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FINANCIAL REGULATION AND THE G20IS THERE A GAP IN THE GOVERNANCE STRUCTURE?

MIKE CALLAGHANLOWY INSTITUTE

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QUESTIONS

• How do we assess progress?

• Is the FSB-G20 relationship right?

• Is there a gap in governance/accountability structure?

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G20 FOCUS ON FINANCIAL REGULATION

• Prior to crisis, unlikely topic for Leaders summit

• Was a political response to a financial crisis

• Washington G20 summit adopted FSF report.

• G20 leaders now associated with detail of FSB

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WHERE ARE WE UP TO?

• Process and timetable driven• Basel 3 – long-way to go • Less progress on reforming derivative markets• Some banks remain ‘too-big-to fail’• Insufficient prioritization• Impact analysis carried out ex-post• Insufficient prioritization of agenda• Insufficient attention on need to change

behaviour.

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How should we assess progress?

• Objective-stable and efficient financial system• But how will it look?

- Less complex- More transparent- Higher and better quality capital- Risk properly priced- Similar prudential standards for similar risks- Efficient, deep, broad access to finance

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NAVIGATING BY SIGHT- Blanchard

• No agreed vision what future financial system should look like.

• Unsure about right role of securitization, right scope for derivatives, role of market versus banks, role of shadow banking.

• Uncertainty and disagreement about effects of capital ratios on funding costs.

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PREVENTING NEXT CRISIS: GONE FAR ENOUGH?-

• Response to date micro-regulation.• Deeper solutions?

- Very large capital requirements- Reduce instability of debt markets- Move to a much simpler, smaller financial system- Substantial taxes on parts of system

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IMPACT ON GROWTH?

• Are the structural changes resulting in not only a safer system but also one that promotes better economic outcomes?

• How to assess the trade-off between safety of the financial system and economic growth.

• Need to avoid ‘material unintended consequences’

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QUESTIONS

• Is the focus on achieving financial stability at ‘any cost’?

• Has the process been too process and timetable driven?

• Is the prioritization of the reforms appropriate?

• Who assesses unintended consequences?• Is there a gap in the governance structure?

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NEW MINISTERIAL BODY

• G20 FM/ Governors/ regulatory heads PLUS non-G20 members of IMFC ( and HK).

• Jointly chaired by chairs FSB and IMFC.• Examine progress in development and implementation

of standards and promoting growth • Secretariat- FSB and IMF staff• Meet at IMF Spring and Annual meetings and replace

G20 FM meeting.• Joint chairs send report to G20 leaders.

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ADVANTAGES

• Financial system is important, deserves more dedicated ministerial oversight.

• Ministers and Governors can assess ‘higher order’ issues, such as getting the balance right.

• Involvement of IMFC addresses legitimacy concerns over FSB.

• More effective use of G20 FM time.