The G20 summit: Time for reflection on the agenda for financial services

The G20 summit: balancing growth with regulatory reform

How can the financial services industry balance stability with economic growth?

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The G20 Summit

The Brisbane G20 summit provided an opportune moment to address two key questions: how the financial sector can contribute to jobs and growth, and, whether to pull back on major regulatory reforms that could potentially slow recovery of a still-fragile global economy? 

Financial services, jobs and growth

Although few expect, or indeed desire, a return to pre-crisis, light touch regulation, there is a danger that over-zealous reforms could halt the following much-needed developments:

  • long-term financing by insurers, asset managers and other channels of intermediation
  • more robust capital markets, particularly outside the US
  • provision by banks of loans, trade finance and risk management
  • consistent, certain financial regulation.

Wealth creation, along with improved culture and behavior, could also help banks restore trust and confidence. This objective could be hastened by essential investment in infrastructure by banks, insurers and asset managers, as well as lending to smaller businesses and trade finance, and the development of capital markets. 

A bold agenda for Brisbane

Key regulators the Financial Stability Board (FSB), the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors, and International Organization of Securities Commissions focused on four core aims:

  • Ending ‘too-big-to-fail’: allowing troubled, large financial institutions to be resolved in an orderly manner, without taxpayer bail-outs.
  • Cross-border resolution: with proposals for the bail-in of debt issued under foreign law, so that organizations can be bailed-in across a group.
  • Shadow banking: alternative finance helps consumers stimulates growth, especially in emerging markets, so the focus should be on risks to financial stability, rather than imposing bank-like regulation.
  • Making derivatives markets safer: through central clearing. Fragmentation and inconsistent national or regional requirements pushes up costs.

The FSB also stressed the importance of identifying sources of potential future crises, including fraud, systems failures and cyber security, as well as other systemically important financial entities such as asset managers and finance companies. 

Balancing regulatory reform with economic growth

The G20, understandably, seeks a stable financial system. However, too many reforms push up compliance costs, and reduce the availability of financial products. Inconsistent and disparate regulations are also costly, while continuing uncertainty over reform makes it harder for financial institutions and their customers to operate and plan ahead.

Regulators should consider the impact of regulation on the financial sector and on jobs and growth, and re-evaluate the cost-benefit of each reform. They should also prioritize reforms, and provide greater certainty on their substance and timing. Finally, any inconsistencies in applying international regulatory standards need to be addressed.

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