kong, switzerland and netherlands, australia and singapore including related institutions in those countries and 9 international standard setting organizations ). the fsf is housed in the bis. prepared for the initiative for policy dialogue ( ipd ) ( housed at columbia university ) which hold its second meeting of it task force on financial market regulation on july1 - 2 ( sponsored by and held at brooks world poverty institute at the university of manchester ). it will analyse a ) the transparency and regulatory challenges and discussions emerging from the current crisis, b ) the implications of both the crisis and regulatory discussions for developing and developed countries and c0 reforms in the global financial architecture that might make the global financial system more stable and more equitable. the financial action task force ( fatf ) is an intergovernmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing. they comprise principally european and north american countries with subsequent additions of japan, mexico, singapore and south africa. several international organizations have observer status. these groups sometimes coordinate with each other both through formal and informal channels. the group with the most representative membership is however the international monetary fund which is comprised of 185 members. however up until recently, the imf had not concentrated its resources on regulation of banks or on monitoring or evaluating the innovations in the financial system and exploring its implications. the fsf, if it widened its mandate to continual monitoring rather than issue - based approaches could come closest to the kind of entity which has the track record needed to coordinate regulatory and oversight functions of bank regulation, securities, insurance accounting rules and payment system issues and monetary and financial stability issues. the impact of innovation and the challenge for regulators it is against the background of this regulatory framework and in the context of a philosophy of financial liberalisation and integration of financial markets that innovative financial technologies took off. financial technologies however rapidly outpaced the regulatory framework and it is now fairly well acknowledged that regulatory frameworks have not kept pace with financial innovation. financial innovation has manifested itself in various ways, the most prominent being the growing importance of new and complex financial instruments, new business models which focus on multiple financial activities facilitated by financial liberalisation, and significant developments in the area of securitisation and disintermediation. to this can be added the rising importance of relatively new, largely unregulated players, such as hedge funds, private equity firms, conduits and structured investment vehicles – sivs, the constraints to financial

some inherent rigidities which fail to cover many of the risks that banks assume in their business operations. that ’ s why capital adequacy concepts have been becoming less rigid though it has been undermined through the use of regulatory capital arbitrage. the current sub - prime crisis in the us is testimony to the effects of regulatory arbitrage and the impact of regulatory loopholes, which can occur in even the most developed financial system. while the bis has been the most pro - active in trying to stay on top of these aspects of risk measurement in the industry, it too has fallen behind. this could principally be because the bis has been concentrating principally on commercial banks, whereas the weaknesses in the financial systems had moved to the securities markets. measuring fair value accounting guidelines and bank regulation guidelines do not always coincide. recent accounting mark - to - market rules of the ifrs are a case in point. indeed, the role that markto - market accounting may have played in the evaluation of assets of financial institutions in recent months and in hampering the ability of creditor financial institutions to organize workouts of debt with their customers has been a matter of some discussion. accounting rules tend to make the decision to reschedule or reorganize debt workouts a matter for greater provisioning by the financial institution, thus discouraging workouts and the long term prospect of recovery. in the recent us case, earlier in the year, government intervened and mandated that some customers must be given time to reorganise their debts. however, accounting rules do not predispose to making arrangements with ones creditors. the verdict is out on how the spanish solution of dynamic provisioning has solved the problem. the counter - argument is that these system prolong the period over which debt is collectible and in the meanwhile might be misrepresenting the value of the asset. discussion and dialogue with the accounting associations seem to be critical to resolving this problem which has the potential for preventing recovery of debt over the longer term. review of basel ii accord the new basel ii accord is expected to eliminate some of those anomalies, but it is not perfect. still, basel ii covers more comprehensive range of risks, better align regulatory capital to underlying risks, integrates capital requirement to a larger framework and provides for the role of supervisors in evaluating risk and market discipline. since it provides options to banks, it appears to encourage improvements in the risk management processes. policy makers have already realised the importance of