Is the G20 Ready for the Next Global Financial Crisis?
Kateryna Dzhaha, Researcher, G20 Research Group
February 4, 2016
As former Bank of International Settlements chair Christian Noyer has aptly pointed out, it is a question of when — not if — the next financial crisis will erupt. This seems particularly true in the light of the current instability. The year 2016 has started with what Britain's George Osborne calls "dangerous cocktail of multiple threats," which includes the erosion of $2.3 trillion from global stock markets in the first week of the year alone, plunging oil prices, as well as worries about China's stock market slump, overall economic slowdown and currency depreciation, not to mention financial turmoil in Russia and Brazil. On top of this, the United States Federal Reserve's monetary tightening is adding to the fear of when the next wave of the global debt crisis might come.
These factors greatly undermine market confidence, which, as 2008 showed, could lead to the failure of banks, markets and the financial system as a whole. At the Washington Summit in 2008, the G20 assumed the role of the main platform for reforming the global financial system to ensure that "a global crisis, such as this one, does not happen again." While many reforms are still underway, some have been successfully implemented. So has the G20 succeeded in making the global financial system robust enough to contain current risks? Do the new rules of the game help maintain market confidence in spite of recurrent instabilities?
The short answer is not yet. The G20 has focused on the four financial regulatory reforms: building resilient financial institutions, ending the too-big-to-fail problem, making derivatives markets safer and addressing risks in the shadow banking sector. Specific commitments of G20 members on each of these reforms have been listed in the declarations of the landmark G20 summits at London (2009) and Pittsburgh (2009). The Financial Stability Board (FSB) was created at London and made responsible for assisting G20 members in implementing the agreed reforms and monitoring their compliance with individual commitments.
Just before the most recent summit in Antalya, Turkey, in November 2015, the FSB released its first annual report to the G20 leaders on Implementation and Effects of the G20 Financial Regulatory Reforms. In it, the FSB said that substantial progress had been made in the implementation of only one of the big four areas of financial regulatory reform — strengthening the resilience of financial institutions. As most G20 members have Basel III risk-based capital rules in place or are in the final stages of implementing them, banks are now far better capitalized and have stronger liquidity arrangements. However, in the remaining policy areas, many problems with implementation remain. On shadow banking, reform was still in an early stage — India was the only G20 member had fully implemented measures regarding both money market funds and the risk alignment of securitisation.
As for over-the-counter derivatives, only those G20 members with the largest derivatives markets had complied with their commitments, while others were behind schedule. Cross-border resolution policies also faced low compliance because of the reluctance of many members to adopt the legislation needed to give legal powers to resolution authorities, such as sharing information across borders and recognizing resolution actions of other jurisdictions. Overall, implementation of the reforms remains uncoordinated and slow.
The G20 has done much on global financial regulation since the last global financial crisis. But, given the slow pace of implementing the agreed reforms, it is unclear whether its work can adequately protect the world from any coming economic disaster. Moreover, as the reforms take effect gradually, it is equally unclear whether the financial system will be safer once they are completed.
At the next G20 summit in Hangzhou, China, in September 2016, the leaders must not only commit to speed up compliance with their commitments, but also to address new risks. The structure of financial markets has significantly changed since the 2008 crisis. The impact of financial turmoil in emerging markets on the economic performance of other G20 members is far greater than expected. New recommendations must thus be elaborated and agreed by G20 leaders in order to address new threats to global financial stability on a timely basis.
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Kateryna Dzhaha, MA, is a researcher with the G20 Research Group, the G7 Research Group and the BRICS Research Group, with a focus on financial regulation and supervision, international trade and international environmental policy. She holds a master's degree in international public policy from the Balsillie School of International Affairs, Wilfrid Laurier University, as well as a master's in international economic relations from Taras Shevchenko National University of Kyiv. Kateryna worked as a graduate research fellow at the Centre for International Governance Innovation, where she was involved in a year-long research project on cross-border resolution of financial firms.
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