Commentary

Letter to G20 on Global Financial Reforms

Below is a letter signed by several international experts, think-tanks and civil society organizations urging G20 Finance Ministers and Central Bank Governors to not become complacent in regards to on-going financial reforms. The letter acknowledges that G20 has made notable progress in some areas but overall the regulatory integrity of our global financial system remains weak due to the limited scope and slow pace of vital reforms.

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Dear G20 Finance Ministers and Central Bank Governors,

We, the undersigned organizations, are writing to request a meeting with you at the upcoming World Bank-IMF Spring meetings in Washington DC, in order to discuss the G20 agenda on establishing a safe and sound financial system – which we consider a prerequisite for achieving the G20’s ambitious goals.

Seven years after the global financial crisis, we are concerned that G20 Finance Ministers and Central Bank Governors have been unable or unwilling to implement agreed financial reforms. For example, Financial Stability Board (FSB) Chairman Mark Carney lamented, “slow and uneven implementation of agreed reforms to the OTC derivatives markets.”^[1] We are further concerned by the way in which the G20 seems to be ready to accommodate the proposals of the financial industry lobby, while not giving the same weight to those from public interest groups. The backtracking on some reforms that had already been adopted in some countries stands proof of this trend.

The G20 has made notable progress in some areas – such as limiting impacts from the failure of financial institutions, increasing capital requirements and having a better understanding of risks in the shadow banking system. However, overall, the regulatory integrity of our global financial system remains weak due to the limited scope and slow pace of vital reforms.

We would appreciate the opportunity to share our concerns in regards to these key reform areas, and to emphasize that these reforms are equally important for the global public interest as they are for a more resilient financial sector:

Ending Too-Big-To-Fail (TBTF):The G20’s work to identify global systemically important financial institutions (G-SIFIs), which are to be held to higher standards, is a positive initiative. It is critical that the G20 – and Financial Stability Board (FSB) – strengthen and expand this work, especially since the financial sector is even more concentrated today than it was before the crisis, with firms becoming bigger and more interconnected. However, ensuring that institutions are not TBTF encompasses several integrally related components in the areas of effective cross-border resolution, structural reform, capital requirements, derivatives markets reform, shadow banking reform and credit rating agencies.

Structural reform: Despite the increasing awareness of the need to reduce the size and interconnectedness of G-SIFIs, structural reforms – meant to separate core banking activities from market-based activities— have not been adopted. We are concerned that structural reform is receiving inadequate consideration at the global level and that domestic legislative proposals for are being watered down.

Capital requirements: We appreciate the progress made in the form of strengthening requirements and adding a leverage ratio, incorporating liquidity requirements and, more recently, a Total Loss Absorbing Capacity (TLAC) standard. However, several shortcomings remain evident, including the low level of capital requirements, the potential manipulation of requirements measured in risk-weighted assets and a leverage ratio requirement that continues to be seen as an elective feature by some jurisdictions.

Derivatives markets: Important reforms approved by the G20 such as the trading derivatives on public exchanges, standardization and central clearing of derivatives are only marginally implemented, while Over-the-Counter (OTC) trading takes place at levels largely similar to pre-crisis levels.

Shadow banking: While there is greater awareness of the risks shadow banking poses to the formal banking sector, the sector has continued to grow compared to pre-crisis levels. We are concerned that the route being pursued by the FSB to regulate the sector is based on an approach that continues to see the “innovations” with a kind eye while neglecting a critical assessment of the supposed advantages of these “innovations.”

Credit rating agencies (CRAs): The G20 has failed to achieve a credible alternative to the reliance on CRAs and, yet, it has failed to agree on some key reforms that could significantly reduce the CRA conflict of interest situations.

Long-term investment finance: The G20 seems to favor mobilization of savings from institutional investors and this is understandable given the amount of savings that exist. We support the G20-commissioned studies to look into how financial reforms affect the mobilization of this financing. However, we are concerned that the returns required by most investors can only be achieved through transferring unacceptable degrees of risk to taxpayers and citizens in the host countries. Furthermore, we believe that platforms being built to encourage such investing overlook economic, social and environmental sustainability safeguards.

Trade and Finance:  The G20 has failed to address the provisions in trade and investment agreements that limit the regulatory powers of legislators and regulators in the area of financial services, which undermine some regulations the G20 itself has endorsed.

Going forward, we would like to request improved channels of communication with the G20 Ministers of Finance and Central Bank Governors, or their delegated staff, on these issues. Our goal is to work constructively with the G20 leaders to establish the G20 as a body to preventfuture financial crises and mitigate their impacts in all countries. We are preparing a position paper that will elaborate on the concerns expressed above.

As a next step, we would like to request a meeting during the IMF-World Bank Spring Meetings in Washington D.C. to exchange views and explore how the G20 and civil society can work together to achieve an inclusive and resilient financial system.

We know this is a busy week for you, but please let us know your availability from April 14 – 19.

Sincerely,

[1] Mark Carney, “Financial Reforms—Finishing the Post-Crisis Agenda and Moving Forward,” Financial Stability Board, February 4, 2015, available at https://www.financialstabilityboard.org/wp-content/uploads/FSB-Chair-letter-to-G20-February-2015.pdf

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