The ERM Current™

In advance of the G-20 Summit in London this week, UK Prime Minister Gordon Brown delivered a speech in St. Paul’s Cathedral highlighting the need to reform the global financial regulatory system.  The Prime Minister used his speech to call for a reform of financial regulation that should include ‘global rules founded in shared global values’. He said:

‘We must reshape the global economic system so that it respects the values we celebrate in everyday life.’  He said the Summit needed to ‘clean up the banking system’ and set rules to:

1. make transparent the risks that banks take;
2. bring hedge funds and shadow banking inside the regulatory net;
3. ensure banks hold sufficient capital and ensure their liquidity;
4. require boards who understand their business and take responsibility for the decisions they take;
5. ensure pay and bonuses reward people for long term value and not short term risk taking.

The Summit will be watched closely by nations across the globe and some are skeptical that any major decisions will be reached this week.  For example, French President Nicolas Sarkozy is reported to be considering an early departure if key decisions regarding regulatory reform are not made.  The stage is set for an interesting week in London.

This past weekend, finance ministers from nations representing the Group of Twenty (“G-20″) met in London to review progress made on action plans from the emergency meeting held in Washington D.C. last fall.  A major outcome of the meeting was a rebuke of the United States call for further capital injections into weak financial institutions.  Instead, the G-20 pressed the need to make progress on the action plans to reform financial regulation and risk management.   Here are a few views of G-20 members as reported in yesterday’s  Wall Street Journal.  

The U.S.’s overseas allies ratcheted up pressure during the weekend to tackle the ailing banking system. “Some countries have not fixed their banks, so I want them to fix their banks,” Canada’s finance minister, Jim Flaherty, said, in what appeared to be a veiled reference to the U.S.  Germany’s finance minister, Peer Steinbrueck, made a similar point as a way of deflecting U.S. demands for more stimulus spending.  ”We are convinced it makes no sense to pump more and more money in our economy when we haven’t restored the confidence on the financial markets,” he told reporters .

As a result, expect to see some major headway in the regulatory reform movement over the next few weeks. Click here to view the latest progress report by the G-20.  

The Group of Twenty (“G-20″) met in Washington, DC on Saturday to jointly develop action plans to address the growing economic crisis sweeping the globe.  A need for greater transparency and accountability in our financial markets served as the primary theme for the meeting.  The result of their discussion was a strong declaration regarding the root causes of the problems we are facing and recommended actions to remedy the situation.  One of their action plans focused squarely on risk management.  Below are the related risk management actions to be taken by the end of March 31, 2009.  

• Regulators should develop enhanced guidance to strengthen banks’ risk management practices, in line with international best practices, and should encourage financial firms to reexamine their internal controls and implement strengthened policies for sound risk management.
• Regulators should develop and implement procedures to ensure that financial firms implement policies to better manage liquidity risk, including by creating strong liquidity cushions.
• Supervisors should ensure that financial firms develop processes that provide for timely and comprehensive measurement of risk concentrations and large counterparty risk positions across products and geographies.
• Firms should reassess their risk management models to guard against stress and report to supervisors on their efforts.
• The Basel Committee should study the need for and help develop firms’ new stress testing models, as appropriate.
• Financial institutions should have clear internal incentives to promote stability, and action needs to be taken, through voluntary effort or regulatory action, to avoid compensation schemes which reward excessive short-term returns or risk taking.
• Banks should exercise effective risk management and due diligence over structured products and securitization.

A great deal of work will be required to properly address these recommendations.  However, the end result will be a much stronger global economy.  Wheelhouse Advisors can help your company quickly assess its risk & control programs and provide cost-effective solutions to the recommended actions.  Visit our website at www.WheelhouseAdvisors.com to learn more.