The G-20 Toronto Summit of June 2010 agenda focused on recovery from the global economic and financial crisis and the implementation of commitments from previous G-20 Summits, while laying the foundation for sustainable and balanced growth.
A brief synopsis of the financial sector related issues presented in the G-20 Summit Declaration, including Annex II (Financial Sector Reform) (the “Declaration”) is provided below.
Building Upon Recent Accomplishments
The G20 recognized recent efforts to build a more resilient financial system, including the implementation of the European Union Stabilization Mechanism and Facility, the planned publication of the results of European bank stress testing and, most recently, the U.S. financial reform bill. At the same time the G-20 noted that more work is required.
Capital and Liquidity
The G-20 indicated their support for a new global regime for bank capital and liquidity, with an agreement on capital to be reached at the time of the upcoming Seoul Summit in November 2010 with the aim of implementation by the end of 2012. The G-20 agreed to “increase the quality, quantity, and international consistency of capital, to strengthen liquidity standards, to discourage excessive leverage and risk taking, and reduce procyclicality.” In particular the G-20 indicated support for a new capital framework that would establish a new requirement that each bank hold in tier 1 capital ,at a minimum, an increasing share of common equity after deductions, measured as a percentage of risk-weighed assets, that enables them to withstand the going concern fully-absorbing capital stresses of the recent financial crisis, without government support.
Further, the G-20 agreed to move to a globally consistent and transparent set of conservative deductions generally applied at the level of common equity, or its equivalent in the case of non-joint stock companies, over a suitable globally consistent transition period.
The G-20 agreed that phase in arrangements for new capital standards will reflect different national starting points and circumstances, with initial variance narrowing over time as countries converge to the new global standard. In addition the G-20 made reference to the quantitative impact study currently being undertaken by the Financial Stability Board (“FSB”)and the Basel Committee on Bank Supervision (“BCBS”) that is measuring the potential impact of the new capital requirements and will ensure that proposed new capital and liquidity standards “are of high quality and adequately calibrated”. The G-20 reiterated support for the introduction of a leverage ratio as a supplementary measure to the Basel II risk-based framework that will be harmonized internationally fully adjusting for differences in accounting. It was also noted that the BCBS had revised capital rules for the trading books of banks was scheduled to take effect on December 31, 2011.
Further, the G-20 supported the consideration of the role of contingent capital requirements in strengthening discipline within the global banking system, in an effort to establish a financial system where the private sector “fully bears the losses on their investments.”
More Intensive Supervision
The G-20 agreed to ask the FSB, in consultation with the International Monetary Fund (“IMF”), to report to Finance Ministers and Governors of Central Banks in October 2010 on recommendations to strengthen oversight and supervision, specifically relating to the mandate, capacity and resources of supervisors and specific powers that should be adopted to proactively identify and address risks including early intervention.
Resolution of Financial Institutions
The G-20 believes that to reduce “moral hazard” there is a need to have a policy framework which includes effective resolution tools, strengthened prudential and supervisory requirements and core financial market infrastructures. The BCBS March 2010 recommendations on cross-border bank resolution were endorsed and a commitment was made to implement them. In addition the G-20 committed to implement domestic resolution powers and tools in a manner that preserves financial stability.
Addressing Systemically Important Financial Institutions
The G-20 noted the FSB interim report on reducing the moral hazard risk posed by systemically important financial institutions and called upon the FSB to consider and develop concrete policy recommendations to address the problems associated with systematically important financial intuitions by the time of the Seoul Summit.
Financial Sector Responsibility
The G-20 agreed that the financial sector should make a fair and substantial contribution towards paying for any burdens associated with government interventions. It was noted that in furtherance of the above objective some countries were pursuing a financial levy and other countries were pursuing different approaches (including Canada).
Financial Market Infrastructure and Regulation
The G-20 agreed to strengthen the financial market infrastructure in order to reduce systematic risk, improve market efficiency, transparency and integrity .
The commitment to trade all standardized OTC derivatives contracts on exchanges or electronic trading platforms, where appropriate, and clear through central counterparties by end of 2012 was reaffirmed. In addition, it was agreed to pursue policy measures with respect to haircut-setting and margining practices for securities financing and OTC derivatives transactions that will reduce procyclicality and enhance financial market resilience.
The G-20 committed to accelerate implementation of “strong” measures to improve transparency and regulatory oversight of hedge funds, credit rating agencies and OTC derivatives, and to improve the functioning and transparency of commodity markets.
The work of the BCBS to address adverse incentives arising from the use of external ratings in the regulatory capital framework was noted, as was the work of the FSB to develop general principles to reduce authorities’ and financial institutions’ reliance on external ratings. The G-20 asked the BCBS and the FSB to report to Finance Minister and the Central Bank Governors on these issues in October 2010.
The G-20 acknowledged the work of the International Organization of Securities Commissions (IOSCO) to facilitate the exchange of information among regulators and supervisors as well as IOSCO’s principles regarding oversight of hedge funds aimed at addressing related regulatory and system risks. Further the G-20 called on the FSB to review national and regional implementation in the above noted areas and to report to Finance Minister and the Central Bank Governors on these issues in October 2010, if further work is required.
The G-20 re-emphasized the importance of achieving a single set of high quality improved global accounting standards and the implementation of the FSB’s standards for sound compensation. Further, the G-20 encouraged the International Accounting Standards Board to further improve involvement of stakeholders within the framework of the independent accounting standards setting process.
Assessment and Peer Review
The G-20 pledged to support robust and transparent independent international assessment and peer review of the financial systems of member countries through the IMF and Work Bank Financial Sector Assessment Program and FSB peer review process. Further the G-20 reaffirmed the FSB’s principal role in the elaboration of international financial sector supervisory and regulatory polices and standards; coordination across various standard setting bodies; ensuring accountability for the reform agenda by conducting thematic and country per reviews; and fostering a level paying field through coherent implementation across sectors and jurisdictions. In addition, the G-20 called on the FSB to expand upon and formalize outreach activities beyond the members of the G-20 to reflect the global nature of the financial system.
Other International Standards and Non-cooperative Jurisdictions’
Finally, the G-20 agreed to consider measures and mechanisms to address non-cooperative jurisdictions based on comprehensive, consistent and transparent assessment and encourage adherence by providing technical support with the support of international financial institutions. The G-20 also indicated support for the work of the Global Forum on Transparency and Exchange of Information for Tax Purposes and welcomed progress on their peer review process and the development of multilateral mechanism for information exchange. In addition, the G-20 indicated support for the work of the Financial Action Task Force (FATF) and FATF–Style Regional Bodies in their fight against anti-money laundering and terrorist financings and the regular updating of a public list on jurisdictions with strategic deficiencies.
There is a considerable amount of work is currently underway to revamp global financial sector regulation. Much of the work is not visible to those who are not directly involved in the regulation of the financial sector in Canada or other G-20 member countries. On a number of important issues, progress is promised before or at the time of the Seoul Summit scheduled for November 11-12 of this year.
Canada is at the centre of many of the reform processes and can be expected to continue to promote in various regulatory venues the many market tested approaches to regulation that have made Canada a model jurisdiction for regulation, including the importance of strong supervisory and inspection capabilities of regulators and the insistence on effective risk management policies and practices of regulated institutions.
The efforts to redesign Canada’s system of securities regulation will be a relevant consideration in terms of implementation in a number of important areas of regulatory reform that have been identified by the G-20. The timetable for implementation of the proposed securities regulatory reforms appear to be generally consistent with many of the reform processes noted above.
Finally, the recent financial crisis has accelerated the process of the globalization of coordinated regulation of the international financial sector. Having said that, as is true of most aspects of international law, the tools to enforce compliance are still rudimentary and depend largely on moral suasion.