G7 leaders endorse supervisory reform agenda
WASHINGTON (Reuters) - Leading financial authorities on Friday endorsed a reform agenda in the wake of the subprime crisis that appeared to spare hedge funds and put the focus instead on banks, complex financial instruments and credit ratings agencies.
Finance ministers and central bankers from the G7 group of industrialized nations endorsed a top-level report -- expected to set the agenda for regulatory improvements through next year -- saying banks needed to do more stress-testing for hard times.
The report was done by the Financial Stability Forum, a grouping of central banks, regulators and international bodies like the International Monetary Fund, which is expected to propose concrete measures in April.
The FSF, which aims to prevent global financial crisis, also called for quick implementation of the latest safety rules for global banks called Basel II, which aims to reward safe banking practices and punish risky practices with hefty capital charges, a G7 source told Reuters.
But hedge funds, often criticized for murky dealings, seem so far to have escaped regulators' wrath as preliminary analyses of the credit crunch show they did not play a big role.
European Central Bank Executive Board member Juergen Stark, speaking at an event alongside the G7 meetings, said hedge funds were not to blame for the financial market crisis but that they needed to operate more in the open.
Stark said more supervision of hedge funds was not feasible but that regulators could do more to oversee the financial firms that do business with hedge funds.
"What can be done ... is to better regulate or better supervise those institutions that provide the credit lines to hedge funds," he said at a conference during the G7 meeting of finance ministers and central bankers.
The FSF report and Stark's comments come as G7 central bankers and finance authorities debate ways to fortify safeguards within the global financial system following August's market meltdown in the wake of the U.S. subprime lending crisis.
CODE OF CONDUCT
"This recent financial market turmoil was not triggered or aggravated by the hedge funds," Stark said. "Both hedge funds and private equity funds play a positive role in the financial markets. They have become major and important players in the financial system," he said.
"They make a contribution to liquidity and the smooth functioning of markets."
Hedge funds did not need to abide by one, global regulatory regime but a code of conduct would be an important step toward meeting concerns by people doing business with hedge funds and by regulators charged with ensuring the smooth functioning of the financial system, he said.
"All in all, we need more transparency and the hedge fund industry seems prepared to enhance the code of conduct," he said.
A code of conduct was also key for sovereign wealth funds, or state-controlled investment companies operated by sovereign entities such as China and Dubai, as it was difficult to know whether the funds were simply commercial actors or state agents with political or strategic objectives, Stark said. Continued...
