The G20 and Financial Regulation: Early Achievements and Structural Gaps
Financial regulation was very prominent in the initial stages of the G20 as a venue for coordination among global political leaders. This early emphasis led to significant successes, but also to a sense of disillusionment as delivery of consistent outcomes could not be sustained and divergence among key jurisdictions became increasingly noticeable. It is argued here that the causes of the G20’s shortcomings are largely structural, linked to a lopsided architecture of global institutions for the preparation of financial regulatory policy. These structural gaps are inherently hard to correct. Any efforts during the Chinese and German presidencies of the G20 to identify and acknowledge them would help to pave the way for future progress towards fulfilment of the G20’s proclaimed objectives.
The G20’s financial regulatory track record: achievements and disappointments
Following the great financial crisis of 2007–08, G20 summits started with a very strong focus on financial regulatory matters. The first G20 Leaders’ Summit, held in Washington DC on 15 November 2008, listed no fewer than 39 actions to be taken in the area of financial regulation alone, or 83 per cent of the 47 points in the summit declaration. This was accompanied by highly aspirational rhetoric. Following the Washington Summit, for example, the then French President Nicolas Sarkozy immediately declared that “this summit is historic” and that it had introduced “a new regulation of financial markets so that such a crisis could not happen again” and “a new, more effective and fairer global economic governance”.
The actual achievements, of course, were more nuanced. The two subsequent summits, held in London in April 2009 and in Pittsburgh in September 2009, resulted in a series of wide-ranging financial regulatory decisions. The assessment of policy reforms is never a matter of universal consensus, perhaps even less so in the area of financial regulation than in other areas of economic policy. Nevertheless, some of the changes resulting from successive G20 summits can be labelled successful.
The prime example for this is arguably the Basel III accord on capital, leverage, and liquidity, initially formulated in December 2010 and updated since by the Basel Committee on Banking Supervision (BCBS). Compared with the previous Basel II accord of 2004, which it replaced, Basel III considerably reinforces the requirements for banks’ capital as measured as a share of their risk-weighted assets; introduces an additional leverage ratio, thus creating a check against the possibility of risk-weighting manipulations by banks; and creates an entirely new framework for bank liquidity regulation. Basel III has been criticised from various corners, both for being too rigorous and for being too lax. But there is no question that it is an improvement on the prior global Basel II regime, and little doubt that it owed its rather quick finalisation to the political impetus provided by the G20.
Aside from Basel III, there are other global financial regulatory reform initiatives that came in the wake of G20 discussions and are unquestionably useful. One of the more significant, though scarcely visible, is a joint effort to improve financial statistics, coordinated by the International Monetary Fund (IMF) and the Financial Stability Board (FSB) and known as the ‘Data Gaps Initiative’. Even though progress in this area tends to be slow and incremental, this has led to an improvement in the quality and quantity of information available to policymakers and to the wider public to analyse financial systems and their evolution. One particularly pioneering aspect of the Data Gaps Initiative is the creation of an International Data Hub on global systemically important banks at the Bank for International Settlements (BIS), in Basel, which to an extent transcends traditional jurisdictional boundaries of banking supervision on a global scale.
Still, other G20 endeavours, even after more than seven years of discussions, remain largely a matter of work in progress. To start with, the Basel III accord is not yet fully implemented, and some of its requirements will only be fully in place in 2019. International Capital Standards for internationally active insurers have not yet been agreed on, let alone implemented. The FSB’s approach to the orderly resolution of future crises involving global systemically important banks, grandly labelled ‘Ending Too-Big-To-Fail’ since 2011, has not attracted an enthusiastic reception from jurisdictions other than its initial promoters in the European Union, Switzerland, and the United States. The approach to the so‑called shadow banking system has been generally long on rhetoric and short on actual policy, reflecting the imprecision of the concept of shadow banking itself.
There has also been a journey of discovery on many of the reforms, involving initially unforeseen consequences. For example, the G20 in 2008–09 decided to impose profound structural changes on the market for financial derivatives transactions, which until then had been only lightly regulated. One of the key measures was the requirement to move the clearing of many derivatives contracts from bilateral relations to central clearing houses, also known as central counterparties (CCPs). But this leads to massive risk concentrations inside the CCPs, and also raises questions about the possibility of fragmentation of derivatives markets across jurisdictional lines, since CCPs are supervised on a country-by-country basis. It is increasingly clear that these challenges had not been comprehensively evaluated at the time the G20 made its decision, as is apparent from a still widely open policy debate about the future framework for the resolution of CCPs in systemic crisis scenarios.
Yet other G20 initiatives have simply failed to come to fruition. One clear example is the G20’s initially expressed ambition to achieve global convergence of financial accounting standards. In spite of the existence of a tried-and-tested set of such standards, known as International Financial Reporting Standards and adopted by the European Union and many other jurisdictions in the course of the 2000s, accounting standard-setters in the United States and in other countries have successfully resisted pressure to converge towards this global framework. The mantra of convergence towards a single set of high-quality global accounting standards was initially announced by the G20 with a mid-2011 deadline; that deadline was extended several times, then was entirely dropped, and then the mere mention of the commitment to global accounting standards convergence was quietly abandoned.
Another impactful G20 innovation was a major enhancement of the arrangements to monitor the implementation of reforms from a global perspective. The Basel Committee, in particular, has established a pioneering program to monitor not only which jurisdictions have transposed Basel III into their laws and regulations, but also the precise level of compliance of such transposition with the global accord, and also some aspects of its practical implementation. In this, the BCBS has established strong methodologies to ensure the neutrality of the assessment, and has not shied away from ‘naming and shaming’ — for example, in a 2014 report, the BCBS found the European Union, its biggest jurisdiction in terms of total banking assets, to be “materially non-compliant” with Basel III. The FSB has regularly collected information about the application of all G20 reforms since 2008, and since 2015 delivers annual reports to G20 Leaders summarising its findings across the entire financial regulatory scope, including some elements of economic impact assessment.
Unsurprisingly, the G20’s efforts have not put an end to the considerable diversity of financial system structures around the world. Different jurisdictions have diverse histories, levels of development, and political and social arrangements which all stand in the way of cross-border convergence. Even so, there has been a remarkable shift of the policy consensus, in different ways in the European Union, China, Japan, and other jurisdictions, towards a recognition that their financial systems’ present domination by banks (as opposed to a large role for securities markets to finance the economy, as is most notably the case in the United States) may not be in their best interests from the standpoint of both economic growth and financial stability. This acknowledgment has motivated the ongoing EU policy of ‘capital markets union’ and various other initiatives around the world to develop capital markets. The G20, however, has played no direct role in this shift, and it remains to be seen how much impact it will have on the actual evolution of financial systems.
Overall, the action of the G20 since 2008 qualifies as the most ambitious and impactful coordinated effort ever to overhaul financial regulation at a global level. But its achievements are lopsided, and far from the vision initially expressed by political leaders (especially European ones) of a globally consistent approach to financial regulatory policy.
Institutional imbalances and prospects
The contrasted landscape of G20 successes, half-measures and failures is not only the product of randomness. There is a degree of correlation between G20 achievements and the strength of existing international arrangements. Perhaps unsurprisingly, treaty-based institutions such as the IMF and World Bank have been able to deliver more quickly on the G20’s early initiatives than looser coordination bodies. Furthermore, it is not a coincidence that Basel III stands out among G20 reforms for effectiveness and impact.
The Basel Committee, created in late 1974, is one of the oldest and most established bodies for global financial regulatory coordination, and is itself hosted by the Basel-based BIS, established by treaty in 1930 and thus the dean of all public international financial organisations. Both the BCBS and BIS, together with other lesser-known bodies such as the Committee on the Global Financial System (CGFS) and Committee on Payments and Market Infrastructures (CPMI), rely on the global community of central banks and central bankers, which is comparatively more cohesive than other networks of national regulatory authorities. By contrast, securities markets authorities, even though they gather in the International Organization of Securities Commissions (IOSCO, created in 1983), have been collectively less effective in the promotion of common standards, as illustrated by the fiasco of G20 efforts to promote accounting standards convergence.
Furthermore, issues which are relevant to both central banks and securities regulators, such as reforms of the over-the-counter (OTC) derivatives markets, have been characterised by a near-complete inability to effectively set standards at the global level. To remedy this gap, there has been a proliferation of initiatives which have not achieved much more than underlining the problem, including an OTC Derivatives Supervisors Group (ODSG) since 2005, an OTC Derivatives Regulators Forum (ODRF) since 2009, an OTC Derivatives Regulators Group (ODRG) since 2011 and an OTC Derivatives Coordination Group (ODCG) since 2012, with largely overlapping compositions and mandates.
It is striking that the financial crisis of 2007–08 has not led to the creation of any significant new global institution for financial regulatory reform. The G20 itself, as a grouping of countries if not a format of top leaders’ summits, was born of the Asian crisis of 1997–98, as was the FSB (the successor to the Financial Stability Forum). In 2008–09, a number of existing bodies — including the FSB, BCBS, CGFS, and CPMI — expanded their membership to large emerging economies, but there was much less institutional creativity than in the wake of the Asian crisis. It is tempting to correlate this observation with the fact that the 2007–08 crisis affected the core of the global financial system, including the United States and European Union, while the Asian crisis had been more contained from a global financial standpoint, even though it covered a very large area in terms of geography and population.
Even after the shift of Leaders’ Summits to the G20 format and the above-mentioned expansion of membership of several key organisations to include emerging economies, the structure of global financial bodies remains markedly imbalanced. Europe is still significantly overrepresented — especially now that the implementation of the set of reforms known as ‘banking union’ implies that national authorities from the 19 euro area countries no longer have policy autonomy, in either banking supervision or monetary policy. Furthermore, almost all global financial regulatory bodies are led by westerners, and headquartered in either Europe or the United States.
Next steps: where to from here
Evidently, it is comparatively easier for the G20 to change the content of financial regulations than the architecture of the institutions which prepare them. Nevertheless, some of the gaps in the current organisational arrangements should be addressed if the G20 is to become more effective at achieving its financial reform objectives. For example, it would be sensible to empower a global body with relevant membership and a clear mandate to issue standards for the global derivatives markets. Some categories of regulated market participants which handle crucial cross-border information, such as credit rating agencies, trade repositories and audit firms, may need to be supervised at a supranational level, as is now partly the case in the European Union. Even some entities that may require public financial assistance in a crisis scenario, such as CCPs, may require more internationally centralised supervisory arrangements in the future than is currently deemed feasible. Among existing entities, future choices of leadership should tilt much more towards diversity of jurisdictional background (and of gender), and, to ensure better legitimacy and acceptance, the relocation of some away from the North Atlantic should be seriously envisaged.
Such suggestions run against considerable institutional and political inertia. The G20 itself is a consensus-based venue, but many of the specialised global public financial regulatory bodies are even more driven by the need for unanimity. In other terms, it would be unreasonable to expect the FSB or any of its members to take the initiative of proposing changes to the existing architecture, even changes that are sorely needed — such initiative belongs to the political leaders. The heads of state who will gather in Hangzhou later this year would do well to reserve part of their time for an open-ended discussion on this theme that might crystallise a process of recognition of at least some of the current institutional gaps, possibly leading to a first set of proposals as early as the G20’s German Presidency in 2017. Going forward, incremental and not-so-incremental changes in the set-up and organisation of global public regulatory and oversight bodies will eventually be needed to enable the maintenance of a decently regulated, globally integrated financial system.
 Nicolas Véron is a Senior Fellow at Bruegel and a Visiting Fellow at the Peterson Institute for International Economics. He is also an independent board member at the Global Trade Repository arm of the Depositary Trust and Clearing Corporation.
 Stéphane Rottier and Nicolas Véron, “An Assessment of the G20’s Initial Action Items”, Bruegel Policy Contribution 2010/08, Brussels, September 2010, http://bruegel.org/wp-content/uploads/imported/publications/pc_2010_08_fin_reg.pdf.
 Transcript of the joint press conference of Nicolas Sarkozy and José Manuel Barroso, 15 November 2008, accessed at http://www.g20.utoronto.ca/summits/2008washington.html.
 See Basel Committee on Banking Supervision, “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems’, December 2010 (revised June 2011), http://www.bis.org/publ/bcbs189.htm, and “Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools,” January 2013, http://www.bis.org/publ/bcbs238.htm.
 See, for example, Institute of International Finance, “The Cumulative Impact on the Global Economy of Changes in the Financial Regulatory Framework,” September 2011.
 See, for example, Anat Admati and Martin Hellwig, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It (Princeton NJ: Princeton University Press, 2013).
 For more information, see Financial Stability Board, “FSB Data Gaps Initiative: A Common Data Template for Global Systemically Important Banks: Phase 2”, 6 May 2014, http://www.fsb.org/2014/05/r_140506/.
 See Financial Stability Board, “Second Thematic Review on Resolution Regimes”, 18 March 2016, http://www.fsb.org/wp-content/uploads/Second-peer-review-report-on-resolution-regimes.pdf.
 G20, Leaders Statement, Pittsburgh Summit, 24–25 September 2009, http://www.g20.utoronto.ca/2009/2009communique0925.html.
 Basel Committee on Banking Supervision, “Regulatory Consistency Assessment Programme (RCAP): Assessment of Basel III Regulations — European Union”, December 2014, http://www.bis.org/bcbs/publ/d300.pdf.
 See Financial Stability Board, “Implementation and Effects of the G20 Financial Regulatory Reforms”, 9 November 2015, http://www.fsb.org/2015/11/implementation-and-effects-of-the-g20-financial-regulatory-reforms/.
 See, for example, Sam Langfield and Marco Pagano, “Bank Bias in Europe: Effects on Systemic Risk and Growth”, European Central Bank Working Paper No1797, May 2015, https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1797.en.pdf.
 Stéphane Rottier and Nicolas Véron, “Not All Financial Regulation Is Global”, Bruegel Policy Brief 2010/07, August 2010, http://bruegel.org/2010/08/not-all-financial-regulation-is-global/.
 To the author’s knowledge, the only exception is the Global Legal Entity Identifier Foundation, established by the FSB in 2014 with a fairly narrow remit.
 Still, the central banks of Belgium, France, Germany, Italy, Luxembourg, the Netherlands, and Spain remain full members of the BCBS, alongside the European Central Bank (ECB) and its Single Supervisory Mechanism; and the national central banks of France, Germany, Italy, the Netherlands, and Spain all retain representation in the FSB’s Steering Committee, alongside the ECB.
 See Nicolas Véron, “Asia’s Changing Position in Global Financial Reform”, in Asian Development Bank and Korea Capital Market Institute, Asian Capital Market Development and Integration: Challenges and Opportunities (New Delhi: Oxford University Press, 2014), http://www.adb.org/sites/default/files/publication/31180/asian-capital-market-development-integration.pdf. In terms of location, the only outlier is the International Forum of Independent Audit Regulators (IFIAR), which in April 2016 announced plans to establish a permanent secretariat in Tokyo.
 The European Securities and Markets Authority is the sole supervisor of rating agencies and trade repositories for all 28 member states of the European Union, including the United Kingdom.
 Nicolas Véron, “Move the Financial Stability Board’s Secretariat to Asia”, RealTime Economic Issues Watch (Blog), 10 May 2012, https://piie.com/blogs/realtime-economic-issues-watch/move-financial-stability-boards-secretariat-asia.