**Focus on Offshore Financial Centres**

The Financial Stability Forum (FSF) met last week in Paris. Chaired by Roger W. Ferguson, Jr., Vice Chairman of the Board of Governors of the Federal Reserve, this 10th meeting reviewed the Offshore Financial Centres (OFCs) initiative it launched in May 2000, based on a report prepared by IMF staff on their OFCs assessment program.

The objective of the FSF’s OFC initiative is to strengthen the supervisory, regulatory, information sharing and international cooperation practices of OFCs on a lasting basis. To help achieve that objective, the FSF asked the International Monetary Fund (IMF) to develop and carry out a process for assessing OFCs’ adherence to relevant international standards and codes.

The IMF’s first round of OFC assessments is now nearing completion. In its meeting report, the Financial Stability Forum ***”welcomed the improvements that have occurred in supervisory and regulatory arrangements in many OFCs, as well as in offshore/onshore supervisory and regulatory cooperation”***.

Given the growing integration of financial markets and recognising that individual progress differs widely, the FSF continues to stress that OFCs need to progressively strengthen their supervisory, regulatory, and information exchange arrangements. To this end, it supports making the monitoring of OFCs an integral part of the IMF’s financial sector surveillance work.

The FSF says it will continue to take a close interest in the IMF’s financial surveillance work and in the progress made by OFCs in strengthening their supervisory, regulatory, and information exchange arrangements. The IMF’s Executive Board intends to discuss the OFC program in November, and the FSF says it will review the overall effectiveness of the OFC initiative in March 2004.

According to a press release at the conclusion of the recent meeting, *”The FSF attaches particular importance to the publication of the IMF assessments as a means of enhancing transparency and enabling the position of individual OFCs to be evaluated by all concerned parties.”*

The International Monetary Fund (IMF) concluded its 2003 Article IV Consultation with The Bahamas and issued a Public Information Notice back in July.

In that PIN, the IMF pointed out that The Bahamas is a small open economy that has a long track record of prudent macroeconomic management and financial stability. It referenced policies in the latter half of the 1990s that focused on fiscal consolidation (the deficit was virtually eliminated) and the strengthening of financial regulation and supervision to address risks of money laundering and fraud in the offshore financial sector.

Although growth has remained subdued in 2002 and early 2003 under the impact of the global economic slowdown and lingering terrorism-related security concerns, the IMF predicted that economic activity will pick up gradually this year and in 2004 with the resumption of strong capital inflows.

At that time, IMF Executive Directors recommended that economic policy in The Bahamas continues to focus on raising international reserves, regaining room for fiscal maneuver, and diversifying the economic base to maintain confidence and reduce economic vulnerabilities. Also emphasised was the importance of structural reforms to improve competitiveness over the medium term.

The meeting in Paris last week also discussed:

· vulnerabilities in the international financial system; and

· market foundations and corporate governance

**Vulnerabilities in the international financial system**

Members took note of the general improvement in financial conditions and the increasing, if uneven, signs of a global recovery. Balance sheets of corporations, financial firms, and households have gotten stronger. Members felt that downside risks now seem more muted than when the FSF met in Berlin in March. Nevertheless, domestic and international imbalances persist and may pose risks.

Members considered the recent back-up in bond yields. They noted that, at this point, there do not seem to be significant systemic risks, but the sustainability of the relatively benign financial conditions must be monitored closely.

Members observed that a hospitable external financing environment appears to have enabled a number of emerging market economies to meet their official financing requirements for the year, with lower credit spreads. In this regard, too, the sustainability of the current environment must be monitored.

· **Reinsurance**

In previous meetings, Members had expressed concerns about potential risks in the reinsurance industry and encouraged greater transparency. A Task Force of the IAIS Technical Committee has developed a concept for global reinsurance market data and ways of improving disclosures. Members urged strongly that insurance supervisors and firms continue to move forward together to resolve a number of complex issues and to ensure that the information to be made available is relevant to strengthening market discipline.

· **Credit risk transfer**

In Berlin, the FSF discussed credit risk transfer (CRT) and urged that action be taken to identify and close information gaps in this area. In response, the Joint Forum has prepared a work plan to take stock of institutional participation and assess supervisory information needs in the CRT market. Members welcomed the work plan, urging the Joint Forum to focus on those efforts that would meaningfully address financial stability concerns. Members also welcomed the ongoing work of the Committee on the Global Financial System in this area, with more information on certain elements of CRT expected by the end of 2004.

**Market foundations and corporate governance**

The Forum reviewed progress and international coherence in the critical areas underscored at the FSF Berlin meeting.

· **Auditor oversight and audit practice standards**

The Forum welcomed enthusiastically the significant progress made in discussions between the International Federation of Accountants (IFAC) and the international regulatory community on reforms to provide assurance to regulators, investors and others that IFAC’s audit-related standards setting activities are conducted in a manner consistent with the public interest. The reforms envisage the establishment of a Public Interest Oversight Board for IFAC’s public interest activities, notably the standard-setting role of the International Audit and Assurance Standards Board (IAASB), and other changes to IFAC’s governance arrangements. The Forum looks forward to the final deliberations on these reforms in the regulatory community and their adoption by IFAC’s Council in November.

The FSF noted progress in strengthening public auditor oversight arrangements at the national level, based on IOSCO Principles for auditor oversight issued in October 2002, and urged a stock-taking of national initiatives. It also suggested that the heads of the national oversight arrangements might come together at an appropriate time to exchange experiences and consider policy options.

· **Accounting standards**

Members noted that good progress has been made in the IASB and FASB short-term convergence project and in strengthening accounting standards internationally. However, some complex and difficult issues remain unresolved. Reaching an international consensus on these issues will require consultation on all sides, and the larger objectives that motivate the need for convergent accounting standards — including financial efficiency, stability and transparency — should be kept in mind.

·** Credit rating agencies and financial analysts**

Members discussed issues relating to the operation of credit rating agencies (CRAs), based on the US SEC’s Concept Release and a set of international guidance principles being developed by IOSCO. Members welcomed the SEC’s review and attached importance to improvements in transparency and the need to protect the ratings process from conflicts of interest. The FSF also took note of work underway in IOSCO to develop high-level principles for addressing conflicts of interest faced by financial analysts. The FSF looks forward to the final publication of IOSCO’s guidance principles and will continue to review developments in these important matters.

· **Corporate governance**

The FSF noted that the work in the OECD on the survey of corporate governance developments in OECD countries and the review of the Principles on Corporate Governance is progressing as planned. It reiterated that improvements in national corporate governance standards should be reflected in the revised Principles.

The next meeting of the Financial Stability Forum will held in Rome in March 2004.