OTTAWA (Reuters) - The final report of a G20 working group on financial regulation recommends that banks build up their capital reserves during good times and that regulators take a firm and comprehensive system-wide approach to risk prevention.
The report, handed out to journalists in Ottawa on Friday, contains 25 recommendations for improving financial system regulation at the national and global levels.
“More needs to be done to guard against excessive risk-taking, to avoid regulatory gaps, and to prevent the type of escalating credit growth that fed the current crisis,” the report said.
The group, which Canada co-chaired with India, was one of four charged with coming up with ideas to present to a Group of 20 nations summit in London next week on how to prevent future global crises.
“There were regulatory failures, there were failures in the private sector, there were failures in risk management, there were failures in boards and there is need for real change,” a senior Canadian official told a briefing.
“And I think this report, together with the work done by a number of international bodies, provides a very sound basis to move forward.”
The report says:
* each country’s regulation of individual institutions should also include a system-wide approach that prevents the build-up of excess risks. This will require strong coordination among regulatory bodies within each country, while financial authorities from different nations should meet to assess global risks and coordinate the responses.
* effective regulation should cover every relevant financial institution, market and investment product, including private pools of capital such as hedge funds.
* once the crisis subsides, international standards for capital and liquidity should be strengthened. Financial institutions should build up their capital reserves in good times so they can absorb losses in bad times.
* international standards for financial regulation should be coordinated to ensure a common international framework for national authorities to apply in their own countries.
* all countries should ensure their regulatory systems more effectively oversee areas that were instrumental in deepening the crisis, such as executive compensation, derivatives contracts, credit rating agencies and accounting standards.
Ahead of the summit, there is a split emerging between the United States and Canada, which want other nations to inject more stimulus, and countries such as Germany and France, which are much less enthusiastic about building up more debt.
“Canada has done its share and other countries must do theirs,” said Kory Teneycke, the chief spokesman for Prime Minister Stephen Harper.
“The further deterioration of global financial conditions that we have witnessed since the (November G20) Washington summit serves to reinforce the importance of timely, targeted and coordinated action from all major economies,” Teneycke said, emphasizing the word “all”.
He said that at the Washington meeting, G20 leaders had agreed on the need for stimulus equivalent to 2 percent of gross domestic product.
“Some countries, including Canada, have exceeded that for good reason. But other countries have come in under that level,” he said.
Teneycke said that to ensure long-term success, all G20 countries must remain committed to adopting medium- and long-term policy measures.
Canada had no plans now for additional fiscal stimulus to combat the recession but would not preclude doing more in the future, he said.
And pressed on calls for more aid to the world’s poor, he said this was “secondary” to the need to restore global economic growth and would not be a priority for the summit.
“Our focus right now at this meeting ... is having that conversation about how we fix that economy,” he said, adding that that was the best way of helping poor countries.
With additional reporting by Randall Palmer and Louise Egan in Ottawa; editing by Peter Galloway