Supervisors will have the responsibility to review firms’ compensation policies and structures with institutional and systemic risk in mind and, to apply corrective measures, such as higher capital requirements, to those firms that fail to implement sound compensation policies and practices. Supervisors would also have the ability to modify compensation structures in the case of firms that fail or require extraordinary public intervention. 33. As I already alluded to, supervisors should pay a major attention to financial firms’ governance. As it stands, prudential regulation to a large extent is build on trust in their ability to value, manage and control their risks. Supervisors should have the power to hold boards responsible for the performance of their institutions. They should ensure that boards and individual directors are sufficiently empowered and informed to understand and to respond appropriately to their risk taking policy. 34. In light of the crisis, proper liquidity risk management should also stand high in firms’ own agenda. In many respect, the recent crisis revealed wrong liquidity pricing and poor liquidity risk valuation by financial firms. There is ample evidence that in an environment of excess global liquidity prior to the recent crisis many financial institutions were led to (i) overestimate the liquidity of their assets, (ii) have overly optimistic assumptions on their ability to refinance, and (iii) ignore, or pay insufficient attention to, liquidity risks in their internal pricing processes. 35. One should never forget that liquidity has a price.
This very significant advance in terms of financial regulation should not obscure the progress that still needs to be made regarding the work underway, especially in the areas of market infrastructures (including for commodity markets), tighter regulation of activities included under the designation the “shadow banking system” and the behaviour of market players themselves. Once again, I underscore our collective responsibility, which is to ensure that all of the G-20 countries and, more widely, the international community as a whole apply international standards. Today’s discussions will be divided into four sessions. The first, chaired by Axel Weber, will examine the notion of disequilibrium after the crisis and will allow us to discuss the unpredictable evolution of global imbalances in the medium term, in the light of different assumptions concerning economic growth and savings trends in the different zones. Mario Draghi has agreed to chair the second session that will focus on questions related to supervision and coordination. As I have already said, the current context is characterised by the reform of global governance and regulation, a process given impetus by the G-20. Therefore, at this stage, it seems appropriate to explore topics such as the evolution of the role of international financial institutions and the accomplishments and future progress in harmonising global financial regulations. The third session, chaired by Michel Camdessus, should help us to gain further insight on what could, or should, be the role of central banks in a post-crisis environment.