Financial Summit Outlines Growth Agenda, Reform

On November 14-15, the leaders of the G20 nations agreed on a blueprint for addressing the current global economic turbulence and reforming the global financial system. Specific plans to revive stagnating economies were left to individual countries, and details of medium-term regulatory reforms were left to their finance ministers. Nevertheless, the leaders indicated in what direction they want to go collectively to restore growth and make financial markets more resilient in a crisis. Following is a snapshot of the summit's action plan and the agreed-upon principles for financial reform.

To restore growth, prevent crisis spillovers and support the developing world, the G20 countries have committed to:

. Use fiscal measures, where possible, to stimulate demand.

. Ease monetary policy by lowering interest rates.

. Ensure that the World Bank, International Monetary Fund (IMF) and regional development banks have sufficient resources to assist emerging-market and developing countries.

To improve the architecture of the global financial system, the leaders have agreed to work on:

. New oversight laws: National governments will reassess current regulatory structures for oversight and risk management, with a particular emphasis on ensuring that all financial markets, products and traders are regulated or subject to oversight, and that financial firms maintain adequate capital to cover risk.

. New reporting requirements: National governments will require financial firms to report on their fiscal condition and on complex financial products they trade or hold, such as derivatives and credit-default swaps, so that national, and possibly international, regulators know both the level of trading of these products and whether they might pose a risk to the financial system.

. Greater international regulatory cooperation: National regulators should strive to better coordinate the development and implementation of financial regulation and make it more consistent across borders. To improve crisis prevention and management, they should share with their foreign counterparts information about cross-border capital flows, particularly those that may pose threats to market stability, and possibly sanction illegal market manipulation and fraudulent activities. New bodies - international colleges of financial supervisors - will provide for discussion of cross-border activities by global banks and the risks they face.

. Revised conflict-of-interest and compensation requirements: National regulators will enhance oversight of credit-rating agencies and ensure that they separate their credit-rating functions from their consulting business. National governments or financial industries themselves should develop new compensation schemes to discourage rewarding excessive short-term returns or investment in unduly risky products or trade transactions.

. Reforming the global multilateral institutions: Developing economies should have a stronger representation in the Financial Stability Forum (FSF), an international financial-standards advisory body set up by the Group of Seven countries, as well as in governing structures of the IMF and World Bank. The IMF should improve its capability to identify economic vulnerabilities within countries and globally, develop an early-crisis-warning system and play a key role in crisis response. Donor countries should ensure that all multilateral financial institutions have adequate resources to support emerging-market and developing countries.

To ensure success of pro-growth policies and regulatory reforms, the G20 countries have pledged to reject protectionism. Specifically, they vowed to:

. Refrain from all new trade and investment barriers for 12 months.

. Restart discussions toward a new global trade accord.

. Keep or make new commitments related to international development goals to assist poor, developing countries.

Source: U.S. Department of State