European leaders unveiled a policy paper containing principles and measures to strengthen the international financial stability that summarizes their position on the financial crisis.

The policy paper to be discussed at the upcoming international G-20 summit in Washington D.C. on Nov.15 does not form formal conclusions adopted by the European Council.

The first principle set out by policy paper is that no financial institution, no market segment, no jurisdiction must be free from proportionate and appropriate regulation or at least from monitoring.

This principle is to be applied to all players in the financial system (for example, leverage funds or hedge funds, rating agencies).

A second principle outlined is that the new international financial system must be based on principles of responsibility. Transparency of financial operations should be guaranteed by a more complete information system no longer leaving whole areas of financial activity outside financial reports, provisions such as securitization, remuneration policies and encouraging excessive risk-taking should be limited. A third principle calls for the new international financial system to allow risks to be measured in order to prevent them.

Transnational financial groups, for example, would be surveyed in a coordinated manner between the different national supervisory authorities through the creation of colleges, an early warning system will be set in place at international level, thus ensuring that global imbalances would be better surveyed.

Another measure suggested in the paper is that the International Monetary Fund (IMF) should play a central role in a more effective financial architecture. It will work to prevent crises and its means should be increased to allow it to effectively come to the assistance of countries affected by the crisis.

On the basis of these principles, the policy paper sets out five guidelines that could be adopted at the Nov. 15 summit. These guideline include submitting rating agencies to registration, to surveillance and to rules of governance; finalizing the principle of convergence of financial norms and standards and review application of the “fair value” rule in order to improve its consistency with prudential rules; deciding that no market segment, no territory, no financial institution escapes proportionate and adequate regulation or at least surveillance; the creation of codes of conduct to avoid excessive risk-taking by the financial industry including in the area of remuneration systems; and entrusting the IMF with the prime responsibility of recommending measures necessary to restore confidence and stability.

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