The Group of 30 countries on Thursday called for changes in international financial regulation to help avoid future meltdowns, but its recommendations were vague and non-binding. In findings that made no reference to the issue of executive compensation, the group of bankers and policy-makers indicated that big firms that pose a risk to the entire system should be subject to particularly close scrutiny.
The global economy has been reeling from a financial crisis that began with a popping US housing bubble and has since infected the entire financial system, shaking confidence and breeding mistrust. The G30 report said countries should avoid having multiple regulators working at cross-purposes, a complaint that has been widely made of the US supervisory system.
Taking aim at the process of securitisation, the report suggests that financial firms should not be allowed to repackage opaque debt instruments and sell them without holding any exposure. "Participation in packaging and sale of collective debt instruments should require the retention of a meaningful part of the credit risk," the report said in making a recommendation that was not new.
Paul Volcker, a former Federal Reserve Chairman and currently an informal advisor to President-elect Barack Obama, chairs the G30's steering committee, and was charged with delivering the findings on Thursday. Despite the fraud scandal surrounding hedge fund manager Bernard Madoff, who is accused of having stolen billions of dollars in a high-finance pyramid scheme, the G30 stopped short of calling for regulation of hedge funds.
It did suggest, however, that regulators should have the authority to establish "appropriate standards for capital, liquidity and risk management" for "private pools of capital" that are large enough to threaten the entire system. The G30 findings also appeared to take a swipe at the widely criticised model of government sponsored enterprises in the US mortgage sector.
"Hybrids of private ownership with government sponsorship should be avoided," the group said. The report urged rating agencies to change the way they receive compensation. At the moment, the agencies are paid by the firms whom they are rating. But again the G30 aimed low: "Regulators should encourage the development of payment models that improve the alignment of incentives.
In an apparent swipe at the Federal Reserve, which has indicated a willingness to lend against risky assets such as real estate bonds, the G30 indicated such loans should be avoided. "Central bank liquidity support operations should be limited to forms that do not entail lending against or the outright purchase or high-risk assets," the group said.
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