G7 leaders endorse supervisory reform agenda

G7 finance leaders endorsed a broad reform agenda for the financial sector in the wake of the subprime crisis on Friday that called on banks to improve stress-testing and fortify access to funding in times of trouble.
Finance ministers and central bankers from the G7 rich nations endorsed a top-level report - expected to set the agenda for regulatory improvements through next year - that appeared to spare hedge funds and focus instead on banks, complex financial instruments and credit ratings agencies.
"We expect market participants to address many of the shortcomings that were exposed by recent events," the G7 officials said in a communiqué, increasing the pressure on credit ratings agencies and banks to remedy some of the root causes of the crisis.
The report was done by the Financial Stability Forum, a group of central banks, regulators and international bodies like the International Monetary Fund, which is expected to propose concrete measures in April.
The FSF paper was not meant to propose concrete solutions but provide a preliminary analysis to allow regulators to understand how stresses in a relatively small part of the US mortgage market ballooned into a global financial crisis.
The FSF, a crisis-prevention group, also called for quick implementation of the latest safety rules for global banks called Basel II, which aims to reward safe practices and punish risky ones with hefty capital charges, sources familiar with the report told Reuters.
But hedge funds, often criticised for murky dealings, seem so far to have escaped regulators' wrath as preliminary analyses of the credit crunch show they did not play a big role.
European Central Bank Executive Board member Juergen Stark, speaking at an event alongside the G7 meetings, said hedge funds were not to blame for the financial market crisis but that they needed to operate more in the open. Stark said more supervision of hedge funds was not feasible but that regulators could do more to oversee the financial firms that do business with hedge funds.
"What can be done ... is to better regulate or better supervise those institutions that provide the credit lines to hedge funds," he said at a conference during the G7 meeting of finance ministers and central bankers.
The FSF report and Stark's comments come as G7 central bankers and finance authorities debate ways to fortify safeguards within the global financial system following August's market meltdown in the wake of the US subprime lending crisis.