IMF, FSF to forge early-warning system for financial crisis

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WASHINGTON, Nov 15 (AFP): The International Monetary Fund (IMF) and the Financial Stability Forum (FSF) said yesterday they will forge an early-warning system for the financial system as world leaders gathered in Washington for a crisis summit.
The FSF is an international group that includes central banks, the IMF and other financial and regulatory bodies that was tasked last year with drawing up an initial response to the unfolding crisis sparked by the collapse of the US subprime mortgage market.
In a joint letter to the Group of Twenty (G20) advanced and emerging countries released hours ahead of a G20 summit on the global financial crisis, the IMF and FSF pledged to step up their combined efforts to promote financial stability.
"The financial crisis has underscored the importance of international coordination both in responding to the crisis and in developing and implementing policies for a sounder financial system," the IMF and the FSF wrote.
"The IMF and the FSF will cooperate in conducting early-warning exercises," said the letter dated November 13 and signed by IMF managing director Dominique Strauss-Kahn and FSF chairman Mario Draghi, the head of the Bank of Italy.
The FSF includes the heads of finance, central banks and financial regulatory authorities of 12 major economies, as well as international institutions including the IMF, the World Bank and the European Central Bank (ECB), and international standards setting bodies such as the Basel Committee on Banking Supervision.
The 185-nation IMF, charged with promoting financial stability, evaluates members' economies annually and issues detailed reports on the financial systems.
"The IMF assesses macro-financial risks and systemic vulnerabilities. The FSF assesses financial system vulnerabilities, drawing on the analyses of its member bodies, including the IMF," Strauss-Kahn and Draghi wrote.
"Where appropriate, the IMF and FSF may provide joint risk assessments and mitigation reports."
Leaders from the world's biggest economic powers gathered in Washington for a crisis summit to recast the global financial order as recession spreads to a growing number of countries.
US President George W Bush was to host more than 20 heads of state and government at a working dinner at the White House followed by formal talks Saturday. Bush Friday argued it was time to reform the world financial system to adapt it to the new century, but said he opposed excessive government interventionism, stressing the need for international cooperation.
"As we address the current crisis, we also need to make broader reforms to adapt our financial systems to the 21st century," Bush said.
"So during this summit, I will work with other leaders to establish principles for reform, such as making markets more transparent and ensuring that markets, firms, and financial products are properly regulated," he said.
US authorities unveiled plans to tighten regulation on exotic financial instruments such as credit default swaps, believed to be a key element of the global financial crisis.
A statement from the US Treasury said that while these instruments "are integral to the smooth functioning of today's complex financial markets," tighter supervision "can enhance the ability of market participants to manage risk."
The Treasury said an intergovernmental task force including the Federal Reserve, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission would undertake "a series of initiatives to strengthen oversight and the infrastructure" of the over-the-counter derivatives market.