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Finance ministers and central bankers from the Group of 20 (G20) leading advanced and emerging economies issued a communiqué on October 15 after a meeting in Paris, their last meeting before the G20 Summit in Cannes.
The financial leaders stressed that the world economy faces growing downward risks, and more measures should be taken to maintain the stability of the banking system and financial markets to boost world economic recovery. Although they agreed to strengthen supervision over the financial industry, differences on other issues such as international monetary system reform remained.
Banking regulation
The meeting formed common views on the global economic situation and the evaluation of the European debt crisis, said Ren Dingqiu, a researcher with the Beijing Academy of Social Sciences. G20 finance ministers and central bank governors agreed on the general trend of the world economy. They pledged to encourage Europe’s bigger bailout plan, strengthen supervision over the financial system and devise action plans to be submitted to the G20 Summit in Cannes in early November.
“We welcome the adoption of the ambitious reform of the European economic governance and the completion by the euroarea countries of the actions necessary to implement the decisions taken by the euroarea leaders on July 21 to increase the capacity and the flexibility of the European Financial Stability Facility (EFSF),” said the communiqué. “We look forward to further work to maximize the impact of the EFSF in order to address contagion.”
The 440-billion-euro ($602.6 billion) EFSF fund is expected to comfort investors owning sovereign bonds of euro-zone countries caught in the sovereign debt crisis, so as to reach the goal of stabilizing global financial markets, said Ren.
G20 financial leaders agreed to “ensure that banks are adequately capitalized and have sufficient access to funding.” European banks’ solvency and liquidity are considered key elements to sustain the euro-zone debt test.
The communiqué also confirmed the enhanced role of central banks, saying that they“stand ready to provide liquidity” to commercial banks if required.
In early October, Dexia, the FrancoBelgian lender, became the first European bank to be split up after it failed to get short-term funding due to concerns over its exposure to Greek sovereign debt.
Wei Liang, an assistant research fellow with the Institute of World Economic Studies at the China Institutes of Contemporary International Relations, pointed out the European debt crisis has created possibilities for a crisis in the banking system. Banks of systemic importance, like Dexia, which own sovereign bonds of debt-ridden states, are particularly prone to the debt crisis.
Because these banks have maintained connections with many other banks, their troubles could easily infect banks cooperating with them. Many banks now refuse to provide loans to these banks. Since they cannot get financing from the market, banks with high exposure to sovereign debt may need to get assistance from governments or be reorganized by other banks.
“A possible banking system crisis will further devastate global financial markets,”Wei said. So the G20 has required that banks of systemic importance increase their capital adequacy ratio to prevent such a crisis.
G20 financial leaders endorsed a capital surcharge ranging from 1 percent to 2.5 percent on banking giants, including Goldman Sachs, HSBC, Deutsche Bank and JP Morgan. Ren believes increasing capital adequacy will help decrease systemic risks in the financial system, but it is unclear if these banks can increase capital adequacy by themselves.
He pointed out many banks were dragged down by the European debt crisis and their profits have dropped sharply. Plus, the crisis is still spreading.
vulnerabilities and strengthen the foundations for strong, sustainable and balanced growth.
It required advanced economies to adopt policies to build confidence and support growth, and implement clear, credible and specific measures to achieve fiscal consolidation. In the meantime, emerging market economies should adjust macroeconomic policies to maintain growth momentum, contain inflationary pressures and endeavor to enhance resilience in the face of volatile capital flows.
“The meeting made a breakthrough on strengthening supervision to foster financial market stability,” said Ren. “It is worth mentioning that while supporting emerging economies’ efforts to promote exchange rate flexibility, the meeting reiterated disorderly exchange rate fluctuations will damage economic and financial stability.”
IMF governance
At the Paris meeting, G20 financial leaders agreed to improve the IMF’s governance. But they didn’t reach an agreement on capital injection into the IMF.
The communiqué stated the IMF must have adequate resources to fulfill its systemic responsibilities, calling for the full implementation of the 2010 quota and governance reform.
In September, IMF chief Christine Lagarde said the IMF’s current capital adequacy would not fulfill all loan demands if the global economic situation keeps deteriorating. But G20 countries have different ideas on putting more capital into the IMF. U.S. Treasury Secretary Timothy Geithner said during the meeting that he had faith in the IMF’s financing capability. The United States promised to support European bailout strategies based on existing resources. Germany and Japan held similar stances.
Ren pointed out that there are at least two reasons for developed economies to reject capital injection. First of all, most developed countries now have economic troubles, and some of them have to deal with political pressures at home. It will be hard for them to take extra money out of their pockets.
For example, recent statistics show the U.S. fiscal deficit amounted to $1.3 trillion in the 2011 fiscal year that ended on September 30. The country’s total national debt has reached $14.8 trillion. The two major political parties of the United States have quite different opinions on how to reduce the deficit, and they continue to wrestle over the subject in the U.S. Congress.
Moreover, developed countries are worried that capital injection into the IMF might lead to emerging economies’ growing weight in the organization, Ren added.
“Though Washington is willing to help Europe out of the current debt crisis, its domestic political and economic situations don’t allow it to put more money into the IMF,”said Wei.
According to the communiqué, G20 financial leaders will submit proposals to the Cannes Summit on issues including the IMF reform.
“The upcoming summit will focus on the European debt crisis, while continuing discussions on issues related to the world economy’s robust, sustainable and balanced development,” Wei said.
The financial leaders stressed that the world economy faces growing downward risks, and more measures should be taken to maintain the stability of the banking system and financial markets to boost world economic recovery. Although they agreed to strengthen supervision over the financial industry, differences on other issues such as international monetary system reform remained.
Banking regulation
The meeting formed common views on the global economic situation and the evaluation of the European debt crisis, said Ren Dingqiu, a researcher with the Beijing Academy of Social Sciences. G20 finance ministers and central bank governors agreed on the general trend of the world economy. They pledged to encourage Europe’s bigger bailout plan, strengthen supervision over the financial system and devise action plans to be submitted to the G20 Summit in Cannes in early November.
“We welcome the adoption of the ambitious reform of the European economic governance and the completion by the euroarea countries of the actions necessary to implement the decisions taken by the euroarea leaders on July 21 to increase the capacity and the flexibility of the European Financial Stability Facility (EFSF),” said the communiqué. “We look forward to further work to maximize the impact of the EFSF in order to address contagion.”
The 440-billion-euro ($602.6 billion) EFSF fund is expected to comfort investors owning sovereign bonds of euro-zone countries caught in the sovereign debt crisis, so as to reach the goal of stabilizing global financial markets, said Ren.
G20 financial leaders agreed to “ensure that banks are adequately capitalized and have sufficient access to funding.” European banks’ solvency and liquidity are considered key elements to sustain the euro-zone debt test.
The communiqué also confirmed the enhanced role of central banks, saying that they“stand ready to provide liquidity” to commercial banks if required.
In early October, Dexia, the FrancoBelgian lender, became the first European bank to be split up after it failed to get short-term funding due to concerns over its exposure to Greek sovereign debt.
Wei Liang, an assistant research fellow with the Institute of World Economic Studies at the China Institutes of Contemporary International Relations, pointed out the European debt crisis has created possibilities for a crisis in the banking system. Banks of systemic importance, like Dexia, which own sovereign bonds of debt-ridden states, are particularly prone to the debt crisis.
Because these banks have maintained connections with many other banks, their troubles could easily infect banks cooperating with them. Many banks now refuse to provide loans to these banks. Since they cannot get financing from the market, banks with high exposure to sovereign debt may need to get assistance from governments or be reorganized by other banks.
“A possible banking system crisis will further devastate global financial markets,”Wei said. So the G20 has required that banks of systemic importance increase their capital adequacy ratio to prevent such a crisis.
G20 financial leaders endorsed a capital surcharge ranging from 1 percent to 2.5 percent on banking giants, including Goldman Sachs, HSBC, Deutsche Bank and JP Morgan. Ren believes increasing capital adequacy will help decrease systemic risks in the financial system, but it is unclear if these banks can increase capital adequacy by themselves.
He pointed out many banks were dragged down by the European debt crisis and their profits have dropped sharply. Plus, the crisis is still spreading.
vulnerabilities and strengthen the foundations for strong, sustainable and balanced growth.
It required advanced economies to adopt policies to build confidence and support growth, and implement clear, credible and specific measures to achieve fiscal consolidation. In the meantime, emerging market economies should adjust macroeconomic policies to maintain growth momentum, contain inflationary pressures and endeavor to enhance resilience in the face of volatile capital flows.
“The meeting made a breakthrough on strengthening supervision to foster financial market stability,” said Ren. “It is worth mentioning that while supporting emerging economies’ efforts to promote exchange rate flexibility, the meeting reiterated disorderly exchange rate fluctuations will damage economic and financial stability.”
IMF governance
At the Paris meeting, G20 financial leaders agreed to improve the IMF’s governance. But they didn’t reach an agreement on capital injection into the IMF.
The communiqué stated the IMF must have adequate resources to fulfill its systemic responsibilities, calling for the full implementation of the 2010 quota and governance reform.
In September, IMF chief Christine Lagarde said the IMF’s current capital adequacy would not fulfill all loan demands if the global economic situation keeps deteriorating. But G20 countries have different ideas on putting more capital into the IMF. U.S. Treasury Secretary Timothy Geithner said during the meeting that he had faith in the IMF’s financing capability. The United States promised to support European bailout strategies based on existing resources. Germany and Japan held similar stances.
Ren pointed out that there are at least two reasons for developed economies to reject capital injection. First of all, most developed countries now have economic troubles, and some of them have to deal with political pressures at home. It will be hard for them to take extra money out of their pockets.
For example, recent statistics show the U.S. fiscal deficit amounted to $1.3 trillion in the 2011 fiscal year that ended on September 30. The country’s total national debt has reached $14.8 trillion. The two major political parties of the United States have quite different opinions on how to reduce the deficit, and they continue to wrestle over the subject in the U.S. Congress.
Moreover, developed countries are worried that capital injection into the IMF might lead to emerging economies’ growing weight in the organization, Ren added.
“Though Washington is willing to help Europe out of the current debt crisis, its domestic political and economic situations don’t allow it to put more money into the IMF,”said Wei.
According to the communiqué, G20 financial leaders will submit proposals to the Cannes Summit on issues including the IMF reform.
“The upcoming summit will focus on the European debt crisis, while continuing discussions on issues related to the world economy’s robust, sustainable and balanced development,” Wei said.