IIF MD Dallara sends Policy Letter to G20 Summit leaders

02 November 2011

On the eve of the G20 Summit in Cannes, Dallara wrote to the leaders to highlight the IIF's perspectives on a series of critical issues. He noted that the IIF believes that the Summit “should focus squarely on setting out strong, convincing measures to revitalise growth”.

Summary

The Policy Letter highlights critical recent agreements and developments in the euro area, including the decisions taken in Brussels last week on Greece. It emphasises the importance of a balanced approach to financial regulatory reform and stresses the importance of the G20 taking actions that can ensure that the banking sector can play its full role in contributing to economic recovery and growth. The letter also touches upon critical concerns in the European and US economies, and notes the importance of preparing for the next Summit to be held in Mexico in mid-2012.

Greece

The IIF reaffirms its support for voluntary private-sector involvement (PSI), offering substantial debt reduction for Greece.

Following the recent announcement by Prime Minister Papandreou of a public referendum, the IIF reaffirmed its intention to move ahead with the October 26-27 agreement to reduce the nominal value of private-sector holdings of Greek government bonds by 50 per cent. The IIF will work closely with the Greek authorities, euro area officials and other relevant parties to agree and finalise details of the debt exchange; and move towards its swift implementation.

More effective firewalls in Europe are urgently needed

Measures announced last week are welcome, and move clearly towards the enhancement of the European Financial Stability Facility (EFSF), as well as establishing a special-purpose vehicle for backstopping sovereign debt. These plans need to be fleshed out and reinforced, including through expedited efforts to attract capital from non-euro area official sources and private investors. As plans are developed in more concrete terms, it is essential that all parties come together behind the continued active role of the ECB in the secondary government bond market. This will allow time for national authorities’ adjustment efforts to take hold, and help stabilise markets at this crucial juncture. The IIF would also emphasise that lower ECB policy rates at this point would enhance market stability as well as help bolster faltering regional economic growth.

Global regulatory reform

Global regulatory reform is needed but bank recapitalisation in Europe and broader measures will come at considerable cost. There is a clear need to restore confidence in Europe’s banking sector, and the recapitalisation plans for European banks are seen as a key part of the overall approach to this.

The IIF wishes to underscore the following points to policymakers at this critical time:

• Banks should be a key support for economic recovery. But the way in which regulatory reform is being implemented militates strongly against this. Banks are already putting in place many key reforms—such as increased core capital requirements, the capital conservation buffer; recovery and resolution plans and strengthened risk management and governance. But some reforms such as the proposed liquidity ratios (including their increasingly questionable emphasis on sovereign debt) are badly in need of reformulation while others—such as the surcharge on so-called “global systemically important banks” (G-SIBs)—will be costly and counterproductive.
• If banks are to play their part in supporting economic recovery, G20 leaders need to look beyond narrow regulatory imperatives to the broader economic and financial context. Implementation of an extensive and increasingly disparate array of regulatory reforms is not consistent with either economic recovery or financial stability. Policy-makers should call a halt to the introduction of new regulation while the core elements of reform, such as increases in equity capital and recovery and resolution arrangements, are put in place. Leaders also need to reaffirm the principle articulated in 2009, that reform will only be truly effective if it is coordinated and interpreted and implemented consistently across major jurisdictions. Global regulations advanced by the G20 need to be formulated and implemented on a truly consistent basis.
• Above all, it is essential for the official sector to begin viewing the banking system as an indispensible partner in fostering recovery, rather than an adversary on which it is necessary to impose ever more punitive measures with insufficient regard to coordination, cumulative effects, or interactions. Regulatory reform is needed and it will be accomplished. But unless it is accomplished in a way which permits banks to play their pivotal role in fostering recovery, the main benefits in terms of future stability combined with global prosperity will be lost.

Full letter

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