HM Treasury News Release
179/98 30 October 1998
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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:
(i) 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;
(ii) 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;
(iii) 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.
(iv) 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:
(i) 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.
(ii) 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
DESINGED TO MINIMIZES THE RISK OF ECONOMIC AND SOCIAL DISRUPTION
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