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Analysis | 2000 G20 Ministerial Documents

The G20 Montreal Ministerial Meeting:
Report on Private Sector Involvement, Standards and Codes, Institutional Reform and the Financial Sector

Marilena Liguori and Nicol Lorantffy
G8 Research Group
Montreal, October 25, 2000

The second meeting of the G20 finance ministers and central bank governors, held in Montreal October 24-25, 2000, discussed globalization on a broad scale. One of the main themes of the discussions was how to address potential financial vulnerabilities, particularly with regard to private sector involvement, implementation of international standards and codes, international institutional reform, and the supervision and surveillance of the financial sector.

Today, there exists a consensus among all the participants that it is necessary to involve private sector investors in preventing financial crises and resolving them should they occur. However, this was not always the case. This new consensus arises out of the noticeable increase in private capital flows to emerging markets during the past decade, as well as the increasing diversity and sophistication of the means and instruments through which these flows are effected. A number of severe financial crises, including the Mexican peso crisis and the 1997-99 Asian financial crisis have occurred over the last decade. Therefore, the G20 members have agreed that the framework for private sector involvement will benefit both debtors and creditors by promoting more efficient and stable international capital markets in which financial crises are less frequent and less severe. Efficient international capital markets require that private investors bear the consequences of the risks they take. At a briefing on October 24, before the G20 finance ministers and governors met, senior officials of Canada's Department of Finance outlined issues on the agenda. The debate has now turned to how private sector involvement can be achieved, i.e., whether it can be done on a purely voluntary basis or if it will be necessary to implement a mechanism such as standstill. However, around the G20 table there was no unanimity on the merit of standstill, so this issue will need further discussion. Instead, the Montreal consensus, achieved as a result of the meeting, declares that the framework of tools and principles outlined at the spring meeting of the International Monetary and Finance Committee (IMFC) will be applied in a flexible manner. The consensus also touched on the issues of borrower obligations, the balance of contributions between public and private creditors, and the value of contractual arrangements. In addition, G20 deputies will meet with the private sector to exchange views and continue progress in this area.

One of the main issues on the agenda at the first G20 meeting in Berlin in December 1999 involved the implementation of standards and codes that set out good practices in the areas of policy transparency, data dissemination, and financial regulation and supervision. At Montreal, it was concluded that weaknesses in this area have contributed to recent financial crises. Therefore, the G20 members agreed that it is important to implement international codes and standards to counteract these weaknesses. They also endorsed the Financial Stability Forum's recommendations and encouraged continued work on incentives to foster implementation. The G20 intends to be a leader in supporting the continuing implementation of standards and codes in a manner and at a pace that reflects each country's priorities for development and reform and its institutional characteristics. Governments will be encouraged to participate in assessment programs led by the International Monetary Fund (IMF) and in the interim conduct on-going self-assessments of their progress in observing standards. Furthermore, they reaffirmed the commitment made in Berlin to undertake the completion of Reports on Observance of Standards and Code (ROSCs) and Financial Sector Assessment Programs (FSAPs), within the context of continuing efforts by the IMF and the World Bank to improve these mechanisms. It was also articulated that FSAPs and ROSCs are in the process of being completed or have already been completed in many of the G20 countries, including Argentina, Australia, Canada, France, India, Korea, Russia, South Africa, Turkey, and the United Kingdom.

The G20 finance ministers and central bank governors are committed to further improving the effectiveness of international institutions, which are necessary to ensure a strong and stable global financial system. To that end, there will be efforts to increase the transparency of their activities and decision-making processes, and to enhance cooperation among them. At the pre-meeting briefing on October 24, questions were raised about the issue of reforming the IMF and World Bank. According to the Canadian officials, the main issue is representation, particularly at the IMF and, although IMF quotas were not formally on the G20 agenda, there was a general feeling that the group is open to discussions about revisions to quota allocations, which should represent the country's position in the international economy.

In terms of supervision and surveillance in the financial sector, the G20 meeting in Berlin in December 1999 declared that improved surveillance will be administered by the IMF, the World Bank, and the Financial Stability Forum. This was reiterated at the Montreal. Senior officials contended that the evidence is clear that a country should not open up its capital account if it does not have a well-regulated banking system and equity market present. The officials also outlined that weak banking systems lie at the heart of financial crises. Once again, addressing this problem leads to an emphasis on standards and codes and prominence must be given to the Basle committee core principles. These core principles are the Basle Capital Accord, Core Principles for Effective Banking Supervision, Sound Practices for Banks' Interactions with Highly Leveraged Institutions, the Supervision of Cross-Border Banking, and the Principles for the Supervision of Banks' Foreign Establishments (the Basle Concordant).

Another aspect of surveillance and regulation of the financial sector that took precedence at the G20 meeting in Montreal was financial abuse. The G20 has agreed to step up its efforts to combat the ills of the financial sector, including money laundering, tax evasion, and corruption, which have the potential to undermine the credibility and integrity of the international financial system. Financial stability is based largely on market integrity, and the G20 is looking forward to the joint paper to be prepared by the IMF and World Bank, at the request of the IMFC, that will outline their respective roles in fighting financial abuse and in protecting the international financial system.

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