The G20 Seoul summit: Transformation of financial system to address the root causes of the crisis is essential
15 November 2010
G20 leaders approved a plan to have regulators draw up a list of about 20 global banks by the end of 2011 that will have to hold more capital and prove that their failure would not damage the financial system.
Strengthened global financial safety nets
As the global economy became more interconnected and integrated, the size and volatility of capital flows increased significantly. The increased volatility was a source of instability during the financial crisis. It even adversely affected countries with solid fundamentals and the effects were greater on those with more open economies. These problems persist. Current volatility of capital flows is reflecting the differing speed of recovery between advanced and emerging market economies. National, regional and multilateral responses are required. Strengthened global financial safety nets can help countries to cope with financial volatility, reducing the economic disruption from sudden swings in capital flows and the perceived need for excessive reserve accumulation.
Therefore, we asked our Finance Ministers and Central Bank Governors to prepare policy options to strengthen global financial safety nets for our consideration at this Summit.
We welcome the following achievements from our mandate:
The enhancement of the Flexible Credit Line (FCL) including the extension of its duration and removal of the access cap. Countries with strong fundamentals and policies will have access to a refined FCL with enhanced predictability and effectiveness.
The creation of the Precautionary Credit Line (PCL) as a new preventative tool. The PCL allows countries with sound fundamentals and policies, but moderate vulnerabilities, to benefit from the IMF’s precautionary liquidity provision.
The recent decision by the IMF to continue its work to further improve the global capacity to cope with shocks of a systemic nature, as well as the recent clarification of the procedures for synchronized approval of the FCLs for multiple countries, by which a number of countries affected by a common shock could concurrently seek access to FCL.
The dialogue to enhance collaboration between Regional Financing Arrangements (RFAs) and the IMF, acknowledging the potential synergies from such collaboration.
Building on the achievements made to date on strengthening global financial safety nets, we need to do further work to improve our capacity to cope with future crises. Therefore, we asked our Finance Ministers and Central Bank Governors to explore, with input from the IMF:
A structured approach to cope with shocks of a systemic nature.
Ways to improve collaboration between RFAs and the IMF across all possible areas and enhance the capability of RFAs for crisis prevention, while recognizing region specific circumstances and characteristics of each RFA.
Our goal is to build a more stable and resilient international monetary system. While the international monetary system has proved resilient, tensions and vulnerabilities are clearly apparent. We agreed to explore ways to further improve the international monetary system to ensure systemic stability in the global economy. We asked the IMF to deepen its work on all aspects of the international monetary system, including capital flow volatility. We look forward to reviewing further analysis and proposals over the next year.
Financial Sector Reforms
The global financial system came to a sudden halt in 2008 as a result of reckless and irresponsible risk taking by banks and other financial institutions, combined with major failures of regulation and supervision. While our initial priority was to move quickly to stabilize financial markets and restore the global flow of capital, we never lost sight of the need to address the root causes of the crisis. We took our first step at the Washington Summit, where we developed the Action Plan to Implement Principles for Reform. Since then, we built on the progress made in London, Pittsburgh, and Toronto, and together, took major strides toward fixing the financial system with the support from the international organizations, particularly the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS).
Transformed financial system to address the root causes of the crisis
Today, we have delivered core elements of the new financial regulatory framework to transform the global financial system.
We endorsed the landmark agreement reached by the BCBS on the new bank capital and liquidity framework, which increases the resilience of the global banking system by raising the quality, quantity and international consistency of bank capital and liquidity, constrains the build-up of leverage and maturity mismatches, and introduces capital buffers above the minimum requirements that can be drawn upon in bad times. The framework includes an internationally harmonized leverage ratio to serve as a backstop to the risk-based capital measures. With this, we have achieved far-reaching reform of the global banking system. The new standards will markedly reduce banks’ incentive to take excessive risks, lower the likelihood and severity of future crises, and enable banks to withstand – without extraordinary government support – stresses of a magnitude associated with the recent financial crisis. This will result in a banking system that can better support stable economic growth. We are committed to adopt and implement fully these standards within the agreed timeframe that is consistent with economic recovery and financial stability. The new framework will be translated into our national laws and regulations, and will be implemented starting on January 1, 2013 and fully phased in by January 1, 2019.
We reaffirmed our view that no firm should be too big or too complicated to fail and that taxpayers should not bear the costs of resolution. We endorsed the policy framework, work processes, and timelines proposed by the FSB to reduce the moral hazard risks posed by systemically important financial institutions (SIFIs) and address the too-big-to-fail problem. This requires a multi-pronged framework combining: a resolution framework and other measures to ensure that all financial institutions can be resolved safely, quickly and without destabilizing the financial system and exposing the taxpayers to the risk of loss; a requirement that SIFIs and initially in particular financial institutions that are globally systemic (G-SIFIs) should have higher loss absorbency capacity to reflect the greater risk that the failure of these firms poses to the global financial system; more intensive supervisory oversight; robust core financial market infrastructure to reduce contagion risk from individual failures; and other supplementary prudential and other requirements as determined by the national authorities which may include, in some circumstances, liquidity surcharges, tighter large exposure restrictions, levies and structural measures. In the context of loss absorbency, we encourage further progress on the feasibility of contingent capital and other instruments. We encouraged the FSB, BCBS and other relevant bodies to complete their remaining work in accordance with the endorsed work processes and timelines in 2011 and 2012.
In addition, we agreed that G-SIFIs should be subject to a sustained process of mandatory international recovery and resolution planning. We agreed to conduct rigorous risk assessment on these firms through international supervisory colleges and negotiate institution-specific crisis cooperation agreements within crisis management groups.
Regular peer reviews will be conducted by the FSB on the effectiveness and consistency of national policy measures for these firms.
We reaffirmed our Toronto commitment to national-level implementation of the BCBS’s cross-border resolution recommendations. To support implementation at the national level, we welcomed the BCBS’s planned stock taking exercise of these recommendations.
We called on the FSB to build on this work and develop attributes of effective resolution regimes by 2011.
Delivering on our commitment in Toronto, we endorsed the policy recommendations prepared by the FSB in consultation with the IMF, on increasing supervisory intensity and effectiveness. We reaffirmed that the new financial regulatory framework must be complemented with more effective oversight and supervision. We agreed that supervisors should have strong and unambiguous mandates, sufficient independence to act, appropriate resources, and a full suite of tools and powers to proactively identify and address risks, including regular stress testing and early intervention.
© G-20
