The world’s banks and financial regulators are “on track” to complete the initial implementation of financial system reforms, says Mario Draghi, the governor of the Bank of Italy and chairman of the Financial Stability Forum, at the weekend’s meeting of the group of eight finance ministers in Osaka, as Financial Times reports.
Draghi says a “fragile stability” has returned to markets, commended big banks on the improved transparency of their financial reporting and added that regulators would provide new guidance on liquidity and accounting standards within the 100-day deadline the G7 had set in April.
According to Draghi, this week the FSF will begin its much more controversial investigation into the possibility of reforming banking capital requirements and other financial regulations to mitigate the forces that amplify risk-taking in good times and credit squeezes in bad times. An FSF working group will meet in London for the first time.
Draghi says the turning point has been the Federal Reserve’s actions to ensure other financial institutions were insulated from the collapse of Bear Stearns.
“It looks unlikely that banks will now have implications for the real economy,” he says. “Risks to the real economy come from the real economy itself & and they may impinge on financial services.”
Despite the improvement in the outlook for banks, particularly those that had raised capital in recent months, Draghi says “there is still lots of stuff that is off-balance sheet, as it comes on-balance sheet more capital will be needed.”
The liquidity of large banks had improved, but improvements in the position of medium-sized banks were harder to find because “a lot are still under strain.”
He also says that the initial regulatory response is well underway, with the Basel committee to publish guidelines on liquidity management by the end of the month, an agreement on cross-border cooperation on banking supervision on target for the end of the year, a revised code of conduct for credit ratings agencies established, and accounting standards setters working on guidelines for fair value accounting in extremely thin markets.
With such work going on, Draghi seemed nonplussed when asked about the proposal from Angela Merkel, the German chancellor, for a European credit rating agency. Germany had supported the FSF’s efforts so far, he said, and there had been “no discussion” of a separate European plan.