Reform of the international financial architecture should be guided by the following objectives:

• We must retain and build on the benefits that open financial markets bring to the world economy.
  

While it is clear that financial markets regulation globally has failed to strike the right balance between financial stability and financial innovation and appropriately managed risk, it is essential that we retain and build on the benefits that open financial markets bring, in which all countries must be able to share.

• Financial institutions’ corporate governance arrangements need to be effective at delivering robust risk management.
  

A key aspect of this will be to ensure that remuneration structures create incentives for appropriate risk management. Regulation should also in turn incentivise market participants to adopt remuneration schemes that are in line with sound risk management.

• In future, prudential regulation needs to ensure that banks build sufficient buffers of resources in good times so that they are able to absorb losses as conditions worsen without amplifying the effects on the financial sector and the wider economy.
  

And an international agreement on a common framework for identifying and assessing liquidity risks is urgently needed. It will be essential to manage the transition through the current downturn to a new equilibrium with strengthened prudential standards, so as to ensure that regulatory regimes do not act procyclically.

• Innovative financial markets must be transparent, appropriately regulated, and supported by robust market infrastructures. 

The financial services industry must enhance transparency in the securitisation markets, including the standardisation of information provided to investors; and, working with policy-makers and regulators, address how to better align incentives between market participants.

• Financial activities should be regulated according to their economic substance rather than their legal form.
  

This will involve addressing the emergence of the shadow banking sector; a shift in regulatory focus towards those institutions and markets that pose the greatest risk; and considering greater powers for regulators to oversee previously under-regulated sectors and how to ensure consistent regulation in all jurisdictions.

• Regulation needs to focus on systemic as well as institution-specific risk.
  

This will mean focusing on the most innovative and risky parts of the financial system, and on the impact of the collective behaviour of market participants on risk. As part of this, the London Summit will review progress towards creating a global early warning system led by the IMF and Financial Stability Forum (FSF), which would aim to identify both macroeconomic and financial market risks, including potential triggers and systemic vulnerabilities, and agree appropriate policy responses.

• Regulatory regimes must be better prepared for failure within financial markets.
  

Regulation cannot address every potential failure, nor is it appropriate for regulators to attempt to operate a zerofailure regime. Instead, there must be greater contingency planning, more effective ways of winding down financial companies and better arrangements for protecting and compensating depositors.

• International financial markets need internationally coordinated regulation.
  

Financial shocks can be transmitted rapidly across borders, and the regulatory and supervisory decisions of national authorities can have international consequences. Therefore policy-makers and regulators must agree principles that national regulatory regimes should follow; internationally consistent standards; a strengthening of the FSF and a broadening of its membership; stronger supervisory cooperation; and more effective cross-border crisis management.