“Better regulation and supervision, and the greater legitimacy of international financial institutions”

The key objectives must be to avoid the excessive build-up of leverage and risk, and to reduce the system’s pro-cyclicality. In the first place, this requires the following changes in regulation, supervision and policies 

• All financial markets, products and participants must be subject to regulation or oversight. 
• Financial market transparency must be enhanced through comprehensive disclosure requirements for systemic, cross-border financial institutions, and for complex financial products. 
• Regulatory capital requirements for activities not previously covered, for liquidity risks, and during economic upswings must be increased. 
•  International cooperation among supervisors in crisis prevention, management and resolution has to be improved. 
• Incentive structures that encourage excessive short-term risk taking have to be changed. 
• Macro financial stability should become an additional, complementary focus for banking supervision with a stronger involvement of central banks. 
• Fiscal and monetary policies need to play a larger role in reducing the pro-cyclicality of the system.
  

As to institutional changes, the legitimacy of international financial institutions must be strengthened by giving major emerging market economies a larger weight in decision-making. These countries should also become full members in global fora and standard-setting bodies. European representation in them should be streamlined.