In this column, I will assess the outcome of their meeting, based on three joint statements: (1) the “Communiqué'”; (2) the “Declaration on Further Steps to Strengthen the Financial System”; and (3) the “Progress Report on the Actions of the London and Washington G-20 Summits.”
The one-page “Communiqué,” which contains the usual bromides about international cooperation, refers specifically to (i) the completion of the $250 billion trade finance initiative and the near completion of $850 billion in additional resources for the International Monetary Fund (IMF) and other international financial institutions (IFIs) pledged at the second G-20 summit; and (ii) the quick implementation of the governance reforms of the IFIs (mainly the IMF and the World Bank [WB]) agreed to in 2008, the WB reforms by spring 2010 and the next IMF quota review by January 2011. The G-20 ministers congratulate themselves on their progress in the “Global Plan for Recovery and Reform” to fight the global financial and economic crises. They also commit themselves to further “necessary financial support measures and expansionary monetary and fiscal policies, consistent with price stability and long-term fiscal sustainability” to achieve full recovery. Although they recognize the need for transparent and credible as well as cooperative and coordinated, exit strategies to end those measures and policies, they argue that these exit strategies will vary in timing and sequencing as well as across different countries and measures. So, regarding the first of the two major contentious issues the G-20 ministers confronted going into their London meeting, they agreed to disagree on the exit strategies, leaving the issue to the be tackled at the Pittsburg summit.
The two-page “Declaration on Further Steps to Strengthen the Financial System” deals with financial regulatory reform issues to prevent the recurrence of another global financial crisis. The G-20 ministers claim that their plan to establish “a robust and comprehensive framework for global regulation and oversight” has progressed well. As evidence they point to the expanded mandate and membership of the Financial Stability Board (FSB) and the Global Forum on Transparency and Exchange of Information. They also note the progress made in the (i) agreement to impose tougher capital requirements “for risky trading activities, off-balance sheet items, and securitized products” and (ii) formulation of proposals to deal with procyclicality; (iii) consensus on the compensation principles and deposit insurance; and (iv) establishment of over 30 supervisory colleges.
But acknowledging that all this is not enough, they focus on six issues: (1) They call for the development a “framework on corporate governance and compensation principles” to control short-term excessive risk taking and to contain systemic risk. They charge the FSB with this task, asking it to develop specific proposals before the Pittsburg summit. As for the cap on bankers' bonus pay, the second major contentious issue that confronted them going into their London meeting, the ministers designate the FSB “to explore possible approaches for limiting total variable remuneration in relation to risk and long-term performance.” So, regarding the second issue, the ministers agreed to disagree on capping the bankers' bonus pay, leaving this issue, like the first one, to the be tackled at the Pittsburg summit. (2) The ministers accept the necessity for stricter international regulation and oversight of financial institutions that are deemed either too big or too interconnected to fail. Specifically, they emphasize the need to have such institutions develop global “living wills” to ensure their orderly resolution in crises at minimum systemic risk. (3) The ministers ask for tougher international prudential regulation of banks through more and higher quality as well as risk-weighted and countercyclical capital requirements, minimum high quality liquidity standards and maximum leverage ratios, based on the Basel II framework. (4) The ministers, aware of the opportunistic regulatory arbitrage that can arise from the failure of some countries, referred to as “non-cooperative jurisdictions [NCJs],” to abide by international agreements on financial regulation and taxation, charge the FSB to report by November on how to deal with NCJs, such as “tax havens,” to ensure their compliance. (5) The ministers want international standards, besides Basel II, to avert regulatory arbitrage as well as new risks, especially in the trading of credit derivatives, such as credit default swaps, in the supervision of credit rating agencies (CRAs) and hedge funds, and in the requirement of minimum quantitative retention (holding a net economic interest) for the originators of complex securities such as collateralized debt obligations. (6) Finally, the ministers stress the importance of convergence toward a set of high quality international accounting standards. Given the heavy emphasis of the declaration on strengthening the capital structure of financial institutions, as advocated primarily by the US, and the relatively sparse role assigned to limiting compensation of finance sector executives, as advocated primarily by the EU, especially France, the G-20 ministers have commendably put financial stability before political expediency.
In an unusually quick response to the G-20 ministers' cue, the Group of Central Bank Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, met the day after the G-20 ministers' meeting to consider a comprehensive package of specific measures to fortify the banking sector's regulation, risk management and supervision. The Basel Committee will announce its detailed proposals on these measures by the end of the year. The tougher capital requirements, expected to hit European banks the hardest, will slow down the expansion of the financial sector, cut into the overall profitability of financial institutions and limit the total compensation of their executives, a much more efficient and effective way than arbitrarily capping their bonus payments.
The 23-page “Progress Report on the Actions of the London and Washington G-20 Summits” is a detailed scorecard of the progress made on the specific Action Plan issues in the declarations of the first and second G-20 summits, under the major headings of Macroeconomy, Restoring Lending, Trade Finance, IFI Reform and Financial Regulation. Since more than half of the report is devoted to Financial Regulation under the subheadings of FSB Establishment, International Cooperation, Prudential Regulation, Scope of Regulation, Transparent Assessment of Regulatory Regimes, Compensation,
Tax Havens and NCJs, Accounting Standards and CRAs, it fleshes out the “Declaration on Further Steps to Strengthen the Financial System.”
The G-20 ministers at the London meeting succeeded in finessing the major differences among G-20 countries on exit strategies and caps on bankers' bonus pay. But these differences will re-emerge at the Pittsburg summit, challenging the G-20 leaders to conclude their third summit with no less unity than their first and second ones. The easing of the global financial crisis and the faster than expected current global economic recovery, for which they can claim some credit, will make solidarity much harder to achieve than before.
