Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Sunday, September 6, 2009

Geithner at the G-20 Meeting

Statement by Secretary Geithner at the G-20 Meeting of Finance Ministers and Central Bank Governors (Sept. 5, 2009):

Our strategy is to put in place stronger constraints on risk taking across the financial system, to bring comprehensive oversight to key institutions and to critical markets, such as derivatives, to reform the securities markets, and to provide the tools necessary to wind down firms that fail.

The fundamental test of reform is to make the system resilient enough to withstand future storms. 

Toward this effort, we outlined here the critical elements of a stronger international capital standard for banks.  Our objective is to reach agreement by the end of next year on a new standard that will raise capital and liquidity requirements and dampen rather than amplify future credit and asset price bubbles.  Financial activities which present the most risk should have higher capital requirements.  And the major globally active financial institutions, those firms that present the greatest risk of systemic crisis, should be held to more demanding standards.

A crucial part of financial reform is to change compensation practices.  On February 4 of this year, the President of the United States first outlined a set of proposals to reform compensation practices, both for institutions that receive exceptional financial assistance and for all banks.  These proposals were designed to constrain excess risk taking by making sure that compensation is tied to risk and long-term performance.  We have proposed, and the House has already passed, legislation to require firms to submit compensation practices to an approval by shareholders.  And the Federal Reserve and other bank supervisors will enforce these standards through the supervisory process. 

We welcome the support we found here in Europe and among the G-20 for compensation reform as part of comprehensive reform of the financial system.  Stronger capital standards are not a substitute for compensation reform.  Compensation reform is a necessary part of building a more stable system.

In addition to capital and compensation, more work needs to be done on over-the-counter derivatives and cross-border resolution frameworks.

Another critical part of the reform agenda is building stronger international financial institutions.  We must provide the resources and tools necessary to support development and provide insurance against future crises.  But this is not just about resources.  We need these institutions to play a greater role in preventing future crises, with stronger surveillance by the IMF.  We need the multilateral development banks to focus their efforts on the key priorities of fighting poverty, supporting higher productivity in agriculture, building the institutions necessary for private investment and growth, and facilitating the transition to a green economy. And we must reform the institutions' governance structures to better reflect the important role of emerging market and developing economies.

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