DECEMBER 07, 2018

By TIOL Edit Team

THE G20 Summit is an opportunity for the world to put its financial, fiscal and economic health under fresh scrutiny. And the scrutiny has been kicked off well by Basel (Switzerland)-based Financial Stability Board (FSB), Bank for International Settlements (BIS) and International Monetary Fund (IMF).

They have already released three reports for consideration of leaders and officials of G20 countries who have converged at Buenos Aires for the 2-day annual summit.

FSB & BIS have listed before G20 Summit the risks & opportunities faced by global financial system even after 10 years of collective efforts to fix fault lines that caused 2007-08 global financial crisis. So has IMF in its G-20 Surveillance Note prepared for the Summit.

Growing global debt and hot capital flows are the obvious risks. Cyber attacks and risk posed by crypto-currencies are emerging threats. New risks popping up from enhanced usage of Finetech can't be ruled out. New risks are also emerging with adoption of new regulations, expansion of global wealth and new formats.

"We must have the discipline to build a system that is robust to the risks we do not anticipate", says outgoing FSB Chairperson Mark Carney in a letter dated 26th November 2018 to G20 leaders.

According to the Letter, asset management has grown from US trillion to nearly US trillion over the past decade, bringing new forms of investment and promoting capital flows from advanced to emerging market economies. Recent developments have, however, also highlighted the risks associated with the US trillion in open-ended funds that promise their investors daily liquidity while, in some cases, investing in potentially highly illiquid assets.

Mr. Carney aptly cautions: "The first challenge is to maintain these hard-won gains. 800 years of economic history teaches that as memories fade, complacency sets in, and backsliding begins. In financial stability, success is an orphan".

We hope his sage advice is appreciated by Indian Government, whose recent initiatives have stirred concern in many quarters about the autonomy of Reserve Bank of India (RBI), especially its right to maintain reserves to face global volatilities.

Similarly, IMF has pitched for strengthening the global financial safety net. As put by it in its G-20 Surveillance Note, "Given the rise in financial vulnerabilities in recent years, timely provision of resources to distressed institutions and sovereigns requires better coordination across the global financial safety net. This includes maintaining swap lines between central banks to provide foreign exchange liquidity during times of systemic financial stress".

The concern voiced in the Note merits serious consideration by the Summit leaders. As put by the Note, "Financial conditions in advanced economies are still accommodative but could worsen abruptly-for example, due to a more drastic drop in equity markets or faster-than-expected U.S. monetary policy tightening should pro-cyclical fiscal policy lead to a surprise increase in inflation. This would likely add to the pressure on emerging markets and highly leveraged advanced economies (e.g., Italy), as would a worsening of risk sentiment".

The Note adds: "A further escalation of trade tensions could dent confidence and trigger more substantial output losses, as could uncertainty around a Brexit deal in Europe. The lack of policy space would amplify the impact of these risks".

The Note also dealt with other domains of the global economy. These include multilateral trade and structural reforms in G20 countries. The Note offers an opportunity that ought to be seized by the Summit. Detailing its proposed package of initiatives for G20, the Note says: "Jointly undertaking structural reforms would add 4 percent to global real GDP in the long term".

FSB's report on 'Implementation and Effects of the G20 Financial Regulatory' is also enlightening. It has tabulated the status of specified reforms undertaken by each of 24 countries/jurisdictions. It shows that no member country is 100 percent compliant in all areas. The comparison also shows that several countries have not notified rules for certain aspects of Basel III norms. Four countries have not created the requisite framework in specified areas.

The leverage ratio, for instance, is now in force in 15 jurisdictions; 11 jurisdictions have final rules in force for the NSFR, while another 11 have published draft or final rules.

It may be recalled that the G20 had launched in 2009 a comprehensive package of financial reforms to create a resilient global financial system. The reforms package has four components: 1) make financial institutions more resilient; 2) end too-big-to-fail (TBTF) illusion; 3) make derivatives markets safer; and 4) enhance resilience of non-bank financial intermediation.

Similarly, BIS report to G20 on Implementation of Basel standards has identified deficiencies in execution and compliance with the norms.

As put by BIS report, "challenges remain, in particular regarding the timely regulatory adoption of these standards. While some member jurisdictions have implemented the standards based on the agreed timelines, others have faced delays so that, in many jurisdictions, rules have yet to be finalised or put into effect".

It notes that some jurisdictions have reported that their implementation of certain standards has been or will be delayed compared with the implementation dates agreed by the Committee, because of their concerns over the pace of implementation in other jurisdictions.

A notable case in point is Net Stable Funding Ratio (NSFR). Only 10 members out of 27 jurisdictions member jurisdictions of the Basel Committee on Banking Supervision (BCBS) have final rules in force.

BIS report has observed limited progress in the implementation of capital requirements for equity investments in funds. Moreover, a considerable number of Basel standards remain due to be transposed into domestic regulations over the next few years.

All this shows that complacency seems to be setting in among standards-setting bodies (SSBs) and enforcement agencies in several countries. As G20 Summit is a political platform, it must bind each head of state into a resolve to personally review the implementation of reforms in respective jurisdiction.

What applies to financial sector reforms applies equally well to implementation of other initiatives agreed under G20 framework. An instance in point is action plan for anti-corruption initiatives. Deficiencies on this front are glaring.

This brings us the need for G20 Heads of State to mobilize their collective political will to act efficiently and collectively. The buck for making the world financially secure and economically inclusive stops at them.

They should not let cynics perceive G20 Summit as a networking and photo opportunities platform.