By André Cartapanis
Translation: Davina Durgana
Passage au crible n°32
The G20 summit that was held in Seoul from November 11th-12th 2010, was made the object of discussion, if somewhat disillusioned. After the meeting in Washington (November 15th, 2008), which ambitioned to restructure Capitalism and prepare a new Bretton Woods, a greater mastery of distortions in exchange rates, often described as currency wars was expected. Lastly, one also hoped for new rules in monetary matters. Additionally, in this plan, the balance sheet of the G20 seems extremely disappointing. However, the heads of State or the government have, all the same, approved the outlines of a reform of the financial regulations that have proven to be ambitious. Yet, their application will not be effective overall in 2009.
> Historical background
> Theoretical framework
> Analysis
> References
Since the onset of the systematic crisis, in autumn of 2008, the heads of State or government have quickly initiated collective action in adopting a vast plan of strengthening financial systems to avoid such a scenario being repeated in the future. The G20 of Washington has thus approved of a Plan of action that resembles a program of extension and deepening the regulations applied to financial intermediaries. On April 2nd, 2009, this roadmap was elaborated from the time of the Summit of the G20 in London, in order to render operational the options retained in Washington. The Summits of Pittsburgh, from September 24th-25th, 2009, and in Toronto, June 26th-27th, 2010 have followed this task, without major change on the terms of financial targets. At the same time, they have expanded the discussions to the governance of international institutions – the IMF in particular – and to the coordination of macroeconomic policies and exchange rate policies. Most recently, the Seoul Summit drew up a new Declaration including a Plan of action sustained by increased coordination of monetary policies and exchange rates. This text agrees with the propositions of the Counsel of Financial Stability and of the Basel Committee under the guise of a new set of macro-prudential standards – from this point forward named Basel III – that must be applied to banks.
1. Global Imbalance and currency wars. The financial crisis is in part tied to global imbalances in balance of payments that have accumulated since the 2000’s between emerging countries (China, Russia, OPEC) and the American economy. In fact, the accumulation of official reserves in Dollars made possible a very lively expansion of international liquidity. This was also accompanied by distortions in rates of exchange, certain currencies were devaluated – such as the Yuan – while the Dollar remained in a situation of heavy over-evaluation due to American competition. As for the Euro, it has maintained the same situation from before the crisis. This configuration has attributed to the Chinese policy of exchange because this was seen effectively as an anchoring of the Yuan to Dollar that favors a process of growth derived by exportation. And yet, one finds today comparable distortions, certain countries – China, Germany, Japan – continue to register very significant excesses in common balance of payments that feed massive transfers of capital and supports the over-evaluation of certain currencies in Asia and in Latin America. This causes in these economies new speculative spheres in the markets of financial assets or in real estate. Hence the idea of limiting global imbalances in a cooperative framework, for example according to the proposition of the American Secretary of the Treasury, Tim Geithner. In this instance, he suggests the imposing of an adjustment of macroeconomic policies as soon as the imbalance exceeds the line of 4% of GDP, in a situation of excess or of deficit of current payments. Another option consists of leaving the rate of exchange to adjust in response to the market forces in order to neutralize the risks of currency wars and manipulation of exchange rates.
2. Macro-prudential Regulation. The prudential regulation that is applied to banks functions to control risk behaviors and to minimize the probability of crisis has in view two objectives. It must contribute to the security of each intermediary bank in order to protect the depositors or the investors, in face of individual failures. Such is the traditional dimension of prudential arrangements – qualified by micro-prudential regulations and called Basel I or Basel II – which seek to limit the risk of financial distress for individual institutions independently of their impact on the rest of the economy. However, the banking regulations must also stabilize the monetary system and financial system in its overall architecture, considering macroeconomic responsibilities. In other words, it has as its goal to contain the systemic risk. It is therefore clear that the finality of such a macro-prudential approach consists of ensuring the stability and the continuity of exchanges in the heart of the financial sphere, even if it also implicates limiting the sources of excessive debt. Finally, it aims to curb all risks of financial distress which induce significant losses in terms of growth, just as was the case, for example, with the systemic crisis of 2008-2009.
In the domain of the coordination of monetary policies or exchange policies, the Seoul Summit constitutes a failure. In fact, no political agreement was possible; China had been opposed as well on the reduction of global imbalances, on the global governance of monetary system and policies of exchange. Rather than adopting the new rules, the participants are just modestly content to trust the IMF with the task of furthering the reflection on the global compatibility of macroeconomic policies. In return, on that which concerns prudential regulation, the G20 of Seoul marks real progress, which has been underemphasized. The new micro-prudential system, which has already been named Basel III, anticipates significantly increasing provisions in equity banks and introducing new ratios – of liquidity and leverage – that they must imperatively respect. As much as measures that are of a nature to limit the risk-taking – illiquidity, insolvability, maturity transformations – of banks. As for risks of contagion and series of bank failures many action lines have been stopped: 1) to reduce the systemic importance of certain establishments in capping their size or in restricting the range of their operations in active markets; 2) strengthening the provisioning in capital stock, contingent on systemic risk carried by an establishment; 3) widening the perimeter of the prudential regulation of these establishments – such as Hedge Funds – or financial products such as derivatives – which we get away from here. In the future, contingent on their contribution to systemic risk, certain banks –qualified as too big to fail – must then be subject to the elevated provisions in equity capital than other more modest banking institutions. If all these measures are certainly in the right direction and mark a major change in the growth of financial deregulation, one would regret then that the calendar of application of these measures extend only until 2019. Finally, emphasized by the operational rearrangement of the basics, Basel III stays subject to the agreement of governments.
Cartapanis André, La Crise financière et les politiques macroprudentielles : inflexion réglementaire ou nouveau paradigme ?, Conférence présidentielle, 59e Congrès de l’AFSE, Université de Paris-Ouest-Nanterre-La Défense, 10 septembre 2010 : http://www.touteconomie.org/index.php?arc=v25. G20, The Seoul Summit Leader’s Declaration November 11-12, 2010: http://media.seoulsummit.kr/contents/dlobo/E1._Seoul_Summit_Leaders_Declaration.pdf
Cartapanis André, « Les architectes de la crise financière », in : Josepha Laroche (Éd.) Un monde en sursis, dérives financières, régulations politiques et exigences éthiques, Paris, L’Harmattan, 2010, coll. Chaos International, pp. 41-52.
