At the IMF-World Bank annual meetings, the global financial and political community will be taking stock of policy developments aimed at averting another global financial crisis. In the five years since the onset of the international financial crisis, global leaders have produced numerous initiatives and financial architecture changes that should be celebrated as a global public good. The strengthening of the Financial Stability Board (FSB) by the global economic powerhouses of the Group of Twenty (G20) will, undoubtedly, be seen as a key hallmark of successful international negotiations that seek to pool economic sovereignty for the global good.
The FSB, the G20 and the IMF are expected to make announcements on the progress and success they have had in implementing a number of their policy proposals. One important building block of the global financial architecture is the flow of data and information; a proposal for an improved database of statistics and information on the interconnectedness of global and domestic financial networks will be announced at the 2013 annual meetings. This initiative, known as the G-20 Data Gaps Initiative, was years in the making and had the cooperation of the IMF, the G20 and the FSB. The IMF has already made a significant effort to inform the international financial community of this new database; the annual meetings will provide the opportunity to unveil this important cooperative tool.
While progress has been made, continued policy gaps in implementing many of the initiatives and reforms that have already been endorsed will likely be highlighted at the IMF-World Bank annual meetings. Among the issues that are likely to be raised are those addressing “too big to fail banks,” shadow banking reforms and regulatory policy convergence.
Following the collapse of Lehman Brothers five years ago, the FSB was tasked with identifying banks that were “too big to fail,” which had systemic importance to the health of the global economy. The FSB’s challenge was, therefore, not only technical, but also political. Unsurprisingly, many banks resented and resisted having their institutions labelled as “too big to fail,” as this categorization would require them to have greater oversight and larger reserves of capital deposits, raising the opportunity costs of lost interest returns.
In addition, the FSB has sought to have governments legislate many of its recommendations to raise capital reserve ratios. This is an enormous political challenge, particularly for democratic governments, which may face implicit or explicit lobbying pressure from potentially strong financial sector interests. The US Congress, for example, has already complicated a number of Obama’s reform initiatives with regard to IMF quotas. It is likely that the US Congress will oppose some of the banking reforms required by the FSB and will link FSB reforms to other fiscal reforms that are on Congress’ agenda. Even if policy makers could raise these capital reserve ratios, the reality is that banks are getting bigger, not smaller, throughout the industrialized world and in the United States — the epicentre of the global financial crisis — which should worry policy makers and taxpayers alike.
Shadow banking reform has also been raised by the FSB as a key policy initiative that needs political attention. Little progress has been made in containing the growth of shadow banking, a slice of the financial sector that includes payday loan establishments, hedge funds and securitized lending. The FSB admits that this sector has grown from US$59 trillion in 2008 to US$67 trillion in 2013, but claims that it is better able to monitor the activities of this sector given the progress that has been made at compliance with FSB initiatives. However, the fear remains that the added restrictions on the formal banking sector will push more capital to the shadow banking sector, potentially increasing the size of the problem. Legislation that could rein in the shadow banking sector is currently under consideration in some European countries, but has not yet been proposed in the United States. Placing shadow banking on the G20 agenda in St. Petersburg was a positive step toward recognizing the looming problem. Chances are that the time will come when policy makers will need to get a better handle on the growing prevalence of shadow banking. The type of open forum the annual meetings will provide allow for further discussion on ways to better manage this elusive sector.
The IMF-World Bank annual meetings will, it is hoped, provide opportunities for further discussion on the problems associated with the continued pursuit of independent regulatory agendas among European and US policy makers. The lack of recognition of regulatory rules and standards covering other jurisdictions is not only fragmenting the regulatory system, but is also challenging the momentum towards global reform, given that the current system appears to protect domestic firms from international rules.
The public good of coordination and convergence may be less politically salient to domestic audiences, as many leaders attending the annual meetings will be concerned with their own banking sectors. Europeans will seek to repair and maintain the threat of banking failures at home, while continuing to blame the United States and the fallout from its banking rules. After significant stimulus and mergers, US leaders will see their domestic banking sector as relatively secure, and instead blame a number of European countries for weaker reforms and continued domestic sovereign debt problems that affect the banking sector. The United States and European countries need to better coordinate their regulatory rules and standards to create common principles that do not fortify their countries’ financial flows, effectively a protectionist measure against competition.
Pressure from taxpayers to find a solution to banking failures may have moved outside of politicians’ radars for the moment. Without “Occupy Wall Street” movements shining the spotlight on accountability in the banking sector, some political heat may have been lifted off of policy makers. Yet, the unpredictability of the international financial system requires a proactive level of policy preparedness. Getting political leaders at the IMF-World Bank meetings to put pressure on their fellow leaders would be a valuable way to ensure continued progress on these important initiatives.