At an informal meeting in Prague Saturday, EU Finance Ministers and Central Bank Governors reached agreement on key principles for the reform of financial market supervision.
As Prague prepared to welcome US President Barack Obama, the Finance Ministers and Central Bank Governors discussed the reform of the structure used to supervise the financial market in the EU, and issued at statement supporting the agreement reached in the G20 on the key actions to be undertaken by standard setters by the end of 2009.
Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of 16 EU nations using the euro, termed on Friday the G20 decisions as historic, ambitious and on the right track.
European Commissioner for Economic and Monetary Affairs, Joaquin Almunia highlighted the relevance of all the most important economies of the world going in the same direction.
EU finance and economic ministers commended the G20 leaders for agreeing to full regulation of financial markets, rejecting protectionism and considering sanctions against tax havens.
On the matter of regulation, the EU finance ministers noted that while financial reporting rules are vital for investor confidence, they could unduly intensify procyclicality, which should be avoided. Ministers endorsed the G20 agreement to implement a range of actions to mitigate procyclicality, including a requirement for banks to build buffers of resources in good times. They also consider that it is urgent to address the issue of valuation of assets in distressed and inactive markets, where market prices cannot be considered as a reliable reference.
The US standard setting authority is in the process of adopting new accounting guidance, with the aim of accurate valuation of assets in illiquid markets which are not functioning properly, which could provide their financial institutions with much more flexibility to move away from using distressed prices in these circumstances, said the ministers. They also propose amendments to current US GAAP impairment rules. These changes could result in a significant divergence of international accounting practice for financial instruments.
Since July 2007, the European and global economies have faced a financial crisis exposing weaknesses in financial market regulation and supervision.
According the the Czech Presidency of the European Union, the participants agreed that, in order to strengthen confidence in the financial markets and prevent future crises, financial market supervision will have to be reformed at EU level. Attention should focus not only on improving the quality and intensity of supervision, but also on the way this supervision is institutionally structured in the EU, said the minister's accompanying statement.
On Friday, the ministers approved draft Council decisions on the existence of excessive deficit in France, Ireland, Greece and Spain. The ministers also agreed on a new Council decision and recommendation aiming to end the excessive deficit situation of the United Kingdom, in respect of which the EDP was launched in 2008.
European Central Bank President Jean-Claude Trichet was in Prague after the ECB lowered its key interest rates earlier in the week. Trichet kicked open the door to further rate cuts, telling reporters that he could not exclude the possibilty we could in a very measured way go down from the present level.
Thursday's reduction was disappointing to many observers, given that economic data has shown the 16-nation bloc is sliding deeper into recession. The reduction took the benchmark rate to an all-time low of 1.25%.
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