1. Public authorities must have all relevant information about all significant institutions, markets and infrastructures in the financial system.
2. Dynamic provisioning and counter‐cyclical capital buffers should be made an integral part of global prudential standards in order to dampen the excessive procyclicality of financial institutions´ behaviour.
3. Leaders should ask accounting standard setters to refine the application of rules to financial instruments and loans, in order to better reflect risks and uncertainties in valuations.
4. Empower retail clients of financial services through coordinated efforts to promote financial education, ensuring their right to receive fair and accurate pre‐sale information, setting up preventive regulatory safeguards and pre‐funded guarantee schemes as well as cracking down on deceptive or abusive practices.
5. Compensation schemes for executives and highly paid employees of financial firms should be subject to disclosure on an individual basis, approval by shareholders of remuneration policies, oversight by supervisors and a comply‐or‐explain mechanism with respect to a Code of Best Practices.
6. In the future, and in order to allay moral hazard and restore effective market discipline, financial firms should internalise the expected social costs of their potential failure. Once the crisis is overcome, the FSF should carefully study the most efficient tools to achieve this goal and to reduce the social costs of bankruptcy of financial firms.
7. The IMF own resources (i.e. quotas) should be strengthened in order to protect its role as a lender of last resort, while not depending excessively on external loans. The Fund should also update its set of lending tools, particularly to strengthen its crisis prevention capabilities.
8. The IMF should be empowered to play an effective role as international financial supervisor so that it can focus on crisis prevention and on early warnings. Its governance structure should be strengthened in order to facilitate international cooperation, information sharing and the exercise of peer pressure.
9. MDBs should be counter-cyclical in their support, increasing their net flows to countries during low growth periods and adapt their capital to the trend level of lending.
10. In the medium term, MDBs need to review their governance and voting power distribution in order to respond to future challenges. MDBs should also improve coordination among themselves and with the IMF, especially as regards short term financing.

1. Public authorities must have all relevant information about all significant institutions, markets and infrastructures in the financial system.

It is important that all stakeholders in the financial system have access to sufficient information and that there is market transparency. With respect to the public authorities, it seems that regulators and supervisors have lost touch in the last few years with the rapidly changing and increasingly complex reality of the financial sector. The first condition to be able to fulfil their role is having good information about where the risks are, when and how they are traded and what the economic substance of innovative instruments is. This would require:

• Mandatory disclosure requirements for hedge funds (direct regulation approach), private equity funds and securitisation trusts on leverage and liquidity risk
• Establishing transactions registers in OTC markets, including inter‐bank markets (unsecured deposits, repos) where no information is currently available. The FSF could be asked to identify those segments where there are information loopholes. In a second stage and based on a careful analysis of business models and potentially risky practices (maturity mismatches, excessive leverage), further decisions could be taken on what kind of oversight each segment needs.

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2. Dynamic provisioning and counter‐cyclical capital buffers should be made an integral part of global prudential standards in order to dampen the excessive procyclicality of financial institutions´ behaviour.

Massive inefficiency in credit allocation is at the heart of the current crisis. During the good times banks have systematically underestimated the risk of the credit they were granting, influenced by abundant and cheap funding, booming asset prices, buoyant growth and strong competitive pressures to generate fee income and gain market share. Now it seems that some of them, as a result of the increased uncertainty about economic prospects, may not be extending credit to some creditworthy borrowers, inflicting damage to the economy.
In order to mitigate this kind of excessive cyclicality, regulatory frameworks should incorporate countercyclical elements aimed at providing banks with the right incentives for sounder risk assessment practices conducive to a more watchful and efficient allocation of credit over the business cycle. One useful tool would be a rule‐based system of dynamic provisions. If loan loss provisions are made in periods of significant risk growth and under pricing of credit risk, banks will provide investors through their accounting statements with much more proper information about their true financial position. That is, in boom periods, such as those we experienced before the crisis erupted in summer 2007, the profits of the banks, their dividends and the bonuses paid to managers will be lower and much more in line with the true risks the banks run. Dynamic provisions should be fully transparent so that investors can judge whether or not banks have covered the increase in credit risk. Complementarily to dynamic provisions, banks should build strong capital buffers in good times that can be drawn down when the cycle turns.

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3. Leaders should ask accounting standard setters to refine the application of rules to financial instruments and loans, in order to better reflect risks and uncertainties in valuations.

It is now evident that the accounting values of assets of financial firms and their profits have been overstated. The bigger western banks have lost more than half of their market capitalisation since July 2007, showing that the previous valuations did not accurately reflect sustainable economic values. This has been a major blow for investors who relied on the accounts of financial firms to take their decisions. As the key purpose of accounting rules is to give reliable and accurate information to investors, what has happened calls for refining the application of accounting rules to better reflect the risks and uncertainties in valuations. Accounting rules for loan loss provisioning should be adjusted to give more room to a rule based dynamic provisioning system. Furthermore, work needs to continue on how to introduce proper valuations for complex, illiquid and difficult‐to‐value financial products, including a reflection on how to stimulate the use of valuation reserves (which could help to recognise the uncertainties in those valuations in the financial statements in a transparent manner). It is important to urge IASB to start working on these issues, since it is now the right time to make the necessary changes. Carrying out this revision is paramount to restore confidence in valuations of financial firms and help normalize the flow of external funds to the financial sector.

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4. Empower retail clients of financial services through coordinated efforts to promote financial education, ensuring their right to receive fair and accurate pre‐sale information, setting up preventive regulatory safeguards and re‐funded guarantee schemes as well as cracking down on deceptive or abusive practices.

Trust and confidence of citizens in the benefits of dealing with the financial industry have been damaged. There is a need to create an appropriate framework for the relationships of retail clients with financial firms through:

• Stepping up efforts to promote financial capabilities, with particular emphasis on responsible borrowing and long term savings
• Requiring financial firms to offer easily understandable information on all products and services, including potential risks and costs
• Establishing the obligation for asset managers to deposit the assets in a third party which should be a regulated entity in order to prevent Ponzi schemes
• Establish pre‐funded guarantee schemes financed by financial firms, and
• Mandate the FSF, in collaboration with international organisations of supervisors, to elaborate a list of common abusive and deceptive practices in their sectors and recommend all member countries to take effective measures to protect clients against them.

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5. Compensation schemes for executives and highly paid employees of financial firms should be subject to disclosure on an individual basis, approval by shareholders of remuneration policies, oversight by supervisors and a comply‐or‐explain mechanism with respect to a Code of Best Practices.

Compensation practices in the financial sector have contributed to the misalignment of incentives along the financial chain and the subsequent excessive focus in the short term. Rent extraction by executives and other highly paid employees has been detrimental to shareholders and has also favoured opaque and inadequate risk‐taking. Without resorting at this stage to legal caps for remuneration, it is imperative to set up a framework of strict oversight and transparency which effectively ensures that variable remuneration is linked to the economic value created over a medium to long‐term perspective. The Code of Best Practices in elaboration at FSF should be rigorous, including the possibility of considering some symmetric features in variable remuneration which rule out severance pay (golden parachutes) when performance has been dismal. Those firms which do not abide by the best practices should explain it to investors and supervisors. The latter could then assess the influence of compensation schemes on risk management in Pillar 2 of the Basel II framework.

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6. In the future, and in order to allay moral hazard and restore effective market discipline, financial firms should internalise the expected social costs of their potential failure. Once the crisis is overcome, the FSF should carefully study the most efficient tools to achieve this goal and to reduce the social costs of bankruptcy of financial firms.

Faced with the threat of a full blown systemic collapse, many governments have had to commit budget resources or to assume huge amounts of risk linked to assets and liabilities of financial firms. This drive towards a certain socialisation of the risks of the financial industry creates moral hazard for the future, as firms may come to believe that if they are sufficiently big or systemic, the public purse will always come to the rescue. In order to restore effective market discipline in the post‐crisis financial system, two lines of action could be pursued:

• Ensure that firms internalise the potential social costs of their actions, through tools which would need to be thoroughly analysed. These could be directed towards reducing the probability of bankruptcy through higher capital or provisions or through financial instruments with payoffs linked to the financial situation of the firm (contingent capital instruments and other insurance‐type products)
• Analyse how to reduce the social costs of bankruptcy of a financial firm, by acting on contagion channels (market infrastructures, management of counterparty risk).

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7. The IMF own resources (i.e. quotas) should be strengthened in order to protect its role as a lender of last resort, while not depending excessively on external loans. The Fund should also update its set of lending tools, particularly to strengthen its crisis prevention capabilities.

The IMF must be well equipped to respond to the crisis, in the first place by having adequate resources for its lending activities. The Fund size has significantly decreased in relation to all relevant references (world GDP, global reserves…). Given the magnitude of the crisis, the IMF’s Forward Commitment Capacity – adding the GAB/NAB plus the bilateral commitments may well fall short of potential demand. In the short term the criteria should be to opt for the most agile options, including official bilateral credits which should be sufficiently safeguarded. However, for the medium term, an increase of quotas should be the way forward as provided by the Fund’s 1991 guidelines. The lending framework should be streamlined and simplified, with one flexible facility for regular conditionality‐based disbursements within the GRA framework. The IMF should also strengthen its prevention schemes: the availability of precautionary SBAs with high access should be consolidated and an additional high insurance mechanism could be put in place.

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8. The IMF should be empowered to play an effective role as international financial supervisor so that it can focus on crisis prevention and on early warnings. Its governance structure should be strengthened in order to facilitate international cooperation, information sharing and the exercise of peer pressure.

The IMF has the legitimacy and the mandate to identify and monitor the risks to global financial stability. The acceptance by the international community of the Fund’s role as a multilateral surveillance institution is paramount to facilitate the Fund’s whistle‐blower role. The ability of the IMF to convey serious concerns on financial stability even in major economies should not be downplayed by exposing the institution to strong criticism and pressure. Therefore the first major change with regards to the IMF should be allowing it to really fulfill its mandate. The IMF should conduct candid Early Warning Exercises duly taking into account all relevant tail risks. While even‐handedness has often been in the IMF’s agenda, it has never really materialised. In order to make progress in this area the IMF’s Independent Evaluation Office could report annually on the consistency and even handedness of bilateral and multilateral surveillance, thereby strengthening IMF’s (and countries) accountability.

As far as governance is concerned, voice of members should reflect their weight in the world economy; including a dynamic realignment of quotas as to ensure that the legitimacy of the IMF is not eroded by inertias. The political traction of the Fund could be strengthened by the creation of a Ministerial Council. This council would give a deciding role to Ministers and would act as an international coordination forum.

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9. MDBs should be counter-cyclical in their support, increasing their net flows to countries during low growth periods and adapt their capital to the trend level of lending.

MDBs can be an effective instrument to help mitigate the impact of the financial crisis on low and middle income economies as well as prevent similar crises in the future. The financial crisis has resulted in increased demands on MDBs, which should be ready to act countercyclically. MDBs should define a trend annual business volume compatible with the absorption capacity of its members and with the Bank’s own resources, that is, an average long term optimal level of lending. Supporting long term growth should be compatible with a counter‐cyclical role: MDBs could lend below their average during the upswing and lend
above the average during the downturn. MBDs could consider the possibility of setting aside some lending capacity during the “good times”, which could only be used in times of crisis or (very) low growth. Each MDB should hence estimate its adequate level of lending in the medium term. They should then assess their lending headroom and capital requirements. The IDB and ADB appear to be priorities in considering possible capital increases. A rigorous and homogenous analysis must underpin any proposal to consider changes in gearing ratios – preserving AAA ratings‐, measures to use existing capital more efficiently, or proposals of capital increase. The preservation of trade finance is also essential and should be a priority of MDBs: the IFC and EBRD should continue to promote and enhance their programs to guarantee inter‐bank credit for trade finance, and other regional Banks should also develop this instrument within their risk management capacities.

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10. In the medium term, MDBs need to review their governance and voting power distribution in order to respond to future challenges. MDBs should also improve coordination among themselves and with the IMF, especially as regards short term financing.

The World Bank and MDBs should align their shareholding to present conditions; cooperative multilateral institutions should not be subject to veto power from any member state; efficiency and representativeness of resident Boards must be enhanced. Regional MDBs must coordinate closely with the World Bank in order to make sure that total available resources are maximized and that overlaps and competition are avoided. MDB’s must urgently harmonize procedures and classification of countries. As regards their relation with the IMF, MDBs provision of short‐term liquidity should be exceptional in the absence of an IMF program. This financing should be temporary and repayments should take place when conditions improve.

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