German Finance Minister Peer Steinbrueck has called for a determined approach by the Group of Seven (G7) industrialised countries to the turbulence in global financial markets, ahead of a meeting of G7 finance ministers and central bank heads in Tokyo on Saturday.
In a letter addressed to US Federal Reserve Chairman Ben Bernanke and made available to Deutsche Presse-Agentur dpa Friday, Steinbrueck highlighted three areas: capital standards for financial companies, liquidity management standards and financial market transparency. He called for the International Monetary Fund to "refocus efforts on global financial market stability and ... develop an early warning system."
The German finance minister said that while he wanted to avoid any "premature reaction," the Tokyo meeting "should clearly show our determination to address the situation." He described the prolonged turbulence on global markets as "triggered by the subprime crisis in the United States."
Although prompt action from central banks had eased immediate problems, further action was necessary, as the "full impact" on the financial sector was not yet clear, Steinbrueck said. Regarding improving capital standards for financial market players, he called for the Basel II Accord, published in 2004, to be "fully implemented as soon as possible in all our constituencies."
While the European Union has adopted the accord, the various financial agencies in the US have yet to do so. On the problem of risk transfer through structured financial products, such as the collateralized debt obligations at the centre of the subprime crisis, Steinbrueck noted that while this led to more efficient allocation of risk, the risks did not disappear and were often shifted to unregulated segments of the market.
In reference to the drying up of liquidity in the banking sector that led central banks to flood the overnight market with large sums repeatedly last year, Steinbrueck said banks needed better to assess their own needs and those of their investment vehicles. He urged the Basel Committee on Banking Supervision to speed up its work in this regard.
Steinbrueck renewed his demand for financial market transparency, saying there was a need for standards in the way ratings agencies operated, in particular to counter potential conflicts of interest in their various functions.
But he welcomed recent proposals from the agencies as a "welcome first step." In order to improve transparency, banks and other financial market players should include on their balance sheets the activities they currently conducted off-balance sheet, Steinbrueck said
Germany tried, and failed in the face of opposition from the US and Britain, to place the issues of financial market transparency and increased regulation of the sector on the agenda of the Group of Eight (G8) at the Heiligendamm summit in June. Since the subprime crisis erupted later that month, there has been increased global support for the German position.
British Prime Minister Gordon Brown called a meeting of EUleaders, including German Chancellor Angela Merkel and French President Nicolas Sarkozy, on January 29 to discuss similar issues ahead of the Tokyo G7 meeting. In a joint communique, the leaders called for greater transparency and an "early warning system" to meet the challenge of future shocks to the world economy.
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