Letter sent by Canada to G20 on financial reforms
OTTAWA, Following is the text of a letter sent by Canadian Finance Minister Jim Flaherty to his counterparts in the Group of 20 leading and emerging nations on Tuesday. Canada released the letter on Wednesday: G20 Colleagues
Dear Colleague,
At their summits in Washington, London and Pittsburgh, the G-20 Leaders agreed to significant financial sector reforms intended to correct the root cause of the worst global financial crisis since the 1930's: excessive risk in the financial system. Solid progress is being made, but it is essential that we maintain focus to deliver on these commitments by the established deadlines.
Our Leaders agreed that the core of reform efforts must target stronger capital and liquidity standards, complemented by clear incentives to mitigate excessive risk-taking practices. We are committed to develop by end-2010 internationally agreed rules to improve both the quantity and quality of bank capital, strengthen liquidity standards and to discourage excessive leverage, which includes a cap on leverage.
We must remain unwavering in our commitment to meet this deadline and we must identify areas where we can mark progress at the Toronto Summit in June. June 26-27-2010 -The G20 Meets in Toronto, Canada
The national implementation of higher level and better quality capital requirements, counter-cyclical capital buffers, together with forward-looking provisioning, strengthened liquidity risk requirements and limits on leverage, will reduce incentives for banks to take excessive risks and will create a financial system better prepared to withstand adverse shocks.
However, stronger regulations are simply not enough. We must also ensure that our supervisory frameworks are flexible and responsive. This means arming supervisors with the necessary tools to ensure they are effective. When we meet later this month, we should agree to develop principles around sound supervision to be discussed at our next meeting in Korea in early June and for consideration by our Leaders at the summit in Toronto.
Our Leaders also agreed in Pittsburgh to work together to improve over-the-counter (OTC) derivatives markets. Specifically, they agreed that all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories and non-centrally cleared contracts should be subject to higher capital requirements. I look forward to reviewing progress on this issue when we meet in Washington later this month. April 22-23- 2010 ~ G20 Finance Minister's Meeting in Washington
In Washington, we will also have the opportunity to discuss a draft of the IMF paper requested by our Leaders on the possible approaches in place or considered by governments to ensure the financial sector makes a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking systems. The cumulative impact of all current reform measures will need to be assessed before further commitments are layered on.
Countries will naturally have varied approaches to dealing with the cost of the financial crisis and there is no one-size fits all solution. In those countries where taxpayers had to pay to bail-out their financial sector, I understand the desire to recover taxpayer losses. In principle, taxpayers should not bear the costs of bailouts of financial institutions.
Going forward, our best approach to ensure that the risk of future financial crises is mitigated is to ensure that our financial institutions are well capitalized, excessive leverage is minimized, and robust resolution regimes appropriate for all institutions are in place.
Any global approach to ensure that the financial sector makes a fair and reasonable contribution to the cost of crises in the future should generally align with the following principles:
* Protect taxpayers; * Remove risk from the financial system; * Protect the flow of credit in good times and bad; and * Respect individual country circumstances.
While some countries may choose to pursue an ex ante systemic risk levy or a tax, I do not believe that this would be an appropriate tool for all countries. Such a levy would remove capital from an institution to an external fund or to general government revenues, which could result in weakening an institution's ability to absorb losses. A global levy could also result in excessive risk taking as a result of a perceived government guarantee against an institution's failure.
In my view, contingent capital is aligned with the principles above and should be considered. As noted in the attached Financial Times editorial by Julie Dickson, the Canadian Federal Superintendent of Financial Institutions, contingent capital would create a notional systemic risk fund embedded in the capital structures of financial institutions. Embedded contingent capital would force the costs of excessive risk taking to be removed from taxpayers and placed on to the right people - shareholders and subordinated debt holders - thus improving market discipline and significantly reducing moral hazard in the banking sector.
Moreover, for the same reduction in credit intermediation, contingent capital has the advantage over a levy or charge of leaving capital available in the institution to facilitate a more stable provision of credit during economic downturns.
I look forward to a rich discussion and making continued progress on the core G20 financial sector reform commitments at our meeting in late April.
AP
April 22-23- 2010 ~ G20 Finance Minister's Meeting in Washington
June 26-27-2010 -The G20 Meets in Toronto, Canada
