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Denver Summit of the Eight
Final Report to the G7 Heads of State and Government
on Promoting Financial Stability

Denver, June 21, 1997
[Executive Summary]

Introduction

The Heads of State and Government in Lyon called for the "implementation of improved practical measures to deal with risks relating to the operation of the global financial markets." The Heads asked for maximum progress over the year in:

The Heads requested that the G7 Finance Ministers report to the next Summit in Denver on these issues. In December 1996, the Ministers provided an Interim Progress Report to the Heads outlining in detail the extensive work undertaken by Finance Ministries, in association with national authorities and the international regulatory bodies([1]) to address the Heads' interest in these areas. This final report for the Summit in Denver describes the accomplishments since Lyon and recommends a set of objectives and proposals to carry this process forward.

International financial markets are undergoing rapid changes, leading to increased expansion, globalization, and complexity. These changes present new opportunities that can lead to increased efficiency in the functioning of the international financial system. At the same time, the changes present new challenges to consumers, investors, and the markets. Governments must take measures to deal effectively with possible systemic or contagion risks and foster financial stability without stifling financial innovation or undermining the benefits of liberalization and competition. Governments and regulators have to be careful that the policies and regulations they develop do not result in "regulatory arbitrage," resulting in the flight of financial activities to less regulated or even unregulated markets. We must pursue these efforts while maintaining the important role of market discipline and promoting the improvement of prudential standards.

In the past year, national and international regulatory bodies, the International Monetary Fund, the World Bank and others[2] have continued to intensify their cooperative efforts on a national, bilateral, and multilateral basis to strengthen the international financial system. These actions have produced meaningful progress to enhance risk assessment and address possible systemic or contagion problems. We welcome the increasing degree of interaction and cooperation among all the various bodies and encourage them to continue their efforts.

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Objectives

Enhancing Cooperation Among Supervisors of Globally Active Financial Institutions

Major, globally active financial institutions operate in world markets through a variety of legal entities and functional business lines and across geographic jurisdictions. Therefore, as a practical matter, supervisors of regulated entities within a financial group must be in a position to understand a firm's global operations, so that all material risks to the relevant entities within the firm and to the group can be considered. International cooperation among supervisors, including exchange of information, is an important tool in the comprehensive risk assessment of global firms, and in assisting supervisors to take timely supervisory action.

Key Areas of Progress

Substantial work to enhance regulatory cooperation is taking place on a bilateral and multilateral basis. Arrangements to exchange information in emergencies represent a significant step by securities and banking regulators to enhance the supervision of globally active financial institutions and are a building block to expand further regulatory cooperation. We welcome the important steps outlined in the reports of the international regulatory bodies to enhance cooperation among supervisors on an ongoing basis and in emergency situations.

The Joint Forum has agreed that, in appropriate circumstances, a coordinator should be identified to facilitate the exchange of information on globally active financial institutions. The Joint Forum is continuing to develop the possible menu of roles that a coordinator could assume during emergency and non-emergency situations. It is also exploring the relative merits and practical implications of each role (including legal and regulatory constraints) for the coordinator and other relevant supervisors.

The Joint Forum has also drafted a set of supervisory principles, including techniques to assess the potential impact of the group-wide capital structure on the regulated firms.

IOSCO and its members have undertaken a number of practical measures to strengthen their cooperation, including coordinated inspections, investigations, and reviews of major, internationally active financial groups.

Regulators from twenty jurisdictions responsible for the supervision of the world's leading derivative markets and over sixty derivatives exchanges reached an agreement intended to improve information sharing on large exposures of internationally active derivatives firms.

We welcome the progress by these groups and, going forward, we:

G7 Finance Ministries are undertaking an assessment of impediments to information sharing identified by the Basle Committee, IOSCO, the IAIS and the Joint Forum.

Encouraging Stronger Risk Management and Improved Transparency in Markets

A stable financial system depends on sound financial institutions, whose operations are transparent to supervisors arid to the market. As financial institutions engage in increasingly complex and global transactions, it is critical that they have in place effective systems to measure, monitor, and control risks, as well as sufficient capital to provide for such risks. Public disclosure can also enhance the role of market discipline by improving the information available to market participants. Insolvency or liquidity problems of major globally active financial groups can seriously affect the payment and settlement systems, and mechanisms to permit firms to reduce the net value of their exposures to counter parties may lessen the vulnerability of the system to such events.

Key Areas of Progress

We welcome the progress that has been made in these areas and look forward to efforts to foster high- quality accounting standards and to improve the information available on the nature and adequacy of risk management and internal controls. In the context of these efforts, we encourage supervisors to examine the feasibility and desirability of establishing stronger public disclosure in periodical financial reports, including whether legislative action is necessary, to maximize the ability of market participants to make meaningful assessments. We also encourage supervisors to explore principles for analyzing the capital positions of regulated entities and where such entities are included in a diversified financial group, on a group-wide basis as well, in order to evaluate risks to the regulated entities.

We welcome the steps outlined in the reports from the international regulatory bodies to reduce risks to payment and settlement systems. We encourage the Committee on Payment and Settlement Systems to continue to work with industry groups that seek to offer risk-reducing multi-currency services.

We agree to introduce, where necessary and appropriate, legislative measures to ensure the enforceability of sound netting agreements in relation to insolvency and bankruptcy rules to reduce systemic risk in international transactions.

Encouraging the Adoption of Strong Prudential Standards in Emerging Economies

Strengthening financial systems in emerging economies will reduce the risks of financial and macroeconomic crises that can impose substantial costs on domestic economies and have potential contagion effects in regional and international markets. In response to the G7, the G10 formed a working party to identify and analyze factors that promote financial stability in emerging economies and to outline a concrete strategy to strengthen financial systems in such economies.

Key Areas of Progress

The working party, which included representatives of emerging market economies, international regulatory bodies, and the international financial institutions, made significant progress:

The international regulatory bodies and the BIS have made significant contributions:

We endorse the strategy proposed by the working party. We also share their view of the ultimate responsibility of national authorities in emerging market economies, the need for sound macroeconomic policies and the importance of further developing competitive, transparent markets operating on sound principles. We encourage the endorsement and implementation of the working party's proposals by national authorities worldwide. We urge national supervisors to implement the Basle Committee's Core Principles, and call on the IMF and World Bank to use them as benchmarks when they advise or conduct surveillance of emerging market economies. We propose the IMF give higher, targeted priority to financial sector stability in its surveillance work incorporating the guidelines and advice of the supervisory community.

We suggest the international regulatory bodies continue to work within the framework proposed by the working party, in dialogue with the international financial institutions. We propose that parties offering bilateral assistance, the World Bank and other development banks encourage sound financial sectors, consistent with the strategy, through the provision of high quality, well-coordinated technical assistance.

We ask the G10 Deputies, in collaboration with emerging market representatives, to review implementation of the strategy. In this context we ask the international regulatory bodies, the IMF and the World Bank to report to Finance Ministers next April on their contribution to this process, including their efforts to strengthen the roles they play in encouraging emerging market economies to adopt the principles and guidelines identified by the supervisory community.

Studying the Implications of Retail Electronic Payments

In response to the G7, the G10 formed a working party to develop a broad understanding of the policy issues that might arise from the development of electronic money and identify those relating to consumer protection, law enforcement and supervision, which could benefit from additional international cooperation. The working party focused on multi-purpose stored value cards and on functionally equivalent payment products for executing payments over open computer networks.

Key Areas of Progress

We endorse the working party report on electronic money and its key findings that consumers, providers and authorities should give attention to the transparency, financial integrity, technical security, and vulnerabilities to activity of electronic money.

On cross-border issues, given the early stage of commercial development we agree with the working party that we should adopt a flexible response to electronic money schemes, particularly in light of somewhat difficult national approaches to regulation, to any impediments to innovation and competition and hence their active development.

The working party provided a useful forum for reflecting the perspectives of central banks, finance ministries, and law enforcement officials. We agree with the working party's conclusion that it is important to monitor the situation going forward and that a similar approach could be useful in the future if circumstances warrant, though it is not necessary at this time to establish new, formal international coordinating mechanisms specifically addressing electronic money developments.

Notes

[1] The Basle Committee on Banking Supervision, the International Organization of Securities Commissions, the International Association of Insurance Supervisors, and the Joint Forum on Financial Conglomerates (which is sponsored by the first three bodies and includes banking, securities, and insurance regulators from 13 countries and the European Commission).

[2] (These include the International Accounting Standards Committee and the Committee on Payment and Settlement Systems of G10 Central Banks.)

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Source: Released at the Denver Summit of the Eight


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