The Financial Stability Forum published their
principles on reservering, crisis management and banker's compensation
yesterday. Here are the headlines:
Recommendations and principles to strengthen
On 2 April 2009, the Financial Stability Forum
(FSF) issued reports covering:
for Addressing Procyclicality in the Financial System;
for Cross-border Cooperation on Crisis Management; and
for Sound Compensation Practices;
The Forum also published an update
on the implementation of the recommendations contained in the FSF's April
on Enhancing Market and Institutional Resilience.
Addressing procyclicality in the financial
The present crisis has demonstrated the
disruptive effects of procyclicality – mutually reinforcing interactions
between the financial and real sectors of the economy that tend to amplify
business cycle fluctuations and cause or exacerbate financial instability.
Addressing procyclicality in the financial system is an essential component
of strengthening the macroprudential orientation of regulatory and
The recommendations set out in this report
mitigate mechanisms that amplify procyclicality in both good and bad
times. They encompass a mix of quantitative/rules-based and discretionary
measures that are interrelated and reinforce one another. They will be
implemented over time once conditions in financial markets return to normal.
Principles for Cross-border Cooperation on
Through these Principles
, relevant authorities, including supervisory agencies, central banks and
finance ministries, commit to coooperate both in making advanced preparations
for dealing with financial crisis and in managing them.
Update on the Implementation of the April
2008 FSF Recommendations
on progress in implementing the recommendations of the April 2008 Report
on Enhancing Market and Institutional Resilience covers actions in five
(i) strengthening capital, liquidity and risk management in the
(ii) enhancing transparency and valuation;
the role and uses of credit ratings;
(iv) strengthening the authorities'
responsiveness to risks; and
(v) putting in place robust arrangements for
dealing with stress in the financial system.
The previous follow-up report, issued in October
2008, is available here.
Principles for Sound Compensation Practices
require compensation practices in the financial industry to align
employees' incentives with the long-term profitability of the firm. The principles
call for the following key principles to be implemented:
Effective governance of compensation
- The firm’s board of directors must actively oversee the compensation system’s design and operation.
- The firm’s board of directors must monitor and review the compensation system to ensure the system operates as intended.
- Staff engaged in financial and risk control must be independent, have apppropriate authority, and be compensated in a manner that is independent of the business areas they oversee and commensurate with their key role in the firm.
Effective alignment of compensation with prudent risk taking
- Compensation must be adjusted for all types of risk.
- Compensation outcomes must be symmetric with risk outcomes.
- Compensation payout schedules must be sensitive to the time horizon of risks.
- The mix of cash, equity and other forms of compensation must be consistent with risk alignment.
Effective supervisory oversight and engagement by stakeholders
- Supervisory review of compensation practices must be rigorous and sustained, and deficiencies must be addressed promptly with supervisory action.
- Firms must disclose clear, comprehensive and timely information about their compensation practices to facilitate constructive engagement by all stakeholders.
The report's opening lines say: “In the future, all the stakeholders of financial firms, including
supervisors [or regulators], shareholders, and (where firms are
systematically important) governments, will expect to receive more
information about compensation policies and to increase their
engagement with them.”
I'm off to Costa Rica.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...