The global reform agenda is many things… Important? Yes. Ambitious? You bet. Enormously complex? That too. But more important than all those, it is celebrating its birthday today!
And it’s a big one. Five! The world’s big push to stabilize the financial system after the global financial crisis turns five today.
Half a decade ago, on September 25th 2009, world leaders gathered in Pittsburgh for a G20 Summit not one year removed from the collapse of Lehman Brothers, with most countries still deep in recession, to agree on how they would make sure that such a crisis could never happen again.
Finance Ministry officials quickly reached for anything caffeinated, as what was agreed wasn’t necessarily for the lethargic of heart. Leaders tasked the Financial Stability Board, the newly formed global watchdog of financial market health, to launch a reform agenda aimed at tackling three goals:
· To increase the stability of banks worldwide by making them hold more capital and liquidity to prevent another crisis.
· To put an end to Too-Big-to-Fail banks by creating plans that would allow markets to cope with another Lehman-style collapse without needing a taxpayer bailout.
· To standardize and regulate the global market for over- the-counter derivative contracts in order to increase its transparency and stability.
So, five year birthdays are important ones to celebrate. The important question though, would be what kind of birthday party is the financial reform agenda having? Is it all streamers, sun, cheering and cake? Or have things gone a bit awry, the clown is a bit too scary, and the kids are all standing under the porch crying while it rains outside?
The truth though, lies somewhere in the middle…or rather; holds a bit of both scenarios.
There should be no doubt. The financial reform agenda is the signal achievement of the G20, the Financial Stability Board, and the whole architecture of global financial cooperation that they brought into being five years ago. Before that, regulatory cooperation on banking and financial markets issues wasn’t organized on anything near the scale that it is today. That means that international financial rules are becoming more standardized, more comparable, and more predictable across borders than they were before, and that’s a good thing for governments that desperately want to see a revival in cross-border investment as well as for the banks and financial market participants that can underwrite exactly such an outcome.
That’s not to say that significant challenges don’t remain, however. There are many of them, and serious ones at that. The international standardization of regulatory practices hasn’t been without wrinkles, and issues such as the mutual recognition of the soundness of each-others rules continues to dog EU-US financial market relations. The effective application of new regulatory practices in emerging markets is also an area where further work will probably have to be done in order to make sure that rapidly deepening financial markets there avoid mistakes their more developed counterparts have made in the past.
Another itchy problem is that the years that have passed, however, haven’t exactly been smooth sailing for the world’s largest economies – especially in Europe. EU leaders have been watching nervously this year as economic indicators, one after the other, come up flat, showing that the continent is growing slowly, if it is even growing at all.
That’s led many to consider whether the financial reform agenda has had a sufficient growth-orientation to balance out its primary mandate of seeking to ensure market stability. Are new regulations impeding banks from being able to lend to the real economy? Should we be doing more to enable securitization (the bundling of loans to reduce individual risk) to help finance a recovery? Are there specific investment areas, like infrastructure and green energy that could benefit from more tailored regulatory treatment?
These are questions that the G20, the Financial Stability Board, and others leading the global reform agenda are increasingly turning to now, and it’s an agenda driven by national leaders that are getting their feet held to the flames by angry electorates with too much debt and too few jobs.
But even at a feet-grilling barbecue it would take a pretty tough critic to not admit that the global regulatory effort has had some fairly remarkable success in making financial markets much more stable than they were five years ago. The new goal of propping up global growth will take a renewed agenda, and another big push to develop and implement. That’s going to take more time.
All in all then, the financial reform agenda’s fifth birthday is worth some applause, at least a small piece of cake and nod of recognition. Stay with this toddler though! The next five years are likely going to be just as crucial as the last.
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July 7, 2022