Thursday, August 25, 2011

UN - Principles for a New Financial Architecture

Principles for a New Financial Architecture
Joseph E. Stiglitz
"The Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System

I. General Principles Concerning Financial Markets and the Role of Government

1. Financial markets are not an end in themselves, but a means: they are supposed to perform certain vital functions which enable the real economy to be more productive:
   a. Mobilizing savings
   b. Allocating capital;
   c. Managing Risk, transferring it from those less able to bear it to those more able

It is hard to have a well-performing modern economy without a good financial system.

2. While markets are at the center of every successful economy, markets only work well when private rewards are aligned with social returns. Incentives matter, but when incentives are distorted, we get distorted behavior.


II. The principles of a regulatory agenda

A. Objectives
B. Design

III. A New Regulatory Framework

1. Improved transparency and disclosure, in a form that is understandable to most investors.
2. Regulating incentives is essential. The current system encourages excessive risk taking, a focus on the short term, and bad accounting practices.
3. Competition is essential to the functioning of a market economy.
4. Exploitive and risky practices of the financial sector need to be curbed.
5. Commercial banks and similar institutions have to have adequate capital and provisioning of risks
6. The regulatory system has to be designed to facilitate effective enforcement and to resist capture.


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