The G20’s Standard-Setting Stragglers
A study by the academic and think-tank network New G20 project released around the Spring IMF-World Bank meetings offered a mixed assessment of emerging economy participation in post-financial crisis regulatory standard adoption. It hailed “remarkable change” in joining the key Basel Committee, International Securities Commission, Payments Committee and Financial Stability boards, but regretted that with neophyte status and limited capacity their representatives’ focus was mainly “defensive” to cushion rule fallout on local banking and capital markets. The expanded supervisory governance is positive with more diverse representation but may slow consensus decision-making particularly if developing country members offer alternative global frameworks. However so far their role has not been proactive in view of lagging expertise and innovation relative to advanced economies, and has concentrated instead on mitigating and reworking specific provisions.
Before 2008 emerging markets were “rule-takers” despite consultation processes, but accounted for less than one-fifth of outside comments on the Basel II norms from the early 2000s. The paper claims that the US and EU are the pre-eminent financial powers, with the ability to set and enforce the agenda through their own jurisdictions when cross-border cooperation is lacking. In the past middle-income countries sought to comply to avoid external criticism and sanction but adherence was often cosmetic in contrast with the current intent to be “responsible” partners. They have embraced macro-prudential concepts in Basel III such as counter-cyclical capital buffers and agreed to extend surveillance to derivatives and shadow banking. On resolution a Chinese state lender is on the list of systemically-important global institutions even as the insolvency and workout regime remains a project in progress.
The BIS and IOSCO fights have been between developed nations reflecting different commercial-investment baking splits and hedge fund comfort levels. Recent relaxation of proposed liquidity set-asides did not involve emerging market regulators, who have looked instead to monetary policy and foreign reserve levels to manage capital flow volatility. However they were active in the debate on trade credit treatment and safe asset definition given relative government securities underdevelopment. A number opposed central clearing and mandatory disclosure for over-the-counter derivatives in view of the heavy infrastructure load but sophisticated centers went ahead with the changes. Incorporation of the new Basel guidelines has been greater in emerging market participants with incomplete grades only in Mexico and Russia according to a 2014 peer review. They agree to full IMF-World Bank financial sector analyses every five years, and the 15 countries involved in the BIS are committed to full implementation despite cost and knowledge barriers.
Banks in Brazil, China and India have begun to move abroad but are less internationalized than Japan’s when they became the focus of wider geographic sweep in early 1980-90s formulas. Advanced economy delegates still dominate not just official bodies but also the main industry associations like the IIF, the study finds. Trade finance risk-weighting adjustment was championed both by government and commercial interests in rare consensus, and with their double-digit credit growth developing economies have managed to challenge conventional “above-trend” definitions that could trigger countermeasures. South Africa’s comments stand out for complexity but in terms of influence the middle-income group may only find it voice with standard-setting body rebalancing reforms as proposed at the Bretton Woods twins which have been muted since introduction.
