In the last few days, business leaders from around the world have been meeting at the annual St Petersburg International Economic Forum (SPIEF) – held during the city’s spectacular ‘white nights’ season.
This year’s SPIEF was particularly significant because Russia holds the G20 Presidency. Under the auspices of the parallel B20 grouping, representatives from banks and businesses, including Standard Chartered, descended on St Petersburg to thrash out a message for G20 leaders ahead of their summit in early September.
President Putin met the delegates – a galaxy of CEOs from Russia and all over the world. The mood was one of cautious optimism about a global economic recovery, although volatile stock market gyrations contributed to some uncertainty.
The big question for business leaders is how financial reforms should be structured and phased in
Five years after the onset of the crisis, the big question for business leaders is how financial reforms (on capital, liquidity, leverage and governance) should be structured and phased in to help secure the G20’s overarching objective of achieving ‘sustainable, inclusive, and balanced growth’.
In recent years, such growth has only been evident in emerging markets, with much of the developed world grappling with the most profound economic downturn since the 1930s.
In St Petersburg, the B20 task force on the financial system discussed three interconnected issues:
- Financial regulation, in particular how reforms should be properly calibrated.
- Financial inclusion, with emphasis on providing financial assistance to the SME sector
- Financial markets infrastructure development, where the objective was to make recommendations on how to create a reliable, stress-resistant financial markets infrastructure, especially within emerging markets.
The main thrust of the B20′s message to G20 will be that sustainable, inclusive, and balanced growth relies on sound financial regulations and a stable macroeconomic requirement. There is growing recognition amongst business leaders that a well-functioning financial system needs a strong set of rules and regulations, and that this has to be complemented by good regulatory supervision.
In short, supervision is as important as good regulation, a point highlighted by Singapore Deputy Prime Minister Tharman Shanmugaratnam at the SPIEF. He noted that strong financial regulations alone would not prevent another financial crisis. Regulators had to get down to the old-fashioned business of supervision – i.e. visiting banks regularly to assess their health and risk.
This message is often lost in the public debate on financial regulation, where there is great pressure to introduce tough rules governing banks on the expectation that legislation alone guarantees a sound financial system.
As the B20 message will make clear, the primary task of the financial sector is to ensure that reforms are properly calibrated and phased in. In this context, there had to be a restoration in the level of trust between national supervisors to implement multilateral agreements on financial reforms. In the absence of such a coherent and coordinated strategy, the global financial system runs the risk of further fragmentation. Countries should therefore strengthen the role of the Financial Stability Board (FSB), to ensure some degree of consistency and harmonisation in the implementation of financial regulations.
Trade finance is one immediate area of concern
Trade finance is one immediate area of concern because it plays a central role in helping to facilitate global trade, economic growth, and job creation. At a time when trade is serving as a engine of global growth, particularly in emerging markets, it is disheartening to see national and multilateral regulators (with the exception of Europe) placing limits on how banks can treat capital, liquidity, and leverage in their trade finance operations.
European regulators have taken the lead by recognising that trade finance is fundamentally different compared with other activities carried out by banks. Trade finance transactions are short-term in nature and default rates have always been low. Countries and companies rely on trade finance to buy and sell goods, but a recent survey by the Asian Development Bank cautioned that banks may reduce trade finance by 13 per cent if all regulators implement restrictive trade finance rules. This is taking place at a time of sluggish growth in world trade – the World Trade Organization estimates that world trade growth fell by 2 per cent in 2012.
In St Petersburg, there was unanimous recognition that trade finance is low-risk in nature and poses no threat to systemic stability. Indeed, how trade finance is treated is likely to have implications for Asia, a region that has traditionally thrived on trade. At a time when the global economy continues to face fiscal and monetary challenges, it is perhaps unwise to destabilise parts of the global economy that are working well.
If G20 leaders manage to agree on this simple principle in September, the B20 process would have made a significant contribution to the grouping’s mantra of achieving sustainable, inclusive, and balanced growth.