G7 Financial Rescue Plan

Over the weekend G7 governments agreed to address this global financial crisis in a coordinated manner, laying out a set of common objectives and principles so that each country could define its own special local financial program.

Here are the main policy actions that will be undertaken:

• Preventing systemically important banks and broker dealers from going bust by taking “decisive action and use all available tools to support systemically important financial institutions and prevent their failure” as in the G7 statement
• Recapitalization of banks and broker dealers via public injections of capital via preferred shares – i.e. partial nationalization of financial institutions. “Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses”
• Temporary guarantee of bank liabilities: all deposits, possibly interbank lines (along the lines of the British approach; see here for U.S. and for Eurozone approach), likely other new debts incurred by the banking system.
• “Ensure that our respective national deposit insurance and guarantee programs are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits”
• Unlimited provision of liquidity to the banking system and to some parts of the shadow banking system to restore interbank lending and lending to the real economy.
• “Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses”
• Provision of credit to the corporate sector via purchases of commercial paper (certainly in the U.S., possibly in Europe)
• Purchase of toxic assets to restore liquidity in the mortgage backed securities market (U.S.). “Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets.
• Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary”
• Implicit triage between distressed banks that are solvent given liquidity support and capital injection and those that are non-systemically important and insolvent that will need to be closed down/merged/resolved
• Use of the IMF and other international financial institutions to provide lending to many emerging market economies – and some advanced ones such as Iceland – that are now at risk of a severe financial crisis.
• Use of any other tools that are available and necessary to avoid a systemic meltdown, including implicitly more monetary policy easing as well as possibly fiscal policy stimulus. “We will use macroeconomic policy tools as necessary and appropriate”