The forum of three global regulatory bodies appointed by the G20 group of countries last November to device ways to strengthen regulatory oversight submitted its recommendations this week.
The recommendations from the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the International Association of Insurance Supervisors, "seek to enhance the nature and expand the scope of financial regulation."
“Unless action is taken, these issues may continue to pose systemic risk to the financial system and the global economy," the forum said in its report.
Specifically, the recommendations introduce or tighten supervision on hedge funds, mortgages and credit derivatives. More generally, they are seeking to improve how supervisors of banks, insurers and markets work together, particularly across national borders.
A fundamental aim is to make it harder for financial firms to shift activities to a sector or country that is more lightly regulated or capitalized or play one regulator off against another.
Blurred distinctions between sectors and difficulties faced by supervisors in spotting risks were demonstrated by the near collapse of U.S. insurer AIG, the demise of U.S. bank Lehman Brothers, and the bailout of Fortis in Belgium and the Netherlands, the report said.
"AIG was an extremely complex operation which had many subsidiaries and was basically able to choose its supervisor," the report said.
The recommendations include the need for consistent capital requirements across all sectors and activities. "A uniform minimum global capital standard does not exist for the securities and insurance sectors," the report said.
The forum also wants mortgage lenders to adopt minimum underwriting standards to ensure the ability of each borrower to repay the loan is accurately assessed. These standards should also include effective verification of income and include appropriate standards for loan-to-value ratios.