G20 Summit: show of unity or discord?

The faces were familiar. The rhetoric of the statement concluding the summit was for the most part, familiar. And yet it was clear to the world watching this latest gathering of the Group of 20 (Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, México, Russia, Saudi Arabia, South Africa, Korea, Turkey, the United Kingdom, United States and European Union) in Seoul, that the mood had changed. The show of unity was less convincing than in London two years ago at the height of the financial crisis, when co-operation at the highest level between the G20 was a necessity not a choice. The final leaders' statement to emerge from Seoul has been criticised in the media for being too vague and failing to provide measurable targets for reform at a global level. From another perspective though, the subtext of the statement and its lack of specifics was confirmation, if it was needed, of the degree of discord and debate taking place behind closed doors.

One of the causes of the tension both before and during the summit was the issue of how to address current global trade imbalances between those nations with surplus funds and strong export-led growth (China and others) and those nations with huge deficits and comparatively poor growth:

"Some of us are experiencing strong growth, while others face high levels of unemployment and sluggish recovery. Uneven growth and widening imbalances are fuelling the temptation to diverge from global solutions into uncoordinated actions... uncoordinated policy actions will only lead to worse outcomes for all."1

Another topic of tension discernible in the sub-text of the statement was the ongoing furore over currency exchange rate practices viewed as anti-competitive. The United States (US) was under attack before and at the summit following accusations of actively pursuing a weaker dollar following the Federal Reserve's renewed quantitative easing programme. China was also under continuing fire for the competitive advantage given to it by a pegged and undervalued renminbi. The leaders' statement included a commitment to move towards "...market-determined exchange rate systems, enhancing exchange rate flexibility to reflect underlying economic fundamentals, and refraining from competitive devaluation of currencies."

Perhaps this G20 summit, even more than Toronto in June, provided evidence of the increasing polarisation between those countries which had taken the brunt of the financial crisis and those which had emerged relatively unscathed. In our most recent of six surveys2 tracking sentiment from the early days of the credit crunch through to the global recovery, 73 per cent of respondents agreed or strongly agreed that polarisation was increasing between those countries where support of the financial services was needed and those where it was not. 'Seoul even more than Toronto perhaps confirmed the perception that those nations amongst the G20 who "escaped the worst effects of the financial crisis no longer subscribe to a collective response." '3

Key regulatory reforms: Basel III

Away from the negative headlines surrounding the summit it is easy to lose sight of some of the key regulatory measures which have arguably been made possible by co-operation between the Group of 20. One such notable achievement as discussed in the Financial Times4, has been the collaboration between the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BSBC) over tougher regulations on the amount of core capital that banks should hold and the endorsement of Basel III by the G20. It may be that Basel III has not gone as far as some would have hoped from a regulatory perspective but, as one respondent put it, in our October survey, it is recognised by many that:

"even a watered down Basel III is still a huge forward jump"

On 12 November the European Union"> class="abbr" title="European Union">EU internal market commissioner Michel Barnier announced that the European Commission will table proposals in March 2011 that will transpose the Basel III accord into EU law. Perhaps the more interesting part of the EU commissioner's statement, though, was the "utmost importance" placed by the Commission on ensuring an "international level playing field" and the call for "all jurisdictions to implement Basel III at the same time, and in a consistent manner, in the EU and beyond". In other words, it is a further warning about the potential for a competitive imbalance between those jurisdictions which decide to go ahead and implement a raft of regulatory measures post the financial crisis and those jurisdictions which may not be intent on pursuing the same regulatory agenda.

GSIFs and SIFs

Post Basel III, the focus of the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BSBC) has now switched to identifying those financial institutions operating at a global and national level that if allowed to collapse, would pose a systemic risk to the stability of financial systems. To this end, various regulatory proposals were on the table at the Seoul summit including higher capital requirements for Globally Systemically Important Institutions (GSIFs) than those set down by Basel III. Opinion was split between regulators in the United States (US) and the United Kingdom (UK) in favour of such a surcharge and regulators in Japan, Germany and France, opposed. Swiss regulators though are seemingly already ahead of the game with a so-called "Swiss finish" top up to the global minimum requirements set out by Basel III. More stringent legislative measures were also on the table to protect the financial system and the taxpayer from a failing GSIF including a requirement to write "living wills", in addition to or as a complement to legislative measures already in place, (for example in the UK the special resolution regime under the Banking Act 2009). More intensive supervisory oversight is also envisaged, with the creation by the end of 2011 of a "peer review council" to monitor compliance by GSIFs of any additional regulatory measures imposed. A target short list of around 20 GSIFs is also to be identified by the end of 2011.

Similar collaboration between the FSB and BSBC is proposed in relation to Systemically Important Institutions (at a national level) SIFs and the legacy of Seoul will perhaps be these additional regulatory measures proposed for GSIFs in the first instance and SIFs in the second instance.

Insurance and shadow banking sectors

A similar exercise is envisaged in relation to the insurance sector, in collaboration with the International Association of Insurance Supervisors (IAIS).

The shadow banking system is also in the sights of the Group of 20 with reference in the leaders' statement to the need to address the regulatory gaps which may emerge in the shadow banking system and for more systemic attention to be paid to this sector. The Financial Stability Board (FSB) will therefore be tasked as a priority with collaborating with other international standard setting bodies to develop recommendations to strengthen the regulation and oversight of the shadow banking system by mid 2011.

Global regulation: how achievable in practice?

Questions remain to be answered though as to what level of regulation and supervision of Globally Systemically Important Institutions (GSIFs), Systemically Important Institutions (SIFs) or other financial institutions in the banking system or shadow banking system can be achieved on a global level without co-operation by regulators on a national level.

Global co-operation on regulatory reform has been a key theme in each of our six surveys. In our latest survey, a clear majority (66 per cent) agreed that there remained a need for more global co-operation on regulation and that without it, the risk of another global financial crisis remained. However question marks were raised in all six surveys as to the practicalities of achieving such a global regulatory system.

Shift from West to East

Finally though, reflecting on the overall impression left by this Group of 20 gathering in the East, the quiet legacy of Seoul may be that here, more than any recent G20 gathering, it was more clear than ever that a change of guard is taking place in the economic world order. This shift in economic power is also reflected in the change in composition of membership of the international Monetary Fund (IMF) with China now the third largest member. At the start of the year, in our January 2010 survey5, some 67 per cent of respondents anticipated a permanent shift in economic power from West to East. Some might argue that the overriding impression to come out of Seoul is that this shift may have already taken place.

Notes:

  1. Paragraph 7, leaders' statement, Seoul Summit, November 2010.
  2. "Global financial recovery – a matter of perspective" a Norton Rose Group survey was published in October 2010 and is the latest of six Norton Rose Group surveys tracking sentiment from the start of the credit crunch, through the global financial crisis and into the period of global recovery.
  3. James Bateson, partner and head of financial institutions, Norton Rose LLP, London, in "Global financial recovery – a matter of perspective", Norton Rose Group survey, October 2010.
  4. "Forget summit failures, look at G20 record", Financial Times, 12 November 2010.
  5. "Financial Institutions in the Future – the Global Financial Recovery", Norton Rose Group survey, January 2010.

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