Australia, at UN, calls for reform of financial systems after market meltdown

The international financial system needs to be substantially reformed to ensure that the current crisis in the global markets is not repeated, Australian Prime Minister Kevin Rudd told the General Assembly’s annual high-level debate tonight.

Mr. Rudd said he would work with other countries to promote a wide-ranging reform programme that would change the regulatory system and encourage much greater stability and less systemic risk in the financial markets.

He warned that the need for reform was especially urgent, given that the world did not seem to have learned the lessons of the Asian financial crisis in the late 1990s.

“There has been a failure of internal governance within financial institutions. There has been a failure of external oversight. Regulators have not always recognized the systemic risk posed by significant financial institutions,” he said.

While the immediate task was to rebuild confidence in the financial system by ensuring adequate liquidity and the continued solvency of key institutions, in the long term the reforms must be more profound.

Financial institutions deemed “systemically important” – Mr. Rudd said this could include commercial banks, investment banks, insurance companies, hedge funds and clearing houses – should be licensed to operate in major economies only under the conditions they are far more transparent about their balance sheets.

The central banks of countries should have increased responsibility for financial system stability, banks and other financial institutions should have to build up larger capital reserves in good times to serve as a buffer when the markets are weak, and institutions must have stronger incentives and mechanisms “to promote responsible behaviour rather than unrestrained greed,” according to the Prime Minister.

He added that regulators should set higher capital requirements for any financial firms that have executive pay packages that reward excessive risk-taking or short-term returns.

Mr. Rudd also called for an enhanced role for the International Monetary Fund (IMF) and for accounting rules to be adjusted to promote long-range perspectives.