity has highlighted the importance to market confidence of reliable valuations and useful disclosures of the risks associated with structured credit products and off-balance sheet entities.

1. Risk disclosure by market participants

Enhanced disclosures by financial firms of more meaningful and consistent quantitative and qualitative information about risk exposures, valuations, off-balance sheet entities and related policies are important to restore market confidence.

2. Accounting and disclosure standards for off-balance sheet vehicles

The build-up and subsequent revelation of significant off-balance sheet exposures has highlighted the need for clarity about the treatment of off-balance sheet entities and about the risks they pose to financial institutions.

3. Valuation

Potential weaknesses in valuation practices and disclosures, and the difficulties associated with fair valuation in circumstances in which markets become unavailable, have become apparent from the turmoil. International standard setters should enhance accounting, disclosure and audit guidance for valuations. Firms' valuation processes and related supervisory guidance should be enhanced. To address these issues:

4. Transparency in securitisation processes and markets

Market practices regarding initial and ongoing disclosures relating to structured products, both in public and private markets, will need to improve in the light of recent events. Securities market regulators will work with market participants to this end. IOSCO will assess the progress made by end-2008.

IV. Changes in the role and uses of credit ratings

Credit rating agencies (CRAs) play an important role in evaluating and disseminating information on structured credit products, and many investors have relied heavily on their ratings opinions. Poor credit assessments by CRAs contributed both to the build-up to and the unfolding of recent events. CRAs have undertaken a series of actions to draw lessons for their internal governance and operational practices. The steps are welcome but more is needed.

1. Quality of the rating process

CRAs should improve the quality of the rating process and manage conflicts of interest in rating structured products. To this end:

2. Differentiated ratings and expanded information on structured products

Structured products have different credit risk properties from traditional corporate debt ratings.

3. CRA assessment of underlying data quality

CRAs should enhance their review of the quality of the data input and of the due diligence performed on underlying assets by originators, arrangers and issuers involved in structured products. CRAs should:

4. Use of ratings by investors and regulators

Enhanced disclosure by CRAs is useful only if investors make appropriate use of the information for their due diligence and risk management. Investors should address their over-reliance on ratings.

Credit ratings are referred to in various regulatory and supervisory frameworks both at the international and at the national level.

V. Strengthening authorities' responsiveness to risk

Some of the weaknesses that have come to light were known or suspected within the community of financial authorities before the turmoil began. Much work was underway at international levels that - if already implemented - might have tempered the scale of the problems experienced. However, international processes for agreeing and implementing regulatory and supervisory responses have in some cases been too slow given the pace of innovation in financial markets.

1. Translating risk analysis into action

Supervisors, regulators and central banks - individually and collectively - will take additional steps to more effectively translate their risk analysis into actions that mitigate those risks.

2. Improving information exchange and cooperation among authorities

Authorities' exchange of information and cooperation in the development of good practices will be improved at national and international levels.

3. Enhancing international bodies' policy work

International bodies will enhance the speed, prioritisation and coordination of their policy development work.

VI. Robust arrangements for dealing with stress in the financial system

1. Central bank operations

Central bank operational frameworks should be sufficiently flexible in terms of potential frequency and maturity of operations, available instruments, and the range of counterparties and collateral, to deal with extraordinary situations. Overall, central banks' responses to the liquidity tensions caused by the financial market turmoil have been reasonably effective at relieving pressures in interbank funding markets. They could not, and were not intended to, address the underlying causes of the problems, which lay well beyond the scope of central banks' reserve-providing operations. Nevertheless, the experience offers some lessons that could lead in some cases to a revision of central bank operational objectives and policy instruments.

2. Arrangements for dealing with weak banks

National arrangements for dealing with weak banks have been tested by recent events and are the subject of review in some countries. The nature of the turmoil, the effects of which have been felt in many countries and in many different types of institutions, has emphasised the need to continue to work on crisis cooperation.


1 This is an informal summary; the full text of the complete set of recommendations is in the report. For ease of reference, the numbering system in this summary follows that of the chapters of the report. Chapter I of the report does not contain recommendations, and hence this summary starts at II.
2 In its report to the FSF, the Senior Supervisors Group analysed year-end 2007 disclosures by a sample of large internationally-oriented banks and securities firms. The report “Leading-Practice Disclosures for Selected Exposures”, April 2008, can be obtained at the following website: