1) Restoring Confidence, Jobs, and Growth
A series of financial market events beginning in 2007 has culminated in the worst international banking crisis in generations. Despite unprecedented interventions by governments to fix the financial system, this crisis has triggered a global recession Before the G20 Leaders met, forecasts suggested that most of the advanced economies and many developing and emerging economies would remain in severe recession over 2009, with world growth in real terms resuming and rising to over 2 percent by the end of 2010.
In response to these events, governments of the G20 nations have agreed to take action to accelerate the return to trend growth and support families and businesses through the recession. In the UK for example, the Government has increased spending to support homeowners and people at risk of losing their job and provided support to get the financial sector lending again. The Bank of England has cut interest rates to their lowest level ever, making it cheaper for businesses and households to borrow. Other countries across the globe have taken similar action.
At the London Summit, leaders of the G20 reaffirmed their commitment to work together to restore growth and jobs.They expressed their confidence that the new actions and commitments agreed at the Summit would accelerate the return to trend growth; and they committed today to taking whatever action is necessary to secure that outcome. Recognising that further action may be needed, they called on the IMF to assess regularly the actions taken and the global actions required.
Not only did Leaders agree to take further action – and not just on fiscal policy but in other policy areas too – but they tied the need for such action to the achievement of quantified and timebound objectives for growth; and put in place a clear monitoring mechanism for judging progress.This represents a significant step forward in international macroeconomic coordination to deal with the crisis.
2) Strengthening financial supervision and regulation
Problems in the financial sector and weaknesses in supervision were one of the fundamental causes of the crisis. Increased lending and securitisation of assets reduced transparency and exposed the banking system to high levels of systemic risk.
While market participants were unable to understand the nature of the risks they were exposed to, the regulatory system allowed them to increase leverage dramatically in the run up to the crisis. The tendency of the financial sector to over expand during upswings was exacerbated by a number of factors: over reliance on Credit Ratings Agencies (CRAs) assessments of the credit risk and potential CRA conflicts of interest, inadequate accounting standards and capital requirements that served to reinforce rather than dampen financial market overexpansion, and remuneration policies that encouraged excessive leveraging and risk-taking.
At the Summit, G20 leaders agreed a blueprint for reforming the regulatory framework of the financial sector. Key principles underlying this framework include the need to strengthen macroprudential supervision; for capital requirements to explicitly incorporate countercyclical elements – but that in present circumstances it would be inappropriate to raise them until recovery takes hold; for all systemically important institutions, including hedge funds, to be subject to regulation and supervision; for common principles for remuneration so as to discourage excessive risk taking; to ensure credit rating agencies do their job properly and without conflicts of interest; and to deal with tax havens and non-cooperative jurisdictions. Leaders also agreed that a central role in coordinating this agenda should be taken by the Financial Stability Forum, now renamed the Financial Stability Board and incorporating all G20 countries.
Agreement on specific measures across all of these areas and all of the G20 countries represents an unprecedented degree of international regulatory coordination, and will lead to major reforms of the global financial sector – reducing the risk of a recurrence of this crisis.
