MUMBAI, March 31 (Reuters) - Hedge funds and large, complex financial institutions must be more closely regulated to better assess financial system risk, a G20 working group on regulation recommended in a report released on Tuesday.
Credit rating agencies should also be subject to supervision, and compensation schemes needed to be considered when assessing a financial firm’s risk-taking and risk-management, the final report of the G20 Working Group on Enhancing Strong Regulation and Strengthening Transparency said.
Among 25 recommendations to be presented to G20 leaders on Thursday, the report called for greater cooperation between regulators, at both national and international levels, to assess and limit systemic risk.
“The first line of defence in preventing instability in the financial system is sound regulation and recent events have clearly demonstrated that regulatory failures in some jurisdictions have fuelled the current crisis,” it said.
Political leaders and finance ministers from the G20 industrialised and emerging economies will hold a one-day summit in London on Thursday to discuss how to respond to the crisis that has driven much of the global economy into recession.
The report recommended capital reserves be built up by banks in good times to withstand large shocks, and that G20 nations support the adoption of Basel II rules for capital adequacy.
“The regulatory framework needs strengthening, and it is essential to get micro-prudential regulation right in order to promote financial institutions that are sound and manage risks appropriately,” the report said.
> For a factbox on the recommendations, see [ID:nBOM166910]
> For other G20 stories, please see [ID:LA715782] (Reporting by V. Ramakrishnan and Saikat Chatterjee; Editing by John Mair)