Wed, Apr 01, 2009 - Page 9 News List

Failure is not an option in seeking new finance rules

By Christine Lagarde

New auditing standards must reflect an overhauled financial architecture that focuses on transparency. The aim of such standards must be to attenuate the impact of financial failure, not amplify it, as has occurred in the crisis.

Indeed, the rating agencies, whose malfunctions contributed to the crisis, must be regulated. We demand an easy policy: stricter rules (especially when fighting conflicts of interest), a specific rating scale for complex products and regular publication of their returns. Europe followed this path when preparing, under the recent French presidency, a European regulation that will soon be adopted. We expect all of our partners to do the same.

Responsibility must be put back at the heart of a system that has sunk into excess. The methods used to pay market operators reflected our collective mistakes. We yielded to short-term incentives, and everything seemed to conspire to push us to accepting excessive risks. We must revise compensation schemes and delay bonus payments until the long-term profitability of a firm’s investments is known.

Finally, we must express our solidarity for emerging and poor countries. Weakened by this crisis, they are the first to suffer from the cuts in financial flows.

The international financial institutions must support them massively, and also have the resources needed to foresee global unbalances and prevent crises, rather than respond only when events become urgent.

France and its European partners, Germany in particular, with which we worked in tight collaboration, will suggest all these points to the G20. Indeed, just as a national fiscal stimulus is less efficient than a coordinated effort, strengthening financial regulations without combating the laxity that prevails elsewhere makes no sense in a globalized world.

We should not delude ourselves — we cannot solve all the problems of this crisis in the coming days. We must, however, reach several objectives and give clear signs of a true collective ambition. History has shown how risky it is to miss some opportunities. On April 2, France and Europe will be present.

Christine Lagarde is the French minister of finance.

COPYRIGHT: PROJECT SYNDICATE

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