G20 to tackle discordant financial plans

The G20 Seoul summit will discuss banking reforms Keystone

The world’s most influential economies will gather in Seoul this week to thrash out a common path towards making the financial system more secure.

Switzerland is planning to introduce new measures to reduce the risk of big banks bringing down the economy if they go bust. But there is a lack of harmony on how to tackle the problem on a global scale.

With many countries introducing a range of different remedies for the same issue, there are fears that it may prove difficult to produce coordinated regulation of a financial system that knows no national boundaries.

In such an event, Swiss banks – already committed to beefing up their capital reserves against risk – may find themselves at a competitive disadvantage to international peers. UBS and Credit Suisse banks have been told to apply the Basel III global regulations plus extra safeguards, known as the Swiss Finish, by 2018.

Some other countries, including the United States, have introduced their own measures. But it is not yet known how many countries will implement Basel III, to what timescale and exactly what qualifies as top-quality capital reserves.

“International standards are not as strong as we would like,” Mario Tuor, spokesman for the Swiss State Secretariat for International Financial Matters (Sif) told swissinfo.ch.

“Being the first to implement regulations is only an advantage if others follow suit. If not everyone agrees to implementation, then it could turn into a disadvantage.”

“Unacceptable state of affairs”

That point has not been lost on Swiss National Bank chairman Philipp Hildebrand, who urged other countries to press ahead with coordinated too-big-to-fail countermeasures.

Writing in the Financial Times last month, Hildebrand asked G20 leaders to end the “unacceptable state of affairs” of having no international standards and called on other countries to follow Switzerland’s lead.

“If [too-big-to-fail regulations] are implemented, they will significantly mitigate the risks posed by systemically important institutions,” he wrote. “While the ‘too-big-to-fail’ problem is particularly pronounced in Switzerland, it is a global market anomaly that must be eradicated.”

But the omens for international agreement do not look particularly good. While there was general agreement about the principle of Basel III earlier this year, there remains some confusion about the exact implementation of the regulations and at what speed they should be enforced.

The G20 meeting in Seoul, taking place on Thursday and Friday, will largely deal with additional regulations to tackle the problem of financial institutions that could bring down economies if they fail.

Opinion is divided on how to regulate the too-big-to-fail problem. The US has introduced a system that forces banks to wind up in an orderly fashion if they get seriously into trouble, while other countries favour new financial instruments that transfer the cost of bail outs from the public to the private sector.

Uncertain outcome

Switzerland has gone for the latter option combined with forcing banks to hold higher capital reserves against risks. But not everyone is convinced that these mechanisms could work.

Switzerland clearly wants G20 countries to follow its example, but as it has no seat at the Seoul summit, it can only make itself heard indirectly through bodies such as the International Monetary Fund or the Financial Stability Board.

Mario Tuor also pointed out that lobbying efforts would only have a limited effect as it is impossible to predict what happens when such powerful and diverse countries come together to thrash out a common consensus.

“We will follow the summit intensively,” he told swissinfo.ch. “But it is difficult to have concrete input as the structure and proceedings are never particularly clear.”

The European Financial Services Round Table (EFR), a lobby group that counts UBS and Credit Suisse as its members, said it supported the G20 meeting. But the organisation is already concerned that “several countries have engaged in a number of uncoordinated measures” to tackle the too-big-to-fail problem.

“There are differences of opinion on certain areas and a situation could arise that discussions would not go in the direction that we would like,” EFR secretary Sebastian Fairhurst told swissinfo.ch.

“There is a danger that if some countries move one way and others head in a different direction, it could lead to further fragmentation.”

The G20

The Group of 20 financial ministers and Central Bank governors was established in 1999 – in the wake of the 1997 Asian financial crisis – to analyse and enhance cooperation in matters that affect the global financial system.

The G20 superseded the G33, which in turn superseded the G22. The composition of the council is designed to reflect both economic importance of the participating countries and to include key emerging economies.

The G20 represents about two-thirds of the world’s population, 85% of global gross domestic product and 80% of world trade.

The G20 consists of Argentina, Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, Britain and the United States.

While the Swiss financial sector is the seventh largest in the world, Switzerland does not have a seat on the G20.

In response to the recent global financial crisis, the behind-the-scenes meetings were ramped up into full-blown summits in 2008.

South Korea holds the revolving presidency in 2010. The meeting in Seoul has commissioned the Financial Stability Board (FSB) to draft a package of measures to deal with the “too-big-to-fail” financial problem.

Those recommendations include: enhanced supervisory powers over the financial sector, regulation of the trade in derivatives, reduced dependence on credit ratings agencies and improving accounting standards.

The G20 Seoul summit will take place on November 11 and 12.

It will also tackle the issue of harmonising global trade that has been dislocated by creeping protectionism and currency fluctuations.