G-7 plan aims to avert finance crises

Finance officials from the world’s top economic powers endorsed a plan Friday aimed at preventing another financial crisis like the credit and mortgage debacles that erupted in the United States and quickly sent tremors around the globe.

“Rapid implementation” of the plan “will not only enhance the resilience of the global financial system for the longer term but should help to support confidence and improve the functioning of the markets,” the Group of 7 officials said in a joint statement.

Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke hosted the G-7 discussions, where officials embraced a plan that would seek to increase the transparency, or openness, of financial markets and to sharpen regulators’ response to urgent financial problems.

Besides the U.S., members of the G-7 are Japan, Germany, Britain, France, Italy and Canada. Friday’s action preceded the weekend meetings of the 185-nation International Monetary Fund and the World Bank.

The Financial Stability Forum, a group that includes central bankers and major financial regulators from around the world, developed the plan adopted by the G-7. The forum is headed by Mario Draghi, chief of Italy’s central bank, who presented his group’s findings to the other G-7 officials during a closed-door meeting.

The plan is designed to make financial markets less secretive and improve supervision, which in theory would help prevent a repeat of the current financial debacles.

It calls for strengthening oversight to ensure that financial firms have sufficient capital, cash and risk-management practices to handle problems. It also would bolster transparency and improve the valuation of complex investment products, improve the operation of credit-rating firms, strengthen authorities’ responsiveness to risks and put in place arrangements to deal with stress in the financial system.

One recommendation is to have banks, securities firms and other financial institutions disclose holdings of risky securities, such as those backed by sub-prime mortgages given to people with tarnished credit. Those mortgages, which soured with the collapse of the U.S. housing market, were at the heart of the U.S. crisis.

Another involves having credit-rating firms distinguish the ratings they give for regular securities, such as corporate bonds, from those they assign to more complex investments. The rating firms have been criticized for contributing to the problems by not accurately assigning risk to mortgage-backed investments.

Yet another recommendation would strengthen supervisors’ guidance to banks for dealing with cash crunches and having banks run “stress tests” to see how they cope under different scenarios.

The plan also calls for the Basel Committee on Banking Supervision, an international body of regulators, to make sure that banks have enough capital to cover any potential losses.