The G20 Summit: what to expect

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The G20 Summit what to expect

• Howard DaviesDirector, LSE

Directors Circle Lecture Alumni Theatre,
NAB 11th March 2009
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The phases of the crisis
Rising US sub-prime mortgage arrears
Losses and downgrades on related asset-backed
securities (ABS) and other structured instruments
Loss of confidence in the value of ABS globally
Wider flight from risk in credit and other markets
Risks flow back to banks balance sheets
Money markets tighten as liquidity is hoarded
Funding problems for some banks
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The Credit Crisis A Five-Act Tragedy
Act One Subprime Act Two Liquidity Act
Three Unravelling Act Four Meltdown Act
Five Pumping
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But what are the underlying causes?

• global imbalances
• loose monetary policy, leading to
• mispricing of risk
• credit bubble
• excess growth of financial sector
• excess leverage, facilitated by procyclical
  regulation

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Global current account balances
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Chinas Growth LaggardPersonal Consumption as
of GDP
Source China National Bureau of Statistics and
Morgan Stanley
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Household debt as a proportion of GDP
Source FSA, ONS, Federal Reserve, Eurodata,
Datastream
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• Bank failures are caused by depositors who
  dont deposit enough money to cover the losses
  due to mismanagement.
• Dan Quayle

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• The owners of capital will stimulate the
  working class to buy more and more of expensive
  goods, houses, and mechanical products, pushing
  them to take more and more expensive credits,
  until their debt becomes unbearable The unpaid
  debt will lead to bankruptcy of the banks, which
  will have to be nationalised, and the state will
  have to take the road which will eventually lead
  to communism.
• Das Kapital

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• So what next?
• growth prospects have deteriorated sharply,
  across the world
• Europe mired in recession
• long downturn the most likely outcome, and
  anaemic recovery

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Growth Rates IMF Forecasts
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European Economic Forecast April 2008
Source www.ft.com
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European Economic Forecast January 2009
Source www.ft.com
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Larger than previous crises
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• Recovery options
• V-shaped sharp contraction, quick bounce-back
• U-shaped longer trough, delayed but strong
  recovery
• L-shaped Japanese style stagnation
• Nike swoosh sharp downturn, weak recovery

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G20 Summit 2 April

• The declared agenda
• stimulating global demand
• strengthening the international financial
  institutions
• reshaping the global financial and regulatory
  system
• putting the world economy on track for
  sustainable growth

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• Stimulating global demand the issues
• fiscal packages uncoordinated so far
• uneven scale of stimuli Germany and Japan
  lagging
• financial protectionism

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• Strengthening the International Financial
• Institutions
• increasing the IMFs resources to allow it to
  lend more
• strengthening the early warning and surveillance
  functions
• more trade credit support from Development banks,
  together with bank recapitalisation

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• Reshaping the global financial and
• regulatory system
• enhance corporate governance and risk management
• strengthen prudential regulation, but with a
  managed transition to avoid exacerbating the
  downturn
• regulate financial activities according to their
  economic substance and ensure regulation is
  consistent in all jurisdictions

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Global Committee Structure A Regulators View
G-7 (Govts)
IMF World Bank (Govts)
OECD (Govts)
WTO
FATF (Money Laundering)
IASB (Accounting
IASC
Financial Stability Forum
Monitoring Group
IAASB (Audit)
PIOB
Bank for International Settlements (Central
Banks)
G-10 (Central Banks)
Basel (Banking)
IOSCO (Securities)
IAIS (Insurance)
IFIAR (Audit)
Source Adapted with permission from Sloan and
Fitzpatrick in Chapter 13, The Structure of
International Market Regulation, in Financial
Markets and Exchanges Law, Oxford University
Press, March 2007
CGFS
CPSS
Joint Forum
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• Specific measures may include
• enlarging and strengthening the Financial
  Stability Forum
• a new approach to capital Basel 3?
• regulation of systemic hedge funds
• a tough approach to offshore centres
• more regulation of credit rating agencies
• supervisory colleges

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• Will it work? The omens are not good
• financial protectionism on the rise
• little co-ordination of fiscal policies so far,
  even in Europe
• fundamental mismatch between global markets,
  global banks and domestic taxpayer-funded support

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• But
• Monetary and fiscal stimulation on a massive
  scale ought to work in the end though many
  businesses may not be there to see it.

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The G20 Summit what to expect

• Howard DaviesDirector, LSE

Directors Circle Lecture Alumni Theatre,
NAB 11th March 2009