The year 2017 marks the 10th anniversary of the outbreak of the global financial crisis. This fateful incident took a serious toll on the global economy, with a cumulative loss of one quarter of a year’s global GDP, according to the Financial Stability Board (FSB), and various political consequences.
The G20 crisis response marks an impressive advance in the co-ordination of financial market policies at global level. The financial industry has been supportive of efforts to improve regulation in order to build a reliable framework for investors and financial services.
As a result, and in addition to many other significant measures to enhance their resilience, banks have built higher and better-quality capital and liquidity buffers. Encouragingly, all internationally active banks have already fully met the Basel III capital requirements, well ahead of the 2019 deadline. In securities markets, derivatives clearing has been fundamentally reformed, and credit-rating agencies, money market and hedge funds have been brought within the regulated perimeter.
Financial markets have proven remarkably resilient in recent years, even when faced with adverse or severe developments. Critical episodes such as the debt crisis in some European Union member states, massive swings in oil prices, non-performing loans and profitability risks in some banking sectors, as well as the UK’s vote to leave the EU, passed without significant turmoil on financial markets so far.
Consistent completion of G20 agenda
As the G20 regulatory programme nears completion, it is important to look ahead. Global policy co-ordination will remain essential and the future agenda should cover three areas.
First, as post-crisis reforms mature, evaluating their effects is a key task. We need a thorough understanding of the effectiveness of the measures implemented around the world, as well as possible unintended consequences. This particularly applies to the cumulative effects on banks, insurers, asset managers and others, and how these may feed through to clients and the wider economy.
It remains important that any ongoing and future work is done in a globally co-ordinated way
The FSB’s framework for post-implementation evaluation of the impact of reform is an extremely important initiative, and close consultation with market participants and other stakeholders should help to identify the wide variety of effects and transmission channels.
Second, while it is the right time to review the effectiveness of the reforms of the past decade, it remains important that any ongoing and future work is done in a globally co-ordinated way. Initiatives such as the review of financial reform, ordered by the US government, and the European Commission’s call for evidence are important and any follow-up to their findings should be aligned to avoid an even more fragmented global financial system. It is also important that the final Basel capital framework is calibrated in a way that supports consistent implementation among regulators across the main jurisdictions to remove unnecessary complexities and inefficiencies.
Regulation for future financial system
Third, the past decade has brought about tremendous technological progress in areas such as algorithmic information processing, artificial intelligence, big data handling, and vastly enhanced calculating and storage capacities, as well as widespread broadband internet access.
These developments transform financial intermediation through crowdfunding and automated financial advice, and market infrastructure through distributed-ledger technology. At the same time, as finance is becoming increasingly digitised, vulnerabilities to cyber attacks and technical glitches become more salient.
For many banks and other financial firms, innovation and digitalisation have become key strategic priorities. While the impact on revenue of digital disruption is still fairly peripheral today, the substantial uptick in financial technology investment indicates the growing importance of this field.
Policymakers around the world are right to take a strong interest in these developments, not only with an eye on possible financial stability and consumer protection risks, but also sensing the positive potential for their economies. In order to remain effective, regulation and supervision should work towards internationally agreed responses to these developments, and be equipped with the capacity needed to promote stability in the new environment.
As a consequence of these three imperatives for the future of the regulatory agenda, it becomes clear that the global financial system cannot afford falling behind on international co-ordination. Finance continues to develop in a global dimension, as new challenges from the market environment and technology show. The economic rationale for the global policy co-operation of the G20 and FSB is therefore as strong as ever.
Axel Lehmann is group chief operating officer at UBS. Steffen Kern is chief economist at the European Securities and Markets Authority, and honorary professor at the University of Mainz. They are also co-chair and member, respectively, of the World Economic Forum Global Future Council on Financial and Monetary Systems.
The week on Risk.net, February 10-16, 2018Receive this by email