Global financial architecture
The global financial and economic crisis led to a wide-ranging debate on the structure and functioning of the international monetary and financial system. The agreements reached by the G20 leaders and the steps taken by the IMF in recent years are described below.
Following their first meeting in November 2008 in Washington DC, the Heads of State or Government (“the Leaders”) of the G20 members met in April 2009 in London for their second summit. They:
- called for action in the areas of financial regulation and macroeconomic policies;
- underlined their commitment to open markets and free trade;
- agreed on steps to fund and reform the international financial institutions;
- agreed that the Financial Stability Forum be expanded, given a strengthened mandate and re-established with a stronger institutional basis and enhanced capacity as the Financial Stability Board (FSB).
At their Pittsburgh summit in September 2009, the G20 leaders:
- confirmed their continued commitment to international cooperation in dealing with the global policy challenges. Underlining the role that the G20 has played in shaping the responses to the global financial crisis, leaders designated the G20 to be the premier forum for our international economic cooperation;
- launched the G20 Framework for Strong, Sustainable and Balanced Growth, which aims to help manage the transition from crisis response to a strong, sustainable and balanced pattern of global growth, as well as to address some of the global imbalances that contributed to the financial crisis. The Framework entails a process of mutual assessment of how national and regional policies and policy frameworks of G20 members fit together and whether they are consistent with the objectives of strong, sustainable and balanced growth. G20 members have set out their policy frameworks in an agreed template, with the EU Presidency, the Eurogroup, the European Commission and the ECB submitting a common contribution from the euro area and the European Union. Building on its expertise in bilateral and multilateral surveillance, the IMF will assist G20 members in this mutual assessment process, drawing on input from other international organisations, including the FSB on financial policies.
- noted the substantial progress that has been made in the various areas of regulation and supervision, but acknowledged that far more needs to be done. Building on the G20 Ministers and Governors’ Declaration on Further Steps to Strengthen the International Financial System, further work is spelt out in four key domains (building high-quality capital and mitigating pro-cyclicality; reforming compensation practices; improving OTC derivatives markets; addressing cross-border resolutions and systemically important financial institutions). Moreover, there was a commitment for all major G20 financial centres to have adopted the Basel II capital framework by 2011.
Convening in Toronto in June 2010 for their fourth summit, G20 leaders:
- followed up on the commitments made at their previous meeting in Pittsburgh and completed the first stage of the mutual assessment process of the G20 Framework. They agreed on a number of concrete commitments, e.g. by advanced deficit countries to take actions to boost national savings and by surplus economies to undertake reforms to reduce their reliance on external demand and focus more on domestic sources of growth. Emerging surplus economies committed to undertake reforms to strengthen social safety nets to help reduce precautionary savings and stimulate private spending and to enhance exchange rate flexibility to reflect underlying economic fundamentals. Furthermore, all G20 members pledged to embark on structural reforms to stimulate economic growth.
- recalled the substantial progress that had been made in such areas as prudential oversight, improving risk management and promoting transparency to strengthen the global financial system. At the same time, they acknowledged that more work was required to achieve the commitments made at the last three summits and identified four pillars of the G20 financial regulatory reform agenda (a new capital framework, effective supervision, addressing systemically important financial institutions (SIFIs), and transparent international assessments and peer reviews).
At their fifth summit in Seoul in November 2010, G20 leaders:
- agreed on the Seoul Action Plan with concrete policy commitments to make progress towards meeting the objectives of the G20 Framework;
- endorsed the outcomes of a number of important work streams that had been reached in preparation for this summit, notably a reform of IMF quotas and governance as well as key building blocks for transforming the financial system by addressing the root causes of the crisis, including the work of the Basel Committee;
- showed awareness that the G20 also had to address issues concerning the large, non-represented group of developing and low-income countries.
At their Cannes Summit on 3-4 November 2011 the G20 leaders reaffirmed their commitment to work together and coordinate their respective policies. The leaders:
- reached agreement on the Cannes Action Plan for Growth and Jobs, setting out country-specific short- and medium-term policy measures, to place the global economy on a stronger, more sustainable and balanced growth path;
- adopted measures to strengthen the resilience of the international monetary system. They endorsed the agreement by their finance ministers and central bank governors on i) coherent conclusions to guide the management of capital flows, ii) common principles for cooperation between the IMF and Regional Financial Arrangements, and iii) an action plan for local currency bond markets. Moreover, the leaders supported the IMF in putting forward a new Precautionary and Liquidity Line to provide on a case-by-case basis flexible short-term liquidity to countries with strong policies and fundamentals facing exogenous shocks;
- made further progress on financial sector reform. The leaders endorsed the implementation of an integrated set of policy measures to address the risks to the global financial system from SIFIs, and the timeline for implementation of these measures. Specific measures focus on G-SIFIs, which will be subject to strengthened supervision, a new international standard for resolution regimes as well as additional capital requirements. They also called on jurisdictions to meet their commitment to implement fully and consistently the Basel II framework as well as the Basel II-5 additional requirements and the Basel III capital and liquidity standards.
The International Monetary Fund (IMF): Recent developments
The IMF continued to support the global response to the financial crisis with strengthened surveillance and policy advice as well as with financial support to its member countries.
- As a follow-up to the commitment made by G20 leaders at their London summit in April 2009 to increase the resources available to international financial institutions, the reformed and expanded New Arrangements to Borrow (NAB) became effective in March 2011. Participation in the NAB was extended from 26 to 40 members, and the overall amount of these credit lines to the IMF increased from SDR 34 billion to SDR 369.9 billion. Most bilateral borrowing and note purchase agreements signed since 2009 between the IMF and its member countries, in the amount of SDR 196 billion, are to be incorporated over time into the NAB.
- In November 2011 the IMF agreed to further amend its lending instruments to respond to the liquidity needs of countries with strong fundamentals that are affected by contagion. In this context, it was decided to increase the flexibility of the Precautionary Credit Line created in August 2010 by allowing it to be used by members with actual balance of payments needs and by enabling six-month arrangements in addition to the existing options of one and two-year arrangements. Given these changes, the Precautionary Credit Line was renamed the Precautionary and Liquidity Line.
- The G20 and the IMF Executive Board also exchanged views in 2011 on the composition of the currency basket that determines the value of the SDR. It was affirmed that the composition of the basket should continue to reflect the relative role of currencies in the global trading and financial system, and that the principles guiding SDR valuation, including stability in terms of major currencies, remained valid, though there is to be further clarification of the criteria for admission to the basket. In the current four-currency SDR basket, the contribution of the euro was set on 1 January 2011 at 42.3 euro cents which represented 37.4%.
- One of the core activities of the IMF, surveillance, underwent its regular triennial review in 2011. This exercise considered lessons for surveillance emerging from the global financial crisis and took stock of the progress made since 2008 (including the new spillover reports mentioned above, and the implementation of the 2007 Decision on Bilateral Surveillance over Members’ Policies). This focus made it a particularly rigorous and comprehensive review. It was agreed that the surveillance framework should be more integrated, even-handed and effective so that it can better identify and address risks, including spillover risks, to economic and financial stability. An action plan put forward by the Managing Director of the IMF will guide the way forward on the six key aspects identified for further improvement, namely: i) interconnections; ii) risk assessments; iii) financial stability; iv) external stability; v) the legal framework; and vi) engagement with and adherence to IMF policy recommendations.