STRENGTHENING INTERNATIONAL FINANCIAL SYSTEMS

Significant reforms to strengthen the international financial system were announced today by Chancellor of the Exchequer Gordon Brown in the UK's role as Presidency of the G7 leading industrial nations.

The statement, agreed by all G7 Finance Ministers and Central Bank Governors, reflects the shared determination of the UK and G7 to modernise the financial system and to put in place new rules and procedures that will promote stability and growth. It affirms that the G7 commit themselves to :

create or sustain conditions for strong, domestic demand-led growth
develop improved procedures for managing crises and preventing them from spreading, including an enhanced IMF financing mechanism supported by private and bilateral finance as appropriate
develop and implement international principles and codes of best practice on: fiscal policy, financial and monetary policy, corporate governance and accounting; and to work to ensure that private sector institutions comply with new standards of disclosure
improve global regulation through co-operation and co-ordination of the activities of key international institutions and national authorities in the management and development of policies to foster stability and reduce systemic risk in the international financial system and better exchanges of information
support reforms to improve the effectiveness of the IMF, including transparency and accountability and changes in lending policies and terms of lending.

The agreement follows intensive discussions between G7 countries. As G7 President, Gordon Brown has led this process of negotiation, following agreement at the IMF meetings in Washington earlier this month to develop quickly proposals for reform.

G7 Finance Ministers and Governors will monitor progress and report to Heads of Government before the Cologne Summit on the impact of the measures they have taken today, and their proposals for further action.

Key Points

The agreement reflects the shared determination of the UK and G7 to modernise the financial system and to put in place new rules and procedures that will promote stability and growth. The key points are that the G7 :

agree that the balance of risks in the world economy has shifted from high inflation to concerns about low growth, and commit themselves to create or sustain conditions for strong, domestic demand-led growth;
agree to implement new arrangements for finance to deal with contagion, including an enhanced IMF financing mechanism supported by private sector involvement, and by bilateral finance as appropriate;
commit to develop and implement international principles and codes of best practice on fiscal policy, financial and monetary policy, corporate governance and accounting; and to work to ensure that private sector institutions comply with new standards of disclosure;
agree to encourage all countries to meet these standards, and call on the IMF to monitor and report on countries compliance;
agree to establish a new process for surveillance of supervisory regimes, and to bring together the international institutions and national regulators to cooperate, coordinate, and exchange information;
commit to develop better procedures for crisis management,including more orderly workouts of debt, effective insolvency and debtor-creditor regimes, lending into arrears by the IMF, and innovative financing techniques by the private sector;
commit to a presumption in favour of openness at the IMF and World Bank and to establish a formal mechanism for evaluation of IMF policies and operations;
undertake to do further work on strengthening prudential regulation, maintaining sustainable exchange rate regimes, developing new structures for coordinating official finance, and strengthening the Interim Committee and the Development Committee at the IMF and World Bank.

Chancellor's statement - Friday 30th October, 1998

I want to report the terms of a new agreement reached by finance ministers and central bank governors of the G7 countries on detailed reforms to strengthen the international financial system.

The agreement is now being published in each of the G7 countries.

A statement welcoming the work of finance ministers and governors, and setting an agenda for future work by the time of the next G7 summit, is being issued simultaneously by heads of government.

I will want to make a detailed statement on the agreement in the House of Commons on Monday and I will, of course, make my pre-budget statement on the domestic economy on Tuesday.

But the financial crisis that swept Asia last year and has reverberated around the world has served to expose long-standing weaknesses in the international financial architecture and, because by its nature the crisis is international, so too must be the policies to address it.

The events of the last few months have shown the need for reform.

In the last few months we have built the consensus to take reform forward.

Today we set out the detailed agenda for that reform -the work completed, the work in progress, and the work to be done.

The old way has too often been crisis management in national economies where purely national regulation does not even reach minimum standards.

The new way forward for today's global economy, where each economy can affect every economy, is sensible global financial regulation, credible crisis prevention, orderly mechanisms for crisis resolution, with a sure foundation in minimum standards and best practice which all adopt to participate in the international financial system.

So today we announce details of a mechanism for crisis prevention; a new process for global financial regulation; and new proposals for transparency and crisis resolution that each G7 country will now adopt and apply.

First, in the statement issued today, G7 ministers and governors repeat that the balance of risks in the world economy has shifted from concerns about high inflation to concerns about low growth. Since we met last month interest rate policy has already been adjusted. In the United States, Japan, Canada, United Kingdom, Spain, Portugal, Ireland, Denmark, Italy, and again in the United States. Our statement today reaffirms our commitment to create or sustain the conditions for strong, domestic-demand led growth and financial stability in each of our economies. The authorities will continue to be vigilant in the light of the shift in the balance of risks on a global basis.

In what has been a difficult time for the world economy there have also been - as we state - positive signs.

The Japanese authorities have made clear their intention that the essential swift and effective action to complete banking reform, including the recapitalisation of banks, with appropriate conditions, will be taken as a matter of urgency.

We welcome the policy commitments by the government of Brazil, and state we will work with the international community to support them.

In Europe, it will be necessary to push forward with structural reforms and, in continental Europe, preparing for the euro, reduce unemployment to sustain conditions conducive to robust domestic demand.

But at the heart of the weaknesses exposed in our financial systems is that for fifty years our policies for regulation, supervision, transparency and stability have been devised and developed for a world of relatively sheltered national economies with limited capital markets.

A new age requires a new approach.

Ministers agree that in this new inter-dependent and instantaneous global marketplace we must now create systems for supervision, transparency, regulation and stability that are as sophisticated as the markets they have to work with.

The g7 has therefore concluded that institutional architecture devised in the 1940s for the economies of the 1940s must be reformed and strengthened to meet the challenges of the 1990s, and that we will need new rules for the global financial system of the 21st century.

First, we need new procedures at an international level for crisis prevention. In response to the current exceptional circumstances in the international capital markets, we are agreed that strengthened arrangements for dealing with contagion are needed;

the central element would be an enhanced IMF supplementary reserve facility which would provide a contingent short term line of credit for countries pursuing strong IMF approved policies. This facility could be drawn upon in times of need and would entail appropriate interest rates along with shorter maturities;
the facility would be accompanied by appropriate private sector involvement;
in appropriate circumstances and up to individual governments the facility could be complemented, in individual cases, by bilateral contingent financing
there will also be a new world bank emergency facility, to provide additional funding on special terms to the most vulnerable groups in society and for restructuring the financial sector. We will now support the more active use of loan guarantees to encourage greater private sector involvement in emerging market financing.

Following the welcome the welcome us congress decision, we call for the IMF quota increase and the new arrangements to borrow to be implemented as soon as possible. Together they will provide additional IMF resources of $90 billion to ensure the stability of the international financial system.

Second, crisis prevention through global financial regulation.

The G7 ministers are now agreed to support the establishment of a process for strengthened financial sector surveillance using national and international regulatory and supervisory expertise, including through a process of peer review, and used in the IMF's regular surveillance of its member countries under article iv;

To this end we will bring together the key international institutions and key national authorities involved in financial sector stability better to co-operate and to co-ordinate their activities in the management and development of policies to foster stability and reduce systemic risk in the international financial system and to exchange information more systematically on risks in the international financial system.

The g7 have agreed today that there also needs be a better mechanism for the international authorities to deal with private sector creditors and national authorities in handling debt problems at times of potential crisis. As part of the process we call upon:

the private sector to adopt "collective action clauses" to facilitate more orderly workout arrangements, and we will consider the use of such clauses in our own sovereign and quasi-sovereign bond issues;
the world bank in cooperation with the IMF and other multilateral development banks to work with their members to put in place effective insolvency and debtor-creditor regimes;
the IMF to act upon the executive board's recent reaffirmation of its policy of lending into arrears, under carefully designed conditions and on a case by case basis.
the private sector to build upon its experience with some emerging market countries in developing new market based contingent financing mechanisms.

But we have also agreed that the international financial system of the future needs to be grounded in new disciplines - undertakings or international rules of the game that now each G7 country is prepared to accept and others must also now apply to be part of the international financial system.

The old architecture was not built to handle massive capital flows and did not have the necessary foundation of minimum standards and good practice.

The new architecture must provide a secure framework guaranteeing minimum standards and good practice.

So we have agreed each country will adopt and apply codes of conduct founded on minimum standards and best practice, in other words agreed ground rules of the game

we therefore commit ourselves to:

comply with an internationally agreed code of conduct on monetary and financial policy. Requiring greater transparency. Each country should specify its objectives for monetary policy, identify responsibility for achieving these objectives, and for reporting and explaining monetary policy decisions and financial regulations. And we are agreed that these standards should be set down in an internationally agreed code of conduct.
we are also agree we will comply with a code of good practices on fiscal transparency.

But these new principles need to go beyond public policy. So on corporate standards, it is agreed that we need an international standard of best practise for transparency and disclosure by financial institutions and their regulators. So we have asked the Basle committee, in conjunction with other relevant bodies, to draw up such a best practice standard as quickly as possible.

The new codes of monetary and fiscal conduct and rules for corporate governance will mean changes in the way governments and financial markets function. They will help produce an environment in which financial markets can operate better. They should reduce the risk of future failures, and mean that when failures do occur the financial system is robust enough to withstand them. By improving public understanding of why and how decisions are made, and making sure the right long-term policies are in place, the codes will help build public understanding and support for the policies that deliver economic growth and prosperity.

And we have agreed that more attention must be given in times of crisis to the effect of economic adjustment on the most vulnerable groups in society.

We therefore agreed that the world bank develop, as a matter of urgency, general principles of good practice in social policy, in consultation with other relevant institutions.

Further detailed work, to report next year has also been agreed on, first the scope for strengthened prudential regulation including consideration of appropriate transparency and disclosure standards for all financial market participants; second on developing new ways to respond to crises, by exploring the possibilities of new structures for official finance and on greater participation by the private sector in crisis containment; and third on assessing proposals for strengthening the role of the IMF and the interim and development committees of the IMF and world bank

These decisions detailed in our document set out an agenda to create an international financial system for the twenty first century that captures the full benefits of global markets and capital flows and is designed to minimizes the risk of economic and social disruption

Press Notices 1998 July to December Index