The G20 standstill on financial reforms while supporting private investment

The media coverage of the official G20 summit in Hamburg on 7-8 July 2017 was mainly about trade and climate, and the split within the G20, particularly between the United States and the rest of the G20. The core of the G20’s initial agenda – financial reform – did not feature prominently in the G20 Leaders ́ Declaration(opens in new window) , despite new measures(opens in new window) by the United States to roll back regulation (so far, only those that went beyond international consensus).

Monitoring reforms – but no reform towards sustainability

Almost all of the G20’s current work on finance consists of monitoring the reforms taken, mainly increasing bank capital requirements (“Basel III”), centralising derivative trading that does not take place on exchanges (“OTC” trading, on which reform is reported(opens in new window) to be “progressing well”) and regulating shadow banking (bank-like activity that is not covered by bank regulation). While Basel III has “generally been transposed into domestic regulations […], challenges remain”, the Basel Committee reports(opens in new window) . In addition, there is still no consensus about finalising the bank reforms regarding how banks are risk-weighing assets: The United States is pushing for a standardised (external) model, as is common there, while the European Union favours internal models with more freedom on how to weigh risks, as many of its large and medium-sized banks rely on such models. The German G20 Presidency also did not manage to reach agreement on strengthening the regulation of shadow banks, e.g. through capital requirements, despite various signs that shadow banks would become a probable source of another financial crisis and despite quite weak reforms taken so far. The recent report(opens in new window) by the G20’s Financial Stability Board (FSB) on shadow banking is merely monitoring and providing possible future actions. In dealing with shadow banking activities, the international standard setting bodies for banking (Basel Committee) and financial markets (IOSCO) launched a consultation on new criteria(opens in new window) for simple, transparent and short-term securitisation (the packaging and trading of loans or other assets, which was a cause of the 2008 financial crisis). Such a consultation often results in weaker criteria, due to pressure by the financial industry.

Attention was paid to a decline in correspondent banking (large banks offering their systems to smaller banks in developing countries for international transfers), which is partly blamed on new, strict anti-money laundering rules. This has also affected non-profit organisations, as a report(opens in new window) by TNI reveals. The G20 have endorsed an FSB action plan(opens in new window) to adjust the balance between affordability and security.

The G20’s new work on “Green Finance” consists of a Study Group(opens in new window) by officials and a Task Force(opens in new window) on Climate-related Financial Disclosure (by the industry under the auspices of the FSB and led by billionaire Michael Bloomberg), both founded in 2016. The Task Force published its final report(opens in new window) in July calling for more voluntary measures by business. The G20 Green Finance Study Group seeks to develop standards for environmental risk analysis and “publicly available environmental data”, which could then be provided by companies on a voluntary basis, and for the voluntary promotion of green bond markets. Despite these disappointingly timid results, the G20 could not even reach enough consensus to welcome them. The work was merely reported on in the Hamburg Action Plan.

Overall, the G20 is sticking to its limited reform agenda, ignoring the dangers of an oversized financial sector and shadow banking. There is no sign that the G20 would promote true alternatives, such as more diversity trough public or cooperative banking, as called for(opens in new window) by the C20 Finance Working Group. On the contrary, the German government pushed (non-OECD) G20 countries to apply the OECD Code(opens in new window) of Liberalisation of Capital Movements, which was at least partly successful, with “some” of these countries starting to apply the code. This will result in more financial interconnectedness and the spreading of financial risks.

Private investment – public debt

As previously, the G20 heavily promoted private investment, particularly in infrastructure, with the endorsement of new Joint Principles and Ambitions on Crowding-In Private Finance(opens in new window) by the multilateral development banks. The World Bank has also just updated its Standard(opens in new window) for Public-Private Partnerships. In addition to existing concerns about these often costly (for the public budget) and mostly secret “partnerships”, some elements of the World Bank standards are particularly worrisome. For instance, they would allow compensation of the private investor in the case of “material adverse government action” or “change in law”, while liberating the investor from its obligations in the case of “force majeure” events. This puts a “disproportionate level of risk on governments”, as the Heinrich Böll Foundation commented(opens in new window) .

Private investments are also the focus of the G20’s “Partnership with Africa(opens in new window) ”, with the “Compact with Africa” at its core. The German Presidency sold the Compact as a new approach, although there have already been similar plans under former G20 presidencies, and it remains unclear what the value of this Compact will be. So far, there is only a report(opens in new window) by the World Bank Group, International Monetary Fund and African Development Bank dating back to March 2017, and – since June – a website(opens in new window) with a “prospectus” for each of the first seven participating countries (Ghana, Cote d’Ivoire, Senegal, Morocco, Tunisia, Ethiopia and Rwanda), describing investment opportunities and conditions. Longer “Compacts” that go beyond the eight pages of the “prospectus” are just being worked out and are scheduled to be released in October 2017. The C20 Finance Working Group criticised(opens in new window) the Compact for championing private investment – and particularly public-private partnerships (PPPs) – over public investments, favouring investor-to-state dispute settlement and not taking social and environmental issues into account. Similar criticism(opens in new window) and a call to take African views more into account came from the African network Afrodad.

The Compact, e.g. through hidden debt from PPPs, might also worsen the looming new debt crisis(opens in new window) in many developing countries of the world. A recent South Centre research paper(opens in new window) described how these debts could lead to a new financial crisis, given the current financial structures of these countries. At least the G20 members committed themselves to new guidelines(opens in new window) for sustainable financing, i.e. debt repaying capacity. But Eurodad criticised(opens in new window) the guidelines as a “step backwards” compared to existing UN principles. More importantly, the G20 still did not agree on any structured debt-workout process, as was called for by the General Assembly of the United Nations in 2014 (against the votes of most developed countries).

By Markus Henn, WEED.