Blog Post

After the G20: time for realism in global financial regulation

While the noisy arguments about macroeconomic imbalances and exchange rates dominated the publicity at the recent G20 summit, the participants in Seoul also marked an important milestone for financial regulation. They symbolically closed a cycle of intense global discussions that started two years earlier with the first G20 summit in Washington. The most prominent item […]

By: Date: November 10, 2010 Topic: Finance & Financial Regulation

While the noisy arguments about macroeconomic imbalances and exchange rates dominated the publicity at the recent G20 summit, the participants in Seoul also marked an important milestone for financial regulation. They symbolically closed a cycle of intense global discussions that started two years earlier with the first G20 summit in Washington. The most prominent item was the endorsement of the Basel 3 accord on bank capital and liquidity, which was completed in September. That agreement significantly tightens earlier requirements and provides a convenient opportunity for world leaders to declare “mission accomplished” and move on to other topics.

In many respects, the scope for global financial reform is becoming narrower. In the US, the adoption of the Dodd-Frank Act in July signaled the end of major legislative activity in this field. Most emerging countries are neither willing nor ready to take the baton of global leadership. Formally, several financial regulatory items remain on the agenda. But it was significant that French president Nicolas Sarkozy, who just took over as president of the G20 process, did not mention any of them, apart from commodities markets, in an August speech outlining his priorities. This stands in striking contrast with two years ago, when financial reform dominated the G20 agenda and many leaders, particularly in Europe, enthused about worldwide harmonization of financial rules.

Global finance cannot realistically be submitted to a single rulebook. The Basel accord itself sets a minimum standard, not an optimum one. Several jurisdictions, from Switzerland to China, are considering higher requirements. Processes for preventing and managing large banking failures remain heterogeneous, as the Financial Stability Board (FSB), which coordinates the world’s financial regulators, acknowledged in a report to the Seoul summit. Global accounting standards convergence is likely to be much more protracted and diverse than generally anticipated before the crisis. All this is not necessarily disastrous, even though it means that some competitive distortions and regulatory arbitrage will remain endemic. Not all regulation needs to be global, as many financial activities, particularly in retail banking, are mainly developed within national borders, or in the case of the EU, regional ones. In this somewhat constrained environment, the next phase of global financial regulatory discussions will be shaped by three broad requirements.

First, the system of global institutions needs to be strengthened and adapted. As in individual countries, the technical nature of financial regulation justifies its delegation to specialized expert bodies. But these can be effective only if their authority is accepted by their many stakeholders. As the financial world becomes more multi-polar, emerging economies must be better empowered in their governance. While public attention has focused on such reform at the International Monetary Fund (IMF), other important institutions such as the Bank for International Settlements (BIS) and International Accounting Standards Board (IASB) are even more behind the curve in giving adequate representation to China, India, Brazil and the like. Several actors also suffer from insufficient transparency or accountability. Thus, the IASB needs to regain the trust of the community of investors, whose concerns it has often appeared to neglect in recent years; the Basel Committee on Banking Supervision needs to open itself to more external scrutiny; and the FSB needs to clarify its role and status, including its relationship with the BIS, which at this point remains ambiguous.

Second, efforts are needed to sustain the worldwide integration of capital markets, a process that brings significant economic benefits to savers and borrowers alike. The ongoing re-regulation of key transactional and informational infrastructure, including trading and clearing platforms, rating agencies, and audit firms, was made necessary by the crisis but also carries risks of fragmentation. These risks are likely to become more apparent with time. The aim of cross-border market inter-operability suggests a higher degree of global regulatory and supervisory integration for these market players than, say, for retail banks. In this spirit, the FSB is right to suggest a specific regulatory regime for the most globally active investment banks, which play a crucial role in cross-border capital market intermediation.

Third, the capacity for public monitoring of the global financial system needs dramatic improvement. This is necessary both to keep track of vulnerabilities in the system, and to verify that global commitments are properly implemented. Strikingly, no appropriate process exists to guarantee that global standards on accounting or bank capital are consistently enforced by those countries committed to them. The IMF, BIS, and FSB all play a role but many loopholes remain, partly because of lack of adequate public disclosures by individual firms and governments.

The harsh realities of the post-crisis world leave little space for airy rhetoric about radical reinvention of the financial system. The above listed requirements may be seen as defining a fairly narrow agenda. Even so, G20 leaders will deserve much praise if they succeed in meeting them in the next few years.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More by this author
 

Opinion

Why China should fear the EU's carbon border tax

Expect Beijing to soon start lobbying against the proposal.

By: Alicia García-Herrero Topic: Energy & Climate, Global Economics & Governance Date: July 26, 2021
Read about event More on this topic
 

Upcoming Event

Sep
1
11:00

Resolving today’s global health crisis, and avoiding future pandemics

Bruegel Annual Meetings, Day 1- How do we exit the COVID-19 pandemic and ensure the world of tomorrow is less vulnerable to future pandemics?

Speakers: Jeremy Farrar, Amanda Glassman, Sri Mulyani Indrawati, Tharman Shanmugaratnam and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

Sep
1
15:00

The future of EU-Africa relations

Bruegel Annual Meetings, Day 1 - A discussion of the state of play and outlook of EU-Africa relations.

Speakers: Masood Ahmed, Amadou Hott, André Sapir, Vera Songwe and Jutta Urpilainen Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

Sep
2
11:15

Towards a new global trade regime: reform of the WTO

Bruegel Annual Meetings, Day 2 - the World Trade Organisation has been going through trying times, a phenomenon amplified by the pandemic. Why are we headed towards a new global trade regime? And what lies ahead for the WTO?

Speakers: Ngozi Okonjo-Iweala and Guntram B. Wolff Topic: Global Economics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event
 

Upcoming Event

Sep
2
13:00

European banks: under global competitive pressure?

Bruegel Annual Meetings, Day 2 - European banks have lost stature and remain generally low-profitability, low-valuation in comparison to their global peers. Is that a problem? If so, what can EU policymakers do to address it?

Speakers: José Antonio Álvarez Álvarez, Mairead McGuinness and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
2
14:15

Monetary and macroeconomic policies at the crossroads

Bruegel Annual Meetings, Day 2- In this session we would like to discuss monetary and macroeconomic policies after Covid-19.

Speakers: Grégory Claeys, Per Callesen, Gita Gopinath, Jorge Sicilia Serrano and Lawrence H. Summers Topic: Finance & Financial Regulation Location: PALAIS DES ACADEMIES, RUE DUCALE 1
Read about event
 

Upcoming Event

Sep
3
10:15

Sustainable finance

Bruegel Annual Meetings, Day 3 - In this session on the final day of the Meetings, our panelists will discuss the future of finance and its sustainability.

Speakers: Maria Demertzis, Alberto De Paoli, Pierre Heilbronn and Alexandra Jour-Schroeder Topic: Energy & Climate, Finance & Financial Regulation Location: Palais des Académies, Rue Ducale 1, Brussels
Read about event More on this topic
 

Upcoming Event

Sep
2
16:00

Navigating a more polarised world: policy implications

Bruegel Annual Meetings, Day 2 - Are we entering a new age in the relationship between international economics and global politics? Is Europe well-equipped for this new world?

Speakers: Hélène Rey, Jean Pisani-Ferry, Adam Tooze and Sabine Weyand Topic: Global Economics & Governance Location: Palais des Academies, Rue Ducale 1
Read article More on this topic
 

Blog Post

A world divided: global vaccine trade and production

COVID-19 has reinforced traditional vaccine production patterns, but the global vaccine trade has changed considerably.

By: Lionel Guetta-Jeanrenaud, Niclas Poitiers and Reinhilde Veugelers Topic: Global Economics & Governance Date: July 20, 2021
Read article More on this topic
 

Opinion

Increasing the global supply of essential medical supplies: Time for Europe to step up its global leadership

Europe has already made a significant financial contribution to beating the pandemic, now it has the oppurtunity and moral responsibility to do more.

By: Anne Bucher and Guntram B. Wolff Topic: Global Economics & Governance Date: July 19, 2021
Read article More by this author
 

Blog Post

The European Union’s carbon border mechanism and the WTO

To avoid any backlash, the European Union should work with other World Trade Organisation members to define basic principles of carbon border adjustment mechanisms.

By: André Sapir Topic: Energy & Climate, Global Economics & Governance Date: July 19, 2021
Read article Download PDF
 

External Publication

Building the Road to Greener Pastures

How the G20 can support the recovery with sustainable local infrastructure investment.

By: Mia Hoffmann, Ben McWilliams and Niclas Poitiers Topic: Global Economics & Governance, Testimonies Date: July 15, 2021
Load more posts