Overview of Progress in the Implementation of the G20 Recommendations for Strengthening Financial Stability

4 November 2011

Since the onset of the global financial crisis, the G20 has established core elements of a new global financial regulatory framework that will make the financial system more resilient and better able to serve the needs of the real economy. National authorities and international bodies, with the Financial Stability Board (FSB) as a central locus of coordination, have further advanced this financial reform programme, based on clear principles and timetables for implementation. This report details the additional progress made in developing and implementing global policy reforms since the G20 Seoul Summit in November 2010.

Major international policy reforms have now been agreed, to address risks and strengthen regulation across the financial sector. A key goal of the policy reforms has been to reduce the moral hazard and other risks associated with systemically important financial institutions (SIFIs) whose disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity. A comprehensive standard for reform of resolution frameworks has now been established that, when fully implemented, will enable authorities to resolve failing financial institutions quickly without destabilising the financial system or exposing taxpayers to the risk of loss. At the same time, failures of SIFIs will be made less likely through greater loss absorbency capacity of global SIFIs (G-SIFIs), more intensive supervision and more robust core financial market infrastructure.

With the strengthening of banking regulations, there is a risk that incentives will increase for market participants to shift banking activities into the less regulated "shadow banking" system. Given the role the shadow banking system played in the crisis, these incentives must be counteracted. The FSB has developed a framework for strengthening the oversight and regulation of the shadow banking system, which includes an annual monitoring exercise and a workplan for developing detailed regulatory policy recommendations in 2012.

As the work to develop international regulatory policy nears completion, attention must increasingly turn to ensuring full and consistent implementation of the agreed policy reforms across jurisdictions, in order to deliver the more resilient global financial system that is needed and to avoid regulatory arbitrage. The implementation timelines that have been set are necessarily ambitious, but realistic. For example, a transition period up to 2019 has been built in for banks to fully implement the new Basel III capital and liquidity frameworks as well as the additional capital surcharges for global systemically important banks (G-SIBs), so as to minimise any burden on economies that are still in the process of recovery.

The FSB is responsible for coordinating and promoting the monitoring of the implementation of agreed G20 and FSB financial reforms and for reporting on it to the G20. Therefore the FSB is setting up a coordination framework, in collaboration with international standard-setting bodies (SSBs), to intensify its monitoring and public reporting of implementation, focusing in particular on priority reform areas. This framework will include rigorous monitoring of Basel II, II.5 and Basel III implementation through the Basel Committee on Banking Supervision (BCBS); a Peer Review Council for monitoring consistent implementation of global SIFI (G-SIFI) policies; a coordination group on over-the-counter (OTC) derivatives reforms; and ongoing monitoring on the implementation of compensation principles and standards. In addition to detailed monitoring, the FSB Secretariat, in consultation with FSB members, will provide an annual scoreboard to the G20 Leaders tracking progress across the full range of reforms. Continue reading