The G20 Summit: A Critical Assessment (Part II) by The Bretton Woods Project

Read Part I here.

Globalist Perspective > Global Governance The G20 Summit: A Critical Assessment (Part II)
By The Bretton Woods Project \| Wednesday, April 08, 2009

In the final part of their series on the London G20 summit, the team from the Bretton Woods Project — a World Bank and IMF watchdog group — outlines the missed chances for reform of international financial institutions. They argue that despite the lofty rhetoric of regulating the “shadow banking system,” little has been done to address key issues such as tax havens.

he G20 communiqué says nothing new on international financial institutions’ governance reform. Big increases in IMF resources have not been matched with clear commitments to end the controversial austerity policies that have so far accompanied IMF bailout packages.

Changes to voting shares to give developing economies "greater voice and representation" are promised in general, but the annex appears to backtrack on IMF reform.

Gordon Brown repeated his assertion that the "shadow banking system" would be brought into "the global regulatory net," but the language of the communiqué is far more cautious.

The existing plan for World Bank governance reforms by the 2010 Spring Meetings has been reconfirmed. As for the IMF, the annex indicates that the slightly accelerated quota review may not address the democratic deficit or governance imbalance — but will be undertaken "to ensure the IMF's finances are on a sustainable footing."

Critics remain concerned that lessons from the Asian financial crisis a decade ago have not been learned, where IMF conditions were blamed for worsening recessions. Duncan Green of Oxfam said, "We have deep concerns about how central the IMF has become in this crisis. The Fund has been given a blank check, but its reform remains no more than a promise."

NGOs and continental European governments pushed the issue of tax havens to the fore in the run-up to the summit. The United Kingdom, itself a sponsor of many of the world's most famous tax havens, including the Cayman Islands and Jersey, had picked up the rhetoric.

The G20 decided to endorse the OECD approach of exchanging information about companies and individuals suspected of evading taxes on request, rather than the more stringent automatic exchange of information called for by the Tax Justice Network and others.

There was no mention of measures that could help developing countries crack down on corporate tax abuse, such as country-by-country financial reporting or requiring transparency of all information on beneficial ownership in all jurisdictions.

On banking regulation, a topic that has dominated headlines in the run-up to the summit, surprisingly little concrete agreement was reached.

The fanfare surrounding a supposed "blacklist" of non-cooperative countries — published on the day of the summit by the OECD — went silent when it emerged that only four countries were on the list — Uruguay, the Philippines, the Malaysian Federal Territory of Labuan and Costa Rica. None of these are well-known tax havens.

The strong rhetoric — declaring that "the era of banking secrecy is over" and promising to "stand ready to deploy sanctions" — has yet to be turned into effective action.

As promised by the G20 finance ministers in March, the Financial Stability Forum will be expanded to include all G20 countries, and renamed the Financial Stability Board (FSB). It will continue to have a purely advisory role to "promote co-ordination," "assess vulnerabilities affecting the financial system" — and "set guidelines."

With no specific powers or sanctions available to it, and a lack of a clear governance structure, it remains to be seen whether the new board will be an improvement on the old forum.

On banking regulation, a topic that has dominated headlines in the run-up to the summit, surprisingly little concrete agreement was reached, though international bodies are tasked with looking further into a host of issues.

International minimum capital requirements will remain unchanged "until recovery is assured," and the often criticized Basel II capital framework supported. The existing "toxic assets" in banks remain a huge problem, but one that has been left to national regulators to fix.

Many hedge funds and private equity firms may continue to escape the regulatory net, especially those formally headquartered in off-shore financial centers.

In his post-summit press conference, British Prime Minister Gordon Brown repeated his assertion that the "shadow banking system" would be brought into "the global regulatory net," but the language of the communiqué is far more cautious, "Systematically important financial institutions, markets and instruments" should be subject to an "appropriate degree of regulation and oversight."

The FSB and IMF are tasked with deciding what "systematically important" means. Many hedge funds and private equity firms may continue to escape the regulatory net, especially those formally headquartered in off-shore financial centers.

Hedge fund and credit rating agency "registration" is promised, and credit derivatives markets will be "standardized" — but it is left to the industry itself to decide how to do this.

This feature is adapted from an article first published by the Bretton Woods Project on April 3, 2009. The Bretton Woods Project works as a networker, information-provider, media informant and watchdog to scrutinize and influence the World Bank and International Monetary Fund (IMF).

You can read Part I here.

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