Five years ago, finance ministers and central bankers convened in Washington for the 2008 IMF Annual Meetings. At those meetings they forged a new consensus for fundamental reform of the global financial system to correct the fault lines that led to the global financial crisis. The ultimate goal was to build a safer, more resilient financial system that supported strong, sustainable and balanced growth in both advanced and emerging market economies.
The G20 assumed a new role as the forum for international economic cooperation between major advanced and emerging market economies. It mandated the international Financial Stability Board (FSB) to co-ordinate reform and expanded its membership to include the major emerging market economies.
Both the G20 and the precursor to the FSB – the Financial Stability Forum – had been initially formed to strengthen international cooperation in the aftermath of the Asian financial crisis a decade earlier. Whether a crisis originates in emerging markets or advanced economies, it is clear that the interconnectedness of the global financial system means that everyone has a stake in its stability. Emerging markets and advanced economies benefit from an open, integrated and resilient global financial system.
G20 members have made major progress correcting those fault lines that caused the crisis. In St Petersburg a few weeks ago, G20 leaders committed to finish the job, concentrating on completing four crucial areas of reform:
Increasing the resilience of the banking system, most notably through agreement and full and consistent implementation of the Basel III standards.
Ending too-big-to-fail. Globally systemic banks and insurers have been identified and will be subject to higher capital requirements and more intensive supervision. National resolution regimes are being developed so that all systemically important firms can be resolved without wider disruption. Over the next year, proposals will be developed for the total loss‐absorbing capacity that institutions should have, as well as for simplifying corporate structures and operations so that those institutions can be resolved safely if they fail.
Transforming shadow banking from a source of risk to a source of resilience. This is needed to diversify sources of financing for our real economies in a sustainable way. A roadmap has been agreed to stronger comprehensive oversight and regulation appropriate to the systemic risks posed by different types of shadow banking.
Making over-the-counter derivatives markets safer. Transparency is being enhanced through platform trading and trade-reporting. The introduction of central counterparties is reducing contagion risk and strengthening the ability of markets to remain liquid, even in times of stress.
How the job of reform is completed will do much to determine global prosperity. G20 leaders agreed on the critical importance of implementing agreed standards in a consistent way. The alternative of yielding to calls for unilateral or inconsistent actions to protect domestic systems would risk fragmenting the global system and slowing growth, whether in advanced, emerging market or developing economies.
The consequences of reforms, including their effects on emerging market and developing economies (EMDEs) are being monitored continuously so that any unintended effects can be addressed. In September, the FSB published its latest monitoring update of the effects on EMDEs of the regulatory reforms agreed by the G20. That report focused on the main issues of interest to EMDEs: the Basel framework, derivatives market reforms, policy measures for ending too big to fail, and structural banking reform initiatives in major advanced economies.
There is broad support among emerging and developing economies across the globe for the international financial reform agenda. Those countries that are members of the G20 and FSB have participated in the design of the reforms and have committed to implement them. EMDE concerns about the reform agenda have centred on the challenge of domestic implementation and on the need for cross-border co-operation to avoid fragmentation.
The implementation of the ambitious reform agenda can be a challenge for many EMDEs, whose supervisors can face resource constraints. Both standard-setters and international financial institutions can assist, through technical assistance and promoting the sharing of best practices.
Cross-border co-operation requires the commitment of all countries, whether advanced, emerging or developing. We must all be prepared to defer to each other’s rules on a cross-border basis when this would produce similar outcomes. Standards must be implanted consistently. Information sharing must be improved and cross-border problems must be solved by working together.
Only then will we realize fully the benefits for all of an open, integrated and resilient global financial system.
Mark Carney is Chairman of the G20’s Financial Stability Board and Governor of the Bank of England