G7 embrace plan to prevent financial crisis

Senior finance officials from the world's top economic powers endorsed a plan on Friday aimed at preventing another financial crisis like the credit and mortgage debacles that erupted in the US and quickly sent tremors around the globe.

US Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke hosted the Group of Seven (G7) discussions in Washington, DC, where officials embraced a plan that would seek to increase the openness, or transparency, of financial markets and to sharpen regulators' response to urgent financial problems.

The G7 nations comprise the US, Japan, Germany, Britain, France, Italy and Canada.

In a joint written statement issued at the meeting, officials said that "rapid implementation" of the plan "will not only enhance the resilience of the global financial system for the longer term but should help to support confidence and improve the functioning of the markets".

Friday's session comes before this weekend's meetings of the 185-nation International Monetary Fund (IMF) and the World Bank. Risks to the US and the global economy have intensified since finance officials from the G7 countries last gathered in the US last October.

Many economists now believe the US has fallen into a recession and the odds of a worldwide downturn have risen sharply, to one in four, according to the IMF, a global financial institution.

In the US, where credit troubles sprang forth with a vengeance last August and quickly spread financial turmoil worldwide, the damage is sorely felt. Foreclosures have surged to record highs, job losses in the first three months of this year have neared the staggering quarter-million mark, and financial companies have racked up billions of dollars in losses.

The forum is headed by Mario Draghi, chief of Italy's central bank, who presented his group's findings to the other G7 officials during their closed-door meeting. The plan is designed to make financial markets less secretive and improve supervision, which in theory would help prevent a repeat of the current financial debacles. It calls for strengthening oversight to make sure financial companies have sufficient capital, cash and risk-management practices to handle problems. It also would bolster transparency and the valuation of complex investment products, improve the operation of credit-rating agencies, strengthen authorities' responsiveness to risks and put in place arrangements to deal with stress in the financial system.

One recommendation is to have banks, securities firms and other financial institutions disclose their holdings of risky securities, such as those backed by sub-prime mortgages given to people with tarnished credit. Those sub-prime mortgages, which soured with the collapse of the US housing market, were at the heart of the crisis.

Another involves having credit rating agencies distinguish the ratings they give for regular securities, such as corporate bonds, from those they assign to more complex investments. These agencies have been criticized for contributing to the problems by not accurately assigning risk to mortgage-backed investments.

Yet another recommendation would strengthen supervisors' guidance to banks for dealing with cash crunches and having banks run "stress tests" to see how they cope under different scenarios of financial strain.

The plan also calls for the Basel Committee on Banking Supervision, an international body of regulators, to make sure banks have enough capital to cover any potential losses.

Meanwhile, ongoing efforts by the U.S., backed by the G7, to prod China to let its currency rise in value also were discussed. China's undervalued currency has been blamed for contributing to the United States' swollen trade deficit and the loss of millions of factory jobs.

The G7 officials welcomed progress that Beijing has made on the currency front but said the country needs to move more quickly to let its currency rise in value. The G7 officials welcomed efforts by some central banks, including the Fed, to expand lending to squeezed financial institutions to help ease market turmoil.