G20 leaders met in Seoul, Korea on 11-12 November for the fifth post-financial crisis Summit.
Given the fragility of the global economy, in Seoul the G20 leaders focused primarily on:
- Macro-economic concerns
- The challenges of global economic imbalances
In the carefully worded Summit Declaration, the G20 committed to “move toward more market-determined exchange rate systems” and indicated they will enhance:
- Exchange rate flexibility
- Refrain from competitive devaluation
- Develop guidelines to help identify large trade imbalances that require preventive or corrective action
The G20 also took several noteworthy actions in the area of financial reform, although these had largely been anticipated, and announced new commitments to address corruption and enhance efforts to promote economic development.
At the same time, the G20 continue to grapple with how to nsure their promises are met. Among other things, they have created and continue to strengthen a peer review or mutual assessment process (MAP) as an accountability mechanism.
Critical timing for G20 Seoul summit as economic, political circumstances risk splintering the G20 resolve
The Seoul Summit came at a critical time for the G20, as diverging national economic and political circumstances risk splintering the G20 resolve.
The G20 leaders stressed the importance of remaining coordinated in an environment where the pace and need for reform across the G20 countries are not uniform.
Seoul Summit achievements
Accounting standards: summit echoed goal of single set of standards
On accounting standards, the G20 echoed – nearly verbatim – recent G20 Summit language.
The leaders re-emphasized the “importance of achieving a single set of improved high quality global accounting standards,” called on the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) to complete convergence projects by the end of 2011, and encouraged the IASB to further improve the involvement of stakeholders (including emerging markets) in the standard setting process.
The G20’s reiteration of this language reflects its view that agreement on a single set of accounting standards is fundamental to its ability to achieve other G20 reforms.
The continued emphasis on 2011 reflects the timing of the convergence program of the IASB and FASB.
It also may be viewed as pressuring the US in its decision whether to incorporate IFRS into the US financial reporting system.
In a related progress report, the Financial Stability Board (FSB) expressed concern over FASB’s exposure draft on financial instruments. It also expressed its hope that consideration of stakeholder comments would lead the accounting boards to “improved and converged” approaches in financial instrument accounting standards.
Financial sector reform
As expected, the hallmark achievements of the Seoul Summit were the G20’s formal endorsement of Basel III and a policy framework developed by the FSB to address systemically important financial institutions (that is, institutions whose failure would disrupt the financial system).
The G20 endorsed the Basel Committee on Banking Supervision’s new minimum capital and liquidity framework, Basel III, which require more and higher quality capital to improve the ability of banks to withstand shocks.
The G20 heralds Basel III as a major accomplishment, suggesting it will:
- “[M]arkedly reduce banks’ incentive to take excessive risks”
- “Lower the likelihood and severity of future crises”
- “Enable banks to withstand – without extraordinary government support – stresses of a magnitude associated with the recent financial crisis.”
Systemically Important Financial Institutions (SIFIs)
Stating strongly that no institution should be “too big to fail,” the G20 endorsed the FSB SIFI policy framework. Key features include:
- More intensive supervision
- Measures for winding up (or resolving) a SIFI without taxpayer support
- Higher capital requirements
- Robust core financial market infrastructure (such as strengthened payment systems, securities settlement systems, and central counterparties, particularly as they apply to OTC derivatives)
- Other supplementary requirements, as determined by national authorities.
Several of these measures will be put in place initially for global SIFIs (or G-SIFIs), who also will be subject to a sustained process of mandatory international recovery and resolution planning.
Despite the agreement on a policy framework, there are a number of remaining differences among G20 members. Issues that still need to be resolved include identifying which financial institutions will be considered globally systemic, and determining how much additional capital will be required.
In addition, by permitting “supplementary requirements,” the G20 leaders are laying the groundwork for potential differences in national legislation or regulation that could have significant ramifications for cross-border financial institutions.