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  • 8/14/2019 Group of 30 Reforms - Volcker

    1/2930Group of Thir

    Financial ReFoRmA Framework for Financial Stability

    ebrgd fr rs t 11:00 eST Jury 15, 2009

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    About the Authors

    The views expressed in this paper are those of the Working Group on

    Financial Reform and do not necessarily represent the views of all of

    the individual members of the Group of Thirty.

    ISBN I-56708-146-0

    Copies of this report are available for $49 from:

    The Group of Thirty

    1726 M Street, N.W., Suite 200

    Washington, D.C. 20036

    Tel: (202) 331-2472 Fax: (202) 785-9423

    www.group30.org email:[email protected]

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    Financial ReFoRmA Framework for Financial Stability

    30 Group o Thirty

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    acRonyms and abbReviations

    CCP Centralcounterparty[clearing]

    CDO CollateralizeddebtobligationCDS Creditdeaultswap

    CLO Collateralizedloanobligation

    CRMPG CounterpartyRiskManagementPolicyGroup

    FDIC FederalDepositInsuranceCorporation

    FVA Fairvalueaccounting

    GSE Government-SponsoredEnterprise

    NAV Netassetvalue

    NRSROs NationallyRecognizedSecuritiesRatingsOrganizations

    OTC Over-the-counter

    SEC SecuritiesandExchangeCommission

    SIV StructuredInvestmentVehicle

    TARP TroubledAssetRelieProgram

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    FoRewoRd

    InJuly2008,theGroupoThirty(G30)launchedaprojectonnancialreormunderthe

    leadershipoaSteeringCommitteechairedbyPaulA.Volcker,withTommasoPadoa-SchioppaandArminioFragaNetoasitsViceChairmen.Theyweresupportedbyother

    G30memberswhoparticipatedinaninormalworkinggroup.Allmembers(apartrom

    thosewithcurrentandprospectivenationalocialresponsibilities)havehadtheopportu-

    nitytoreviewanddiscusspreliminarydrats.

    TheReportistheresponsibilityotheSteeringCommitteeandrefectsbroadareaso

    agreementamongtheparticipatingG30members,whoparticipatedintheirindividualca-

    pacities.TheReportdoesnotrefecttheocialviewsothoseinpolicymakingpositionsor

    inleadershiprolesintheprivatesector.Wheretherearesubstantialdierencesinemphasis

    andsubstance,theyarenotedinthetext.

    TheG30undertookthisprojectastheglobalnancialcrisisentereditssecondyear.

    Theanalysishasbeeninormedbytheextremeeventslaterin2008,whichrockedthevery

    oundationotheestablishednancialsystemandwhichledtounprecedentedandmassive

    governmentinterventionbothintheUnitedStatesandinmanyothercountriestocontaina

    spreadingnancialpanic.

    TheReportdoesnotaddresstheneedortheseorpossibleurtheremergencyactions.

    Dicultquestionsoweaningmarketsandnancialinstitutionsromocialliesupport

    aresuretoarise.Whiletheanalysisandrecommendationsdealinsomeinstanceswiththe

    needorlegislation,regulation,andsupervision,theReportisnotdirectedtowardques-

    tionsabouttheappropriateocusandnatureonationaladministrativearrangements.Theseare,inanyevent,infuencedbytheparticularconstitutional,legal,andadministra-

    tivetraditionsoindividualnationsandregionalarrangements.

    TheReport,rather,ocusesonhowthenancialsystemmightreasonablybeorganized

    oncethepresentcrisishaspassed,tobetterassureareasonabledegreeostability.Policy-

    makers,centralbankers,andnancialregulatorswillnecessarilyremainocusedondealing

    withimmediatethreatstotheeectiveunctioningomarkets.However,intakingwhat

    areineectemergencymeasures,aconsensusonthedesirableandlastingelementsoa

    reormedsystemcanbeuseul,andevennecessary,tospeedrestorationocondencein

    sturdy,competitive,andecientnancialarrangementsservingbothnationalandinter-

    nationalmarkets.TheReport,benettingromtheexperienceandbroadperspectiveo

    G30members,isintendedtohelpinormtheneededdebateamongpolicymakersandthe

    internationalnancialcommunityontheseissues.TheReportaddresses:

    a.Thepolicyissuesrelatedtoredeningthescopeandboundariesoprudential

    regulation;

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    b.Reormingthestructureoprudentialregulation,includingtheroleocentralbanks,

    theimplicationsortheworkingsolender-o-last-resortacilitiesandotherele-

    mentsotheocialsaetynet,andtheneedorgreaterinternationalcoordination;

    c. Improvinggovernance,riskmanagement,regulatorypolicies,andaccountingprac-ticesandstandards;and

    d.Improvementsintransparencyandnancialinrastructurearrangements.

    Twonalnotesareinorder.

    First,thisReportisintendedtobeuseultopolicymakersinallthecountrieswhose

    nancialsystemshavebeendisruptedinthiscrisis.Forthisreason,mostrecommendations

    areramedintermsthatshouldpermitconsiderationindierentcountriesinaashionthat

    takesaccountoparticulareaturesotheirnationalsystems.However,sincethiscrisishas

    beenrootedindevelopmentswithintheUnitedStates,andgiventheparticularimportance

    oreormstotheU.S.nancialsystemintermsoitssizeandglobalimpact,severalothe

    issuesandrecommendationshaveadirectU.S.ocus.

    Second,theocusothisReportisonthesaetyandsoundnessaspectsonancial

    regulation.Therearemanyotherimportantaspectsonancialregulationthataretouched

    uponhereonlytotheextentthattheybearonnancialstability,includingcompetition

    policies,customerandinvestorprotection,marketpracticesoversight,andnancialraud

    andcrimeprevention.Also,totheextentdistinctionsaredrawnbetweenregulationand

    supervision,theormerencompassesthesettingopolicies,principles,rules,andstandards,

    whilethelatterencompassesthejudgmentalapplicationothosepoliciesandstandardsto

    particularinstitutions.

    Thekeyissueposedbythepresentcrisisiscrystalclear:Howcanwerestorestrong,

    competitive,innovativenancialmarketstosupportglobaleconomicgrowthwithoutonce

    againriskingabreakdowninmarketunctioningsosevereastoputtheworldeconomies

    atrisk?

    Thesearchorviableanswerstothatquestionneedstobegin.

    PaulA.Volcker

    Chairman of the Trustees

    The Group of Thirty

    JacobA.Frenkel

    Chairman

    The Group of Thirty

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    Acknowledgements

    On behal o the entire Group o Thirty (G30), I would like to express appreciation to

    those whose time, talent, and energy have driven this project to successul ruition.In particular, we acknowledge the leadership o the Steering Committee, chaired by Paul

    Volcker and Vice Chairmen Arminio Fraga Neto and Tommaso Padoa-Schioppa. Their

    collective understanding o the nature o the nancial crisis and insights as to the necessary

    reorms are invaluable.

    Special recognition must also go to those members o the G30 who actively participated

    in the working group project deliberations and discussions.

    Crating a thoughtul report that addresses many dicult supervisory, regulatory,

    market, and other matters requires considerable knowledge o the issues and an ability to

    synthesize the views o numerous individuals. We particularly appreciate the work o Ste-

    phen Thieke, who served as principal dratsman o the report, who brought extraordinary

    experience and accomplishment to that role and to our deliberations.

    We would also like to thank a number o experts who advised the Steering Group and

    participated in our deliberations. In particular, thanks go to Mark Walker, Alan Beller, and

    Mayree Clark. Several institutions provided valuable in-kind support to the project including:

    Cleary Gottlieb Steen and Hamilton LLP, Promontory Financial Group, and RiskMetrics.

    Thanks also to the editor, Diane Stamm, and the designers, Sarah McPhie and Katie

    Burgess, or their dedicated eorts and fexibility when working on this project.

    Finally, the coordination o this project and the many aspects o report production had

    their logistical center at the oces o the Group o Thirty. This project could not have beencompleted without the eorts o Executive Director Stuart Mackintosh, Sviatlana Francis,

    and Nicole Firment o the Group o Thirty.

    Jacob A. Frenkel

    Chairman

    The Group of Thirty

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    Financial ReFoRm woRking gRoup

    Steering Committee

    Ch

    Paul A. Volcker

    ChairmanotheTrustees,TheGroupoThirty

    FormerChairman,BoardoGovernorsotheFederalReserveSystem

    Vc Ch

    Arminio Fraga Neto

    FoundingPartner,GaveaInvestimentos

    FormerGovernor,BancodoBrasil

    Vc Ch

    Tommaso Padoa-Schioppa

    FormerMinisteroEconomyandFinance,Italy

    FormerChairman,InternationalAccountingStandardsCommittee

    FormerMemberotheExecutiveBoard,EuropeanCentralBank

    FormerChairman,CONSOB,Italy

    Pjc DcStephen Thieke,RiskMetrics

    Wethanktheollowingmembers,whoparticipatedintheprojectintheirindividualcapaci-

    ties.Theviewsexpresseddonotnecessarilyrefectthoseotheinstitutionswithwhichthey

    arealiated.

    Jacob A. Frenkel

    Chairman,GroupoThirty

    Vice-Chairman,AmericanInternational

    Group

    FormerGovernor,BankoIsrael

    Geoffrey L. Bell

    ExecutiveSecretary,GroupoThirty

    President,GeoreyBell&Company

    E. Gerald Corrigan

    ManagingDirector,GoldmanSachs

    Group,Inc.

    FormerPresident,FederalReserve

    BankoNewYork

    Andrew D. Crockett

    President,JPMorganChaseInternational

    FormerGeneralManager,Bankor

    InternationalSettlements

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    Richard Debs

    AdvisoryDirector,MorganStanley

    FormerPresident,MorganStanley

    InternationalFormerCOO,FederalReserveBank

    oNewYork

    Jacques de Larosire

    Counseiller,BNPParibas

    FormerPresident,EuropeanBank

    orReconstructionandDevelopment

    FormerManagingDirector,International

    MonetaryFund

    FormerGovernor,BanquedeFrance

    Gerd Husler

    MemberotheBoardoDirectorsand

    SeniorAdvisor,RHJInternational

    FormerCounsellorandDirector,

    InternationalMonetaryFund

    FormerManagingDirector,DresdnerBank

    John G. Heimann

    SeniorAdvisor,FinancialStabilityInstitute

    FormerU.S.ComptrollerotheCurrency

    William R. Rhodes

    SeniorViceChairman,Citigroup

    Chairman,President,andCEO,

    CiticorpandCitibank

    Ernest Stern

    PartnerandSeniorAdvisor,

    TheRohatynGroup

    FormerManagingDirector,

    JPMorganChase

    FormerManagingDirector,WorldBank

    David Walker

    SeniorAdvisor,MorganStanley

    International

    FormerExecutiveDirector,Bank

    oEngland

    FormerChairman,Securitiesand

    InvestmentsBoard,U.K.

    exps

    AlanBeller,ClearyGottliebSteen&Hamilton,LLP

    MayreeClark,AetosCapital

    MarkWalker,ClearyGottliebSteen&Hamilton,LLP

    StuartP.M.Mackintosh,TheGroupoThirty

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    appendix

    LiSt o reCommenDationS

    Core reCommenDation i

    gps d wksss h cv pdl l d spvs

    s b ld. Allsystemicallysignicantnancialinstitutions,regardlessotype,

    mustbesubjecttoanappropriatedegreeoprudentialoversight.

    Pdl rl d Spvs Bk ozs

    rcd 1:

    a. Inallcountries,theactivitiesogovernment-insureddeposit-takinginstitutionsshouldbesubjecttoprudentialregulationandsupervisionbyasingleregulator(thatis,con-

    solidatedsupervision).Thelargestandmostcomplexbankingorganizationsshould

    besubjecttoparticularlycloseregulationandsupervision,meetinghighandcommon

    internationalstandards.

    b.Large,systemicallyimportantbankinginstitutionsshouldberestrictedinundertak-

    ingproprietaryactivitiesthatpresentparticularlyhighrisksandseriousconfictso

    interest.Sponsorshipandmanagementocommingledprivatepoolsocapital(that

    is,hedgeandprivateequityundsinwhichthebankinginstitutionsowncapitalis

    commingledwithclientunds)shouldordinarilybeprohibitedandlargeproprietary

    tradingshouldbelimitedbystrictcapitalandliquidityrequirements.Participation

    inpackagingandsaleocollectivedebtinstrumentsshouldrequiretheretentionoa

    meaningulpartothecreditrisk.

    c. Ingeneral,government-insureddeposit-takinginstitutionsshouldnotbeownedand

    controlledbyunregulatednon-nancialorganizations,andstrictlimitsshouldbe

    imposedondealingsamongsuchbankinginstitutionsandpartialnon-bankowners.

    d.Toguardagainstexcessiveconcentrationinnationalbankingsystems,withimplica-

    tionsoreectiveocialoversight,managementcontrol,andeectivecompetition,

    nationwidelimitsondepositconcentrationshouldbeconsideredatalevelappropri-

    atetoindividualcountries.

    Csldd Spvs n-Bk cl iss

    rcd 2:

    a. Forthosecountrieslackingsucharrangements,arameworkornational-levelcon-

    solidatedprudentialregulationandsupervisionoverlargeinternationallyactiveinsur-

    ancecompaniesshouldbeestablished.

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    Financial ReFoRmA Framework for Financial Stability

    b.Anappropriateprudentialregulatorshouldbedesignatedorthoselargeinvestment

    banksandbroker-dealersthatarenotorganizedasbankholdingcompanies.

    my mk ml ds d Spvsrcd 3:

    a.Moneymarketmutualundswishingtocontinuetooerbank-likeservices,such

    astransactionaccountservices,withdrawalsondemandatpar,andassuranceso

    maintainingastablenetassetvalue(NAV)atparshouldberequiredtoreorganizeas

    special-purposebanks,withappropriateprudentialregulationandsupervision,gov-

    ernmentinsurance,andaccesstocentralbanklender-o-last-resortacilities.

    b.Thoseinstitutionsremainingasmoneymarketmutualundsshouldonlyoeracon-

    servativeinvestmentoptionwithmodestupsidepotentialatrelativelylowrisk.The

    vehiclesshouldbeclearlydierentiatedromederallyinsuredinstrumentsoeredbybanks,suchasmoneymarketdepositunds,withnoexplicitorimplicitassurancesto

    investorsthatundscanbewithdrawnondemandatastableNAV.Moneymarketmu-

    tualundsshouldnotbepermittedtouseamortizedcostpricing,withtheimplication

    thattheycarryafuctuatingNAVratherthanonethatispeggedatUS$1.00pershare.

    ovsh Pv Pls Cpl

    rcd 4:

    a.Managersoprivatepoolsocapitalthatemploysubstantialborrowedundsshould

    berequiredtoregisterwithanappropriatenationalprudentialregulator.There

    shouldbesomeminimumsizeandventurecapitalexemptionsromsuchregistration

    requirement.

    b.Theprudentialregulatorosuchmanagersshouldhaveauthoritytorequireperiodic

    regulatoryreportsandpublicdisclosuresoappropriateinormationregardingthe

    size,investmentstyle,borrowing,andperormanceotheundsundermanagement.

    Sinceintroductionoevenamodestsystemoregistrationandregulationcancreate

    aalseimpressionolowerinvestmentrisk,disclosure,andsuitabilitystandardswill

    havetobereevaluated.

    c.Forundsaboveasizejudgedtobepotentiallysystemicallysignicant,theprudentialregulatorshouldhaveauthoritytoestablishappropriatestandardsorcapital,liquid-

    ity,andriskmanagement.

    d.Forthesepurposes,thejurisdictionotheappropriateprudentialregulatorshouldbe

    basedontheprimarybusinesslocationothemanagerosuchunds,regardlesso

    thelegaldomicileotheundsthemselves.Giventheglobalnatureothemarketsin

    whichsuchmanagersandundsoperate,itisimperativethataregulatoryramework

    beappliedonaninternationallyconsistentbasis.

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    Financial ReFoRmA Framework for Financial Stability10

    gv-Spsd epss (gSes)

    rcd 5:

    a.FortheUnitedStates,thepolicyresolutionotheappropriateroleoGSEsinmort-

    gagenanceshouldbebasedonaclearseparationotheunctionsoprivatesector

    mortgagenanceriskintermediationromgovernmentsectorguaranteesorinsurance

    omortgagecreditrisk.

    b.Governmentalentitiesprovidingsupportorthemortgagemarketbymeansomarket

    purchasesshouldhaveexplicitstatutorybackingandnancialsupport.Hybridso

    privateownershipwithgovernmentsponsorshipshouldbeavoided.Intime,existing

    GSEmortgagepurchasingandportolioactivitiesshouldbespunotoprivatesector

    entities,withthegovernment,iitdesires,maintainingacapacitytointerveneinthe

    marketthroughawhollyownedpublicinstitution.

    Core reCommenDation ii

    th qly d cvss pdl l d spvs s

    b pvd. Thiswillrequirebetter-resourcedprudentialregulatorsandcentralbanks

    operatingwithinstructuresthataordmuchhigherlevelsonationalandinternational

    policycoordination.

    rly Sc

    rcd 6:

    a.Countriesshouldreevaluatetheirregulatorystructureswithaviewtoeliminatingun-

    necessaryoverlapsandgapsincoverageandcomplexity,removingthepotentialor

    regulatoryarbitrage,andimprovingregulatorycoordination.

    b.Inallcases,countriesshouldexplicitlyrearmtheinsulationonationalregulatory

    authoritiesrompoliticalandmarketpressuresandreassesstheneedorimproving

    thequalityandadequacyoresourcesavailabletosuchauthorities.

    rl h Cl Bk

    rcd 7:

    a.Wherenotalreadythecase,centralbanksshouldacceptaroleinpromotingand

    maintainingnancialstability.Theexpectationshouldbethatconcernsornancial

    stabilityarerelevantnotjustintimesonancialcrisis,butalsointimesorapid

    creditexpansionandincreaseduseoleveragethatmayleadtocrises.

    b.Incountrieswherethecentralbankisnottheprudentialregulator,thecentralbank

    shouldhave:(i)astrongroleonthegoverningbodyotheprudentialandmarkets

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    Financial ReFoRmA Framework for Financial Stability 11

    regulator(s);(ii)aormalreviewrolewithrespecttoproposedchangesinkeypruden-

    tialpolicies,especiallycapitalandliquiditypoliciesandmarginarrangements;and(iii)

    asupervisoryroleinregardtothelargestsystemicallysignicantrms,andcritical

    paymentandclearingsystems.c. Asharpdistinctionshouldbemaintainedbetweenthoseregulatedbankingorganiza-

    tionswithnormalaccesstocentralbankliquidityacilitiesandothertypesonancial

    institutionswhoseaccess,iany,shouldbelimitedtoextremeemergencysituationso

    criticalsystemicimportance.

    d.Centralbankemergencylendingauthorityorhighlyunusualandexigentcircum-

    stancesshouldbepreserved,butshouldinclude,bylaworpractice,supportbyap-

    propriatepoliticalauthoritiesortheuseosuchauthorityinextendingsuchcreditto

    non-bankinstitutions.

    e. Centralbankliquiditysupportoperationsshouldbelimitedtoormsthatdonot

    entaillendingagainstortheoutrightpurchaseohigh-riskassets,orotherormso

    long-termdirectorindirectcapitalsupport.Inprinciple,thoseormsosupportare

    moreappropriatelyprovidedbydirectlyaccountablegovernmententities.Inpractice,

    totheextentthecentralbankistheonlyentitywiththeresourcesandauthoritytoact

    quicklytoprovidethisormosystemicsupport,thereshouldbesubsequentapproval

    oanappropriategovernmentalentitywiththeconsequentrisktransertothatentity.

    il Cd

    rcd 8:

    a.Nationalregulatoryauthoritiesandnanceministersarestronglyencouragedto

    adaptandenhanceexistingmechanismsorinternationalregulatoryandsupervisory

    coordination.Theocusoneededenhancementsshouldbeto:(i)bettercoordinate

    oversightothelargestinternationalbankingorganizations,withmoretimelyand

    openinormationsharing,andgreaterclarityonhomeandhostresponsibilities,in-

    cludingincrisismanagement;(ii)movebeyondcoordinatedrulemakingandstandard

    settingtotheidenticationandmodicationomaterialnationaldierencesinthe

    applicationandenorcementosuchstandards;(iii)closeregulatorygapsandraise

    standards,whereneeded,withrespecttooshorebankingcenters;and(iv)develop

    themeansorjointconsiderationosystemicriskconcernsandthecyclicalityimplica-tionsoregulatoryandsupervisorypolicies.Theappropriateagenciesshouldstrength-

    entheiractionsinmembercountriestopromoteimplementationandenorcemento

    internationalstandards.

    b.Giventherecurringimportanceoexcessiveleverageasacontributingactorto

    nancialdisruptions,andtheincreasinglycomplexwaysinwhichleveragecanbe

    employedonandobalancesheets,prudentialregulatorsandcentralbanksshould

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    Financial ReFoRmA Framework for Financial Stability1

    collaboratewithinternationalagenciesinaneorttodeneleverageandthencollect

    andreportdataonthedegreeoleverageandmaturityandliquiditymismatchesin

    variousnationalsystemsandmarkets.

    c. Totheextentnewinternationalregulatoryorganizationsareultimatelyneeded,theinitialocusshouldbeondevelopingmoreormalregionalmechanisms,suchasinthe

    EuropeanUnion,butwithcontinuedattentivenesstotheglobaldimensionomost

    signicantnancialmarkets.

    Core reCommenDation iii

    isl plcs d sdds s b shd, wh pcl

    phss sdds vc, sk , cpl, d lqdy.

    Regulatorypoliciesandaccountingstandardsmustalsoguardagainstprocyclicaleects

    andbeconsistentwithmaintainingprudentbusinesspractices.

    rly Sdds gvc d rsk m

    rcd 9:

    Regulatorystandardsorgovernanceandriskmanagementshouldberaised,withparticu-

    laremphasison:

    a. Strengtheningboardsodirectorswithgreaterengagementoindependentmembers

    havingnancialindustryandriskmanagementexpertise;

    b.Coordinatingboardoversightocompensationandriskmanagementpolicies,with

    theaimobalancingrisktakingwithprudenceandthelong-runinterestsoand

    returnstoshareholders;

    c. Ensuringsystematicboard-levelreviewsandexercisesaimedatestablishingthemost

    importantparametersorsettingthermsrisktoleranceandevaluatingitsriskpro-

    lerelativetothoseparameters;

    d.Ensuringtheriskmanagementandauditingunctionsareullyindependentand

    adequatelyresourcedareasotherm.Theriskmanagementunctionshouldreport

    directlytothechieexecutiveocerratherthanthroughtheheadoanotherunc-

    tionalarea;

    e. Conductingperiodicreviewsoarmspotentialvulnerabilitytoriskarisingromcreditconcentrations,excessivematuritymismatches,excessiveleverage,orunduereli-

    anceonassetmarketliquidity;

    . Ensuringthatalllargermshavethecapacitytocontinuouslymonitor,withinamat-

    terohours,theirlargestcounterpartycreditexposuresonanenterprisewidebasis

    andtomakethatinormationavailable,asappropriate,toitsseniormanagement,its

    board,anditsprudentialregulatorandcentralbank;

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    Financial ReFoRmA Framework for Financial Stability 1

    g.Ensuringindustrywideacceptanceoandactiononthemanyspecicriskmanage-

    mentpracticeimprovementscontainedinthereportsotheCounterpartyRiskMan-

    agementPolicyGroup(CRMPG)andtheInstituteoInternationalFinance.

    rly Cpl Sdds

    rcd 10:

    a. Internationalregulatorycapitalstandardsshouldbeenhancedtoaddresstendencies

    towardprocyclicality.Benchmarksorbeingwellcapitalizedshouldberaised,given

    thedemonstrablelimitationsoeventhemostadvancedtoolsorestimatingrmwide

    risk.

    b.Thesebenchmarksshouldbeexpressedasabroadrangewithinwhichcapitalratios

    shouldbemanaged,withtheexpectationthat,aspartosupervisoryguidance,rms

    willoperateattheupperendosucharangeinperiodswhenmarketsareexuberantandtendenciesorunderestimatingandunderpricingriskaregreat.

    c. Theexistinginternationaldenitionsocapitalshouldbereevaluated,lookingtoward

    closealignmentonnationaldenitions.

    d.Capitalandriskdisclosurestandardsshouldbereevaluatedtoprovideahigherdegree

    otransparencyoarmsriskappetite,itsestimatedneedsorandallocationoeco-

    nomiccapital,anditsvaluationpractices.

    Sdds Lqdy rsk m

    rcd 11:

    a.Base-levelliquiditystandardsshouldincorporatenormsormaintainingasizable

    diversiedmixolong-termundingandanavailablecushionohighlyliquidunen-

    cumberedassets.Oncesuchstandardsaredeveloped,considerationshouldbegivento

    whatisthepreerredmixoseniorandsubordinateddebtinbankcapitalstructures.

    b.Supervisoryguidanceorliquiditystandardsshouldbebasedonamorerenedanaly-

    sisoarmscapacitytomaintainampleliquidityunderstressconditions,including

    evaluationothequalityandeectivenessoitsliquiditymanagementpoliciesand

    contingencyundingplan.

    c. Liquiditydisclosurestandards,buildingonthesuggestedpracticesintheBaselCom-

    mitteePrinciples,shouldcomplementthesuggestedimproveddisclosurepracticesor

    capitalandriskproleinormation.

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    Financial ReFoRmA Framework for Financial Stability1

    Vl acc

    rcd 12:

    a. Fairvalueaccountingprinciplesandstandardsshouldbereevaluatedwithaview

    todevelopingmorerealisticguidelinesordealingwithlessliquidinstrumentsand

    distressedmarkets.

    b.Thetensionbetweenthebusinesspurposeservedbyregulatednancialinstitutions

    thatintermediatecreditandliquidityriskandtheinterestsoinvestorsandcreditors

    shouldberesolvedbydevelopmentoprinciples-basedstandardsthatbetterrefectthe

    businessmodelotheseinstitutions,applyappropriaterigortovaluationandevalu-

    ationointent,andrequireimproveddisclosureandtransparency.Thesestandards

    shouldalsobereviewedby,andcoordinatedwith,prudentialregulatorstoensure

    applicationinaashionconsistentwithsaeandsoundoperationosuchinstitutions.

    c. Accountingprinciplesshouldalsobemademorefexibleinregardtotheprudential

    needorregulatedinstitutionstomaintainadequatecreditlossreservessucientto

    coverexpectedlossesacrosstheirportoliosoverthelieoassetsinthoseportolios.

    Thereshouldbeulltransparencyothemannerinwhichreservesaredeterminedand

    allocated.

    d.AsemphasizedinthethirdreportotheCRMPG,underanyandallstandardso

    accountingandunderanyandallmarketconditions,individualnancialinstitutions

    mustensurethatwhollyadequateresources,insulatedbyail-saeindependentdeci-

    sion-makingauthority,areatthecenterothevaluationandpricevericationprocess.

    Core reCommenDation iV

    cl ks d pdcs s b d sp, wh b-

    ld sk d pdl cvs. th sc spp sch

    ks s b d ch bs d ss pl ls

    v l fcl ss.

    rs Cfdc Sczd Cd mks

    rcd 13:

    a.MarketSupervision:Extensiveinnovationinthecapitalmarketsandtherapidgrowth

    osecuritizationmakeitimperativethatsecuritizedandotherstructuredproductand

    derivativesmarketsbeheldtoregulatory,disclosure,andtransparencystandardsat

    leastcomparabletothosethathavehistoricallybeenappliedtothepublicsecurities

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    Financial ReFoRmA Framework for Financial Stability 1

    markets.Thismayrequirethatabroaderrangeomarketsbemonitored,thatthere

    beadequatetransparencyastotransactionvolumesandholdingsacrossallproducts,

    andthatbothcreditandleverageelementsoeachproductbethoroughlyunderstood

    andmonitored.b.CreditUnderwritingStandards:Thehealthyredevelopmentosecuritizedcreditmar-

    ketsrequiresarestorationomarketcondenceintheadequacyandsustainabilityo

    creditunderwritingstandards.Tohelpachievethis,regulatorsshouldrequireregu-

    latednancialinstitutionstoretainameaningulportionothecreditrisktheyare

    packagingintosecuritizedandotherstructuredcreditproducts.

    c. O-Balance-SheetVehicles:Pendingaccountingrulechangesortheconsolidation

    omanytypesoo-balance-sheetvehiclesrepresentapositiveandneededimprove-

    ment.Itisimportant,beoretheyareullyimplemented,thatcareulconsiderationbe

    giventohowtheserulesarelikelytoimpacteortstorestoretheviabilityosecuri-

    tizedcreditmarkets.

    r acy rs

    rcd 14:

    RegulatorypolicieswithregardtoNationallyRecognizedSecuritiesRatingOrganizations

    (NRSROs)andtheuseoratingsshouldberevised,preerablyonaninternationallycoordi-

    natedbasis,toachievetheollowing:

    a.Usersoriskratings,mostimportantlyregulatedusers,shouldbeencouragedtore-

    storeoracquirethecapacityorindependentevaluationsotheriskocreditproductsinwhichtheyareinvesting.

    b.RiskratingsissuedbytheNRSROsshouldbemademorerobust,torefecttherisk

    opotentialvaluationlossesarisingnotjustromdeaultprobabilitiesandlossinthe

    eventodeault,butalsoromtheullrangeopotentialriskactors(includingliquid-

    ityandpricevolatility).

    c. Regulatorsshouldencouragethedevelopmentopaymentmodelsthatimprovethe

    alignmentoincentivesamongtheprovidersoriskratingsandtheirclientsandusers,

    andpermituserstoholdNRSROsaccountableorthequalityotheirworkproduct.

    th ovsh Cd Dl Swps (CDS)

    d ov-h-C (otC) mks

    rcd 15:

    a.Much-neededplannedimprovementstotheinrastructuresupportingtheOTCderiva-

    tivesmarketsshouldbeurthersupportedbylegislationtoestablishaormalsystem

    oregulationandoversightosuchmarkets.

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    Financial ReFoRmA Framework for Financial Stability1

    b.Giventheglobalnatureothemarket,itisessentialthattherebeaconsistentregula-

    toryrameworkonaninternationalscale,andnationalregulatorsshouldshareinor-

    mationandenterintoappropriatecooperativearrangementswithauthoritiesoother

    countriesresponsibleoroverseeingactivities.

    a rsl mchs cl iss

    rcd 16:

    a. Incountrieswherethisisnotalreadythecase,alegalregimeshouldbeestablishedto

    provideregulatorswithauthoritytorequireearlywarning,promptcorrectiveactions,

    andorderlyclosingsoregulatedbankingorganizations,andothersystemicallysigni-

    icantregulatednancialinstitutions.IntheUnitedStates,legislationshouldestablish

    aprocessormanagingtheresolutionoailednon-depositorynancialinstitutions

    (includingnon-bankaliateswithinabankholdingcompanystructure)comparabletotheprocessordepositoryinstitutions.

    b.Theregimeornon-depositorynancialinstitutionsshouldapplyonlytothoseew

    organizationswhoseailuremightreasonablybeconsideredtoposeathreattothe

    nancialsystemandthereoresubjecttoocialregulation.

    c. Aregulatorybodyhavingpowerscomparabletothoseavailableortheresolution

    obankinginstitutionsshouldbeempoweredtoactasareceiverorconservatoro

    aailednon-depositoryorganizationandtoplacetheorganizationinliquidationor

    takeactiontorestoreittoasoundandsolventcondition.

    d.Thespecialtreatmentaccordedtovariousormsonancialcontractsundercurrent

    U.S.lawshouldbeexaminedinlightorecentexperience,withaviewtowardresolv-

    ingclaimsunderthesecontractsinamannerleastdisruptivetothenancialsystem.

    ipv tspcy Scd Pdc mks

    rcd 17:

    a.Thedisclosureanddisseminationregimeorasset-backedandotherstructuredxed-

    incomenancialproducts(includingsecuritiesandothernancialproducts)inthe

    publicandprivatemarketsshouldbeenhanced.

    b.Theappropriatenationalregulatorshould,inconjunctionwithinvestors,determinewhatinormationismaterialtoinvestorsintheseproductsandshouldconsideren-

    hancingexistingrulesoradoptnewrulesthatensuredisclosureothatinormation,

    orbothasset-backedandsyntheticstructuredproducts.

    c. Theappropriatenationalregulatorshouldconditiontransactionsintheprivateand

    wholesalemarketsonsatisactionoappropriateinormationdisclosurestandards.

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    Financial ReFoRmA Framework for Financial Stability 1

    Sh mk acvy d Vl i

    rcd 18:

    Eortstorestoreinvestorcondenceintheworkingsothesemarketssuggestaneedtore-

    visitevaluationsothecostsandbenetsoinrastructureinvestmentsthatwouldacilitate

    amuchhigherlevelotransparencyaroundactivitylevels,tradedprices,andrelatedvalua-

    tions.Partothecostsosuchchangesistheimpactonrm-specicconcernsregardingthe

    privatenatureotheirmarketactivity.Theseconcerns,anddirectinvestmentcosts,needto

    beweighedagainstthepotentialbenetsohigherlevelsomarkettransparency.

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    1

    membeRs oF the gRoup oF thiRty

    Paul A. Volcker

    ChairmanotheBoardoTrustees,GroupoThirtyFormerChairman,BoardoGovernorsotheFederalReserveSystem

    Jacob A. FrenkelChairman,GroupoThirtyViceChairman,AmericanInternationalGroupFormerGovernor,BankoIsrael

    Geoffrey L. BellExecutiveSecretary,GroupoThirtyPresident,GeoreyBell&Company,Inc.

    Montek S. Ahluwalia

    DeputyChairman,PlanningCommissionoIndiaFormerDirector,IndependentEvaluationOce,InternationalMonetaryFund

    Abdulatif Al-HamadChairman,ArabFundorEconomicandSocialDevelopmentFormerMinisteroFinanceandMinisteroPlanning,Kuwait

    Leszek BalcerowiczChairmanotheBoard,BruegelProessor,WarsawSchooloEconomicsFormerPresident,NationalBankoPolandFormerDeputyPrimeMinisterandMinisteroFinance,Poland

    Jaime CaruanaFinancialCounsellor,InternationalMonetaryFundFormerGovernor,BancodeEspaaFormerChairman,BaselCommitteeonBankingSupervision

    Domingo CavalloChairmanandCEO,DFCAssociates,LLCFormerMinisteroEconomy,Argentina

    E. Gerald CorriganManagingDirector,GoldmanSachsGroup,Inc.FormerPresident,FederalReserveBankoNewYork

    Andrew D. CrockettPresident,JPMorganChaseInternationalFormerGeneralManager,BankorInternationalSettlements

    Guillermo de la Dehesa RomeroDirectorandMemberotheExecutiveCommittee,GrupoSantanderFormerDeputyManagingDirector,BancodeEspaaFormerSecretaryoState,MinistryoEconomyandFinance,Spain

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    1

    Mario DraghiGovernor,BancadItaliaChairman,FinancialStabilityForumMemberotheGoverningandGeneralCouncils,EuropeanCentralBank

    FormerViceChairmanandManagingDirector,GoldmanSachsInternational

    Martin FeldsteinProessoroEconomics,HarvardUniversityPresidentEmeritus,NationalBureauoEconomicResearchFormerChairman,CounciloEconomicAdvisers

    Roger W. Ferguson, Jr.ChieExecutive,TIAA-CREFFormerChairman,SwissReAmericaHoldingCorporationFormerViceChairman,BoardoGovernorsotheFederalReserveSystem

    Stanley Fischer

    Governor,BankoIsraelFormerFirstManagingDirector,InternationalMonetaryFund

    Arminio Fraga NetoPartner,GaveaInvestimentosFormerGovernor,BancodoBrasil

    Timothy F. GeithnerPresidentandChieExecutiveOcer,FederalReserveBankoNewYorkFormerU.S.UndersecretaryoTreasuryorInternationalAairs

    Gerd HuslerMemberotheBoardoDirectorsandSeniorAdvisor,RHJInternational

    FormerCounsellorandDirector,InternationalCapitalMarketsDepartment, InternationalMonetaryFundFormerManagingDirector,DresdnerBank

    Philipp HildebrandViceChairmanotheGoverningBoard,SwissNationalBankFormerPartner,MooreCapitalManagement

    Mervyn KingGovernor,BankoEnglandFormerProessoroEconomics,LondonSchooloEconomics

    Paul KrugmanProessoroEconomics,WoodrowWilsonSchool,PrincetonUniversityFormerMember,CounciloEconomicAdvisors

    Guillermo Ortiz MartinezGovernor,BancodeMexicoFormerSecretaryoFinanceandPublicCredit,Mexico

    Tommaso Padoa-SchioppaFormerMinisteroEconomyandFinance,ItalyFormerChairman,InternationalAccountingStandardsCommitteeFormerMemberotheExecutiveBoard,EuropeanCentralBankFormerChairman,CONSOB

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    0

    Kenneth RogoffThomasD.CabotProessoroPublicPolicyandEconomics,HarvardUniversityFormerChieEconomistandDirectoroResearch,IMF

    Tharman ShanmugaratnamMinisteroFinance,SingaporeFormerManagingDirector,MonetaryAuthorityoSingapore

    Lawrence SummersCharlesW.EliotUniversityProessor,HarvardUniversityFormerPresident,HarvardUniversityFormerU.S.SecretaryotheTreasury

    Jean-Claude TrichetPresident,EuropeanCentralBankFormerGovernor,BanquedeFrance

    David WalkerSeniorAdvisor,MorganStanleyInternational,Inc.FormerChairman,MorganStanleyInternational,Inc.FormerChairman,SecuritiesandInvestmentsBoard,UK

    Zhou XiaochuanGovernor,PeoplesBankoChinaFormerPresident,ChinaConstructionBankFormerAsst.MinisteroForeignTrade

    Yutaka YamaguchiFormerDeputyGovernor,BankoJapanFormerChairman,EuroCurrencyStandingCommission

    Ernesto ZedilloDirector,YaleCenterortheStudyoGlobalization,YaleUniversityFormerPresidentoMexico

    Senior memBerS

    William McDonoughViceChairmanandSpecialAdvisortotheChairman,MerrillLynchFormerChairman,PublicCompanyAccountingOversightBoardFormerPresident,FederalReserveBankoNewYork

    William R. RhodesSeniorViceChairman,CitigroupChairman,PresidentandCEO,CiticorpandCitibank

    Ernest SternPartnerandSeniorAdvisor,TheRohatynGroupFormerManagingDirector,JPMorganChaseFormerManagingDirector,WorldBank

    Marina v N. WhitmanProessoroBusinessAdministration&PublicPolicy,UniversityoMichiganFormerMember,CounciloEconomicAdvisors

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    1

    emerituS memBerS

    Lord Richardson of Duntisbourne, KGHonoraryChairman,GroupoThirty

    FormerGovernor,BankoEngland

    Richard A. DebsAdvisoryDirector,MorganStanleyFormerPresident,MorganStanleyInternationalFormerCOO,FederalReserveBankoNewYork

    Gerhard FelsFormerDirector,InstitutderdeutschenWirtschat

    Wilfried GuthFormerSpokesmenotheBoardoManagingDirectors,DeutscheBankAG

    Toyoo GyohtenPresident,InstituteorInternationalMonetaryAairsFormerChairman,BankoTokyo

    John G. HeimannSeniorAdvisor,FinancialStabilityInstituteFormerUSComptrollerotheCurrency

    Erik HoffmeyerFormerChairman,DanmarksNationalbank

    Peter B. Kenen

    SeniorFellowinInternationalEconomics,CouncilonForeignRelationsFormerWalkerProessoroEconomics&InternationalFinance, DepartmentoEconomics,PrincetonUniversity

    Jacques de LarosireConseiller,BNPParibasFormerPresident,EuropeanBankorReconstructionandDevelopmentFormerManagingDirector,InternationalMonetaryFundFormerGovernor,BanquedeFrance

    Shijuro OgataFormerDeputyGovernor,BankoJapanFormerDeputyGovernor,JapanDevelopmentBank

    Sylvia OstryDistinguishedResearchFellowMunkCentreorInternationalStudies,TorontoFormerAmbassadororTradeNegotiations,CanadaFormerHead,OECDEconomicsandStatisticsDepartment

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    publications oF the gRoup oF thiRty

    since 10

    SPeCiaL rePortSTheStructureoFinancialSupervision:ApproachesandChallengesinaGlobalMarketplace G30 Financial Regulatory Systems Working Group. 2008

    Global Clearing and Settlement: Final Monitoring ReportGlobal Monitoring Committee. 2006

    Reinsurance and International Financial MarketsReinsurance Study Group. 2006

    Enhancing Public Confdence in Financial ReportingSteering & Working Committees on Accounting. 2004

    Global Clearing and Settlement: A Plan o ActionSteering & Working Committees of Global Clearing & Settlements Study. 2003

    Derivatives: Practices and Principles: Follow-up Surveys o Industry PracticeGlobal Derivatives Study Group. 1994

    Derivatives: Practices and Principles, Appendix III: Survey o Industry PracticeGlobal Derivatives Study Group. 1994

    Derivatives: Practices and Principles, Appendix II: Legal Enorceability:Survey o Nine JurisdictionsGlobal Derivatives Study Group. 1993

    Derivatives:PracticesandPrinciples,AppendixI:WorkingPapers Global Derivatives Study Group. 1993

    Derivatives: Practices and PrinciplesGlobal Derivatives Study Group. 1993

    Clearance and Settlement Systems: Status Reports, Autumn 1992Various Authors. 1992

    Clearance and Settlement Systems: Status Reports, Year-End 1990Various Authors. 1991

    Conerence on Clearance and Settlement Systems;London, March 1990: SpeechesVarious Authors. 1990

    ClearanceandSettlementSystems:StatusReports,Spring1990 Various Authors. 1990

    rePortS

    SharingtheGainsromTrade:RevivingtheDohaRound Study Group Report. 2004

    KeyIssuesinSovereignDebtRestructuring Study Group Report. 2002

    ReducingtheRisksoInternationalInsolvency A Compendium of Work in Progress. 2000

    Collapse:TheVenezuelanBankingCrisiso94 Ruth de Krivoy. 2000

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    TheEvolvingCorporation:GlobalImperativesandNationalResponses Study Group Report. 1999

    InternationalInsolvenciesintheFinancialSector Study Group Report. 1998

    GlobalInstitutions,NationalSupervisionandSystemicRisk Study Group on Supervision and Regulation. 1997

    LatinAmericanCapitalFlows:LivingwithVolatility Latin American Capital Flows Study Group. 1994

    DeningtheRolesoAccountants,BankersandRegulatorsintheUnitedStates Study Group on Accountants, Bankers and Regulators. 1994

    EMU Ater MaastrichtPeter B. Kenen. 1992

    Sea Changes in Latin America

    Pedro Aspe, Andres Bianchi and Domingo Cavallo, with discussionby S.T. Beza and William Rhodes. 1992

    The Summit Process and Collective Security: Future Responsibility SharingThe Summit Reform Study Group. 1991

    Financing Eastern EuropeRichard A. Debs, Harvey Shapiro and Charles Taylor. 1991

    The Risks Facing the World EconomyThe Risks Facing the World Economy Study Group. 1991

    tHe WiLLiam taYLor memoriaL LeCtureSThe Credit Crisis: The Quest or Stability and Reorm

    E. Gerald Corrigan. 2008

    Lessons Learned rom the 2008 Financial Crisis

    Eugene A. Ludwig. 2008Two Cheers or Financial Stability

    Howard Davies. 2006

    Implications o Basel II or Emerging Market CountriesStanley Fisher. 2003

    Issues in Corporate GovernanceWilliam J. McDonough. 2003

    Post Crisis Asia: The Way ForwardLee Hsien Loong. 2001

    Licensing Banks: Still Necessary?Tommaso Padoa-Schioppa. 2000

    Banking Supervision and Financial StabilityAndrew Crockett. 1998

    Global Risk ManagementUlrich Cartellieri and Alan Greenspan. 1996

    The Financial Disruptions o the 1980s: A Central Banker Looks BackE. Gerald Corrigan. 1993

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    oCCaSionaL PaPerS78.TheG30atThirty Peter B. Kenen. 2008

    77.DistortingtheMicrotoEmbellishtheMacro:TheCaseoArgentina Domingo Cavallo, Joaqun Cottani. 2008

    76. Credit Crunch: Where Do We Stand?Thomas A. Russo. 2008

    75. Banking, Financial, and Regulatory ReormLiu Mingkang, Roger Ferguson, Guillermo Ortiz Martinez. 2007

    74. The Achievements and Challenges o European Union Financial Integrationand Its Implications or the United StatesJacques de Larosiere. 2007

    73. Nine Common Misconceptions About Competitiveness and GlobalizationGuillermo de la Dehesa. 2007

    72. International Currencies and National Monetary Policies

    Barry Eichengreen. 200671. The International Role o the Dollar and Trade Balance Adjustment

    Linda Goldberg and Cdric Tille. 2006

    70.TheCriticalMissionotheEuropeanStabilityandGrowthPact Jacques de Larosiere. 2004

    69.IsItPossibletoPreservetheEuropeanSocialModel? Guillermo de la Dehesa. 2004

    68.ExternalTransparencyinTradePolicy Sylvia Ostry. 2004

    67.AmericanCapitalismandGlobalConvergence Marina v. N. Whitman. 2003

    66.Enronetal:MarketForcesinDisarray Jaime Caruana, Andrew Crockett, Douglas Flint, Trevor Harris, Tom Jones. 2002

    65.VentureCapitalintheUnitedStatesandEurope Guillermo de la Dehesa. 2002

    64.ExplainingtheEurotoaWashingtonAudience

    Tommaso Padoa-Schioppa. 2001

    63.ExchangeRateRegimes:SomeLessonsromPostwarEurope Charles Wyplosz. 2000

    62.DecisionmakingorEuropeanEconomicandMonetaryUnion Erik Hoffmeyer. 2000

    61.ChartingaCourseortheMultilateralTradingSystem: TheSeattleMinisterialMeetingandBeyond Ernest Preeg. 1999

    60.ExchangeRateArrangementsortheEmergingMarketEconomies Felipe Larran and Andrs Velasco. 1999

    59.G3ExchangeRateRelationships:ARecapotheRecord andaReviewoProposalsorChange Richard Clarida. 1999

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    58.RealEstateBoomsandBankingBusts:AnInternationalPerspective Richard Herring and Susan Wachter. 1999

    57.TheFutureoGlobalFinancialRegulation Sir Andrew Large. 1998

    56.ReinorcingtheWTO Sylvia Ostry. 1998

    55.Japan:TheRoadtoRecovery Akio Mikuni. 1998

    54.FinancialServicesintheUruguayRoundandtheWTO Sydney J. Key. 1997

    53.ANewRegimeorForeignDirectInvestment Sylvia Ostry. 1997

    52.DerivativesandMonetaryPolicy Gerd Hausler. 1996

    51.TheReormoWholesalePaymentSystemsandImpactonFinancialMarkets

    David Folkerts-Landau, Peter Garber, and Dirk Schoenmaker. 199650.EMUProspects Guillermo de la Dehesa and Peter B. Kenen. 1995

    49.NewDimensionsoMarketAccess Sylvia Ostry. 1995

    48.ThirtyYearsinCentralBanking Erik Hoffmeyer. 1994

    47.Capital,AssetRiskandBankFailure Linda M. Hooks. 1994

    46.InSearchoaLevelPlayingField:TheImplementation otheBasleCapitalAccordinJapanandtheUnitedStates Hal S. Scott and Shinsaku Iwahara. 1994

    45.TheImpactoTradeonOECDLaborMarkets Robert Z. Lawrence. 1994

    44.GlobalDerivatives:PublicSectorResponses James A. Leach, William J. McDonough, David W. Mullins, Brian Quinn. 1993

    43.TheTenCommandmentsoSystemicReorm Vaclav Klaus. 1993

    42.Tripolarism:RegionalandGlobalEconomicCooperation Tommaso Padoa-Schioppa. 1993

    41.TheThreatoManagedTradetoTransormingEconomies Sylvia Ostry. 1993

    40.TheNewTradeAgenda

    Geza Feketekuty. 199239.EMUandtheRegions Guillermo de la Dehesa and Paul Krugman. 1992

    38.WhyNow?ChangeandTurmoilinU.S.Banking Lawrence J. White. 1992

    37.AreForeign-ownedSubsidiariesGoodortheUnitedStates? Raymond Vernon. 1992

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    36.TheEconomicTransormationoEastGermany:SomePreliminaryLessons Gerhard Fels and Claus Schnabel. 1991

    35.InternationalTradeinBankingServices:AConceptualFramework Sydney J. Key and Hal S. Scott. 1991

    34.PrivatizationinEasternandCentralEurope Guillermo de la Dehesa. 1991

    33.ForeignDirectInvestment:TheNeglectedTwinoTrade DeAnne Julius. 1991

    32.InterdependenceoCapitalMarketsandPolicyImplications Stephen H. Axilrod. 1990

    31.TwoViewsoGermanReunication Hans Tietmeyer and Wilfried Guth. 1990

    30.EuropeintheNineties:ProblemsandAspirations Wilfried Guth. 1990

    29.ImplicationsoIncreasingCorporateIndebtednessorMonetaryPolicy

    Benjamin M. Friedman. 199028.FinancialandMonetaryIntegrationinEurope:1990,1992andBeyond Tommaso Padoa-Schioppa. 1990

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    Group of Thirty

    1726 M Street, N.W., Suite200

    Washington, DC 2003630