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The Associated Press October 20, 2010, 9:37AM ET

Group sets framework for 'too big to fail' banks

The body mandated by the world's leading countries with reforming the global financial system said Wednesday it has agreed on a framework of stricter standards and supervision for large banks and other institutions whose failure could cause widespread economic disruption.

The collapse of U.S. investment bank Lehman Brothers Holdings just over two years ago focused attention on the dangers posed to the global financial system by large banks and insurance companies that go bankrupt.

The Group of 20 leading rich and emerging nations, which has taken on the role of coordinating economic and financial policies after the crisis, last year tasked the Swiss-based Financial Stability Board with undertaking reforms.

The FSB said it agreed on a policy framework to address how to deal with "too big to fail" financial institutions, such as requiring that they have a higher capacity to absorb losses "to reflect the greater risks that these institutions pose to the global financial system," according to a statement.

FSB Chairman Mario Draghi said the agreement, as well as other proposals for bolstering the global financial system, will be presented to G-20 leaders for endorsement at a summit next month in Seoul.

"I'm confident," he said, when asked if the G-20 would approve the proposals. He spoke after an FSB plenary meeting held in the South Korean capital, Seoul. The FSB's secretariat is in Basel, Switzerland.

The FSB, formerly known as the Financial Stability Forum, received a new name and a broadened mandate to undertake financial regulatory reforms at the G-20 summit held in London last year.

The G-20 has taken over from the Group of Seven advanced nations as the key steering committee for the global economy since the financial crisis. It includes both advanced economies such as the United States, Germany, Japan and France and emerging ones like China, Turkey, Brazil and India. South Korea is chairing the group this year.

Last month, the oversight body of the separate Basel Committee on Banking Supervision agreed for banks to significantly increase their capital reserves by the end of this decade, seen as a way to bolster bank finances and control excessive risk-taking -- two problems identified as major factors behind the global crisis.

The FSB said Wednesday that it welcomed those new standards.

The board also said it endorsed recommendations for increased financial supervision to enhance the effectiveness of new rules.

"Strong supervision is a necessary complement to stronger rules," said Draghi, who is also governor of Italy's central bank.

The FSB also said it endorsed reducing the reliance of authorities and financial institutions on credit ratings agencies.

Those agencies were strongly criticized during the financial crisis for failing to foresee problems with investments such as securities backed by subprime mortgages in the United States, which have been blamed for contributing to the credit crisis and the recession.

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