Here is the “Leaders Declaration“ for the Summit on Financial Markets and the World Economy (aka the G-20 Summit) hosted by President Bush last Friday and Saturday in Washington, DC.
This is the second of a two-part note. Here’s the first part.
A fair amount of the press coverage followed a ready-made storyline: “Lame duck President / not much accomplished.” This storyline is incorrect. Let’s look at some important wins in the actual text of the declaration.
- Formerly Communist China and Russia (along with all the other participating nations) agreed to the following text:
12. We recognize that these reforms will only be successful if grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems. These principles are essential to economic growth and prosperity and have lifted millions out of poverty, and have significantly raised the global standard of living. Recognizing the necessity to improve financial sector regulation, we must avoid over-regulation that would hamper economic growth and exacerbate the contraction of capital flows, including to developing countries.
- All 20 nations agreed to reject protectionism, to refrain from raising new trade barriers for a year, and to continue working toward a global free trade “Doha” agreement:
13. We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports. Further, we shall strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO�s Doha Development Agenda with an ambitious and balanced outcome. We instruct our Trade Ministers to achieve this objective and stand ready to assist directly, as necessary.
- All 20 nations agreed on the “root causes of the crisis.” It’s not as clear as the President’s explanation, but it’s quite close, especially given that this is the result of a 20-nation negotiation.
3. During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.
4. Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption.
- All 20 nations agreed on five key principles:
- strengthening transparency and accountability;
- enhancing sound regulation;
- promoting integrity in financial markets;
- reinforcing international cooperation; and
- reforming international financial institutions.
- The document never talks about a “single global regulator” or anything approaching that. Instead, it emphasizes coordination and cooperation among national regulators.
Regulation is first and foremost the responsibility of national regulators who constitute the first line of defense against market instability. However, our financial markets are global in scope, therefore, intensified international cooperation among regulators and strengthening of international standards, where necessary, and their consistent implementation is necessary to protect against adverse cross-border, regional and global developments affecting international financial stability.
- The document emphasizes strengthening transparency and accountability, thus allowing well-informed market forces to provide market discipline:
We will strengthen financial market transparency, including by enhancing required disclosure on complex financial products and ensuring complete and accurate disclosure by firms of their financial conditions.
- While agreeing on the need for financial sector reform, the leaders sounded a cautionary note against over-regulation warning that it would “hamper economic growth and exacerbate the contraction of capital flows, including to developing countries.” This is similar to what the President said last Thursday.
- The leaders committed to continue to work to alleviate poverty and address the needs of the most vulnerable.
- The leaders agreed to meet again by April 30th of next year “to review the implementation of the principles and decisions agreed today.”
- You’ll note that pages 6-10 of the declaration are an “action plan” of 47 specific to-dos. The list addresses:
- accounting standards;
- addressing the valuation of complex illiquid securities, especially during times of market stress;
- requiring financial institutions to disclose more information about their risks and losses on an ongoing basis;
- looking for opportunities to better coordinate among national financial regulators;
- improving bankruptcy laws to allow for an orderly wind-down of “large complex cross-border financial institutions;”
- reforming the regulation of credit rating agencies;
- strengthening capital standards “in amounts necessary to sustain confidence;”
- actions to reduce risk in the markets for credit default swaps;
- enhancing regulatory guidance “to strengthen banks’ risk management practices;” and
- steps toward reforming international financial institutions like the International Monetary Fund and the World Bank.
Skim the document and judge for yourself. We think this summit was a big success, both in the good things that were agreed to, and the bad things that were not.