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G20 Meetings > 1999 Documents

Financial Sector Regulation and Supervision
(Backgrounder)

Finance Ministers and Central Bank Governors Meeting
Berlin, Germany, December 15 & 16, 1999

Why Is Improved Financial Sector Regulation and Supervision Important?

A country’s financial sector is the major channel through which borrowing and lending takes place. A poorly regulated or managed financial sector, or one with insufficient capital for the risks it takes, can increase a country’s vulnerability to financial crises.

Improved financial sector regulation and supervision can help ensure that financial institutions take adequate steps to manage risks. Appropriate financial sector policies can also help establish deep and liquid domestic capital markets, which reduce incentives for excessive external borrowing. In general, improved financial sector regulation and supervision can help prevent crises by making national economies less vulnerable to adverse developments at home and abroad.

What Is Being Done?

The international community is taking steps to help countries strengthen their financial sectors, including:

• Improved financial sector surveillance by the International Monetary Fund (IMF) and the World Bank. The IMF in particular is preparing Financial System Stability Assessments (FSSAs) for some selected countries. These will help identify and address vulnerabilities in financial systems, and help assess observance of core principles, standards and good practices by member countries. The FSSAs are a form of "peer review" in that they are prepared with the participation of outside experts drawn from national supervisory agencies. In the G20, Canada and South Africa have undergone FSSAs. FSSAs are planned for India and Brazil.
  
  
• The establishment of the Financial Stability Forum (FSF) by G7 finance ministers and central bank governors in February 1999. The purpose of the FSF is to promote international financial stability through enhanced information exchange and international cooperation in financial market supervision and surveillance. It regularly brings together senior officials of finance ministries, central banks and supervisory agencies from countries where significant international financial centres are located. Also represented are the IMF, the World Bank and international organizations responsible for cooperation in the regulation and supervision of the banking, insurance and securities sectors. The Forum has set up working groups to examine hedge funds, offshore financial centres and short-term capital flows. Important emerging-market countries that are not members of the FSF are represented in these working groups. The Forum has also established a Task Force on Implementation of Standards and a Study Group on Deposit Insurance.

A Role for the G20

At their meeting in Berlin, G20 ministers and governors will discuss how improved financial sector regulation can help countries reduce their vulnerability to financial crises. They will also consider how they can cooperate with the Financial Stability Forum and best make use of its work in identifying factors that can contribute to crises. As well, ministers and governors will discuss the role of the international community in helping national governments take stock of the health of financial sectors in individual countries.

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Source: Department of Finance, Canada