It is time to take stock of the G-20. Just over five years ago, during the free fall of the global financial crisis, representatives from 20 of the world’s leading economies agreed to gather twice a year in order to develop a more sustainable regulatory framework for financial institutions.
There have been many signs of promise. The group has agreed on a new framework for regulatory standards for each country’s most important financial institutions and tasked a Financial Stability Board (FSB) with monitoring adherence to them. But the G-20 has also fallen short of some expectations. Although there have been improvements in global financial regulation over the past five years, serious flaws remain.
The G-20 has already addressed the main pillars of financial regulatory reform. The most important decision concerned international bank capital regulations. Prior to the G-20, there were serious problems. The Basel II agreement, initially published in June 2004, gave banks enormous discretion in determining whether they met minimum capital standards. That agreement was also undermined by the fact that the United States decided not to live up to it.
The Basel III regulations, which were agreed upon in 2011, were a great improvement. The first important step was that all the G-20 countries agreed to recognize the regulations and task a new body, called the Regulatory Consistency Assessment Programme (RCAP), with monitoring, assessing, and evaluating the implementation of new, more stringent capital standards. The RCAP audits the regulatory frameworks of participating countries and issues formal publications evaluating their progress. It has the authority to request improvements as necessary, and has done so. In each of the four countries it has reviewed, it has requested improvements -- 90 of them, in the case of China. In a preliminary assessment, the European Union was declared materially noncompliant on two items, and the United States was declared materially noncompliant on one item.
Another achievement of the G-20 was the creation of a regulatory framework for over-the-counter-derivatives, risky financial instruments that were at the
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