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Analysis

G20 Finance Conclusions on Financial Crises, 1999-2009

Drawn from G20 finance communiqués
Anton Malkin, G20 Research Group, August 2009

Summary of Conclusions on Financial Crises in G20 Finance Communiqués

Notes: *emergency meetings

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Definition

This analysis focuses on the global governance of systemic financial crisis. Such a crisis is defined as a sudden, surprising loss of confidence, liquidity or solvency in private financial institutions, financial markets or governments that the home national governments are unable to control and that thus spreads to other countries in ways that do or might endanger the broader global financial system. A crisis can come in different varieties, especially in the current era of intensifying or “third wave” globalization. This era has brought increased “hot money” flows, credit risk, transmission of shocks, increasingly sophisticated financial institutions, highly leveraged institutions, and regulatory arbitrage. It has seen not only the old crises brought by government’s international payments imbalances but also new crises brought by the private sector fleeing countries in response to the collapse of far-off private sector financial institutions, and thus devastating the economies and societies of the countries they flee.

Not included in this definition are the related but separate issues of global imbalances, exchange rate misalignments andreform of the international financial institutions including the International Monetary Fund. It should not include anything that may touch on the issue of financial crises from other issue areas, such as the still ongoing America-turned-global financial crisis, instigated by a sudden credit contraction in the U.S. housing market, which gradually spread to global financial markets, sharply deteriorating the liquidity and solvency in the banking systems of advanced industrialized countries, adversely affecting the exporting industries of emerging market economies, as well as quickly deteriorating the solvency and financial stability of transition economies of Eastern Europe, and spreading to the developing world as well. Discussions of regulatory approaches, of executive compensation practices, of exit strategies, are particularly pertinent here.

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Criteria

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Conclusions on Financial Crises in G20 Finance Communiqués

Berlin, Germany, December 15-16, 1999
Communiqué

Overview
4. Ministers and Governors at this inaugural meeting discussed the role and objectives of the G20, and ways to address the main vulnerabilities currently facing their respective economies and the global financial system. They recognized that sound national economic and financial policies are central to building an international financial system that is less prone to crises. They noted the importance of strengthening national balance sheets to help cushion against unexpected shocks. They encouraged steps to strengthen sovereign debt management, and greater attention to the impact of various government policies on the borrowing decisions of private firms. They recognized that unsustainable exchange rate regimes are a critical source of vulnerability, and that a consistent exchange rate and monetary policy is essential. They discussed a range of possible domestic policy responses to the challenges of globalization, and exchanged views on the role of the international community in helping to reduce vulnerability to crises.

6. Members of the G20 asked their Deputies to consider existing work in other fora (including the Financial Stability Forum) and to examine further ways to reduce vulnerabilities to crises. Deputies will report on their progress at the time of the next meeting of G20 Finance Ministers and Governors, to be held in Canada in autumn 2000.

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Montreal, Canada, October 25, 2000
Communiqué

We, the Finance Ministers and Central Bank Governors of the G20, held our second meeting today in Montreal, Québec, Canada. We discussed the state of the world economy, particularly the associated policy challenges and ways of addressing potential vulnerabilities. We welcome the continued strengthening of global economic growth, but remain mindful of the importance of sound national economic and financial policies in building an international financial system that is less prone to crises.

Implement the emerging international consensus on policies to reduce countries’ vulnerability to financial crises, including through appropriate exchange rate arrangements, prudent liability management, private sector involvement in crisis prevention and resolution, and adoption of codes and standards in key areas including transparency, data dissemination, market integrity, and financial sector policy. A summary of our conclusions in these areas can be found in the Annex to this statement.

Annex: Reducing Vulnerability to Financial Crises

At our meeting today, we considered ways to reduce the frequency and severity of financial crises, such as those which in recent years have taken their toll on growth and social conditions in many emerging markets and had significant repercussions for the global economy. We agreed that countries can substantially reduce their vulnerability to crises through sound policies in key areas, including through appropriate exchange rate arrangements, prudent liability management, the development and implementation of international standards and codes, and appropriate involvement of the private sector.

Experience has shown all too clearly that crises originating in one country can have serious repercussions for neighbouring countries and indeed the entire global economy. For this reason, the international community has a strong and legitimate interest in establishing "best practices" in these key policy areas. We agreed that these best practices have the following main elements, which if implemented will help to reduce vulnerability to financial crises in a complementary and mutually reinforcing manner.

There is a spectrum of possible exchange rate arrangements and no single arrangement is necessarily right for all countries all the time. The experience of recent years suggests that countries face a much higher risk of financial crisis if they choose an exchange rate regime that is not backed by consistent macroeconomic and structural policies and appropriate institutional arrangements.

We agreed that a comprehensive strategy to reduce vulnerability to financial crises requires attention to liability management including effective management of public-sector liabilities, appropriate consideration of the external financial situation of the private sector, and effective and transparent financial sector regulation and supervision.
We noted the enormous increase in private capital flows to emerging markets over the past decade, as well as the increasing diversity and sophistication of the means and instruments through which these flows are effected and welcomed the overall impact of this development in fostering more rapid growth and raising the standard of living of hundreds of millions of people around the world. At the same time, the last decade has witnessed a number of severe crises.

In this environment, we 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.

We welcomed the agreement reached at the IMFC Spring meeting on a framework of principles and tools, and the progress made at the IMFC annual meeting on the operational framework by which private sector involvement in the prevention and resolution of financial crises can be promoted.

Finally, we considered the role that weaknesses in financial sector regulation and supervision, in corporate governance, in the disclosure of economic and financial data, and in the transparency of macroeconomic policies have played in contributing to recent financial crises. We agreed on the importance of international codes and standards to address these weaknesses, endorsed the Financial Stability Forum’s recommendations, and encouraged continued work on incentives to foster implementation. The G20, as part of its mandate to promote co-operation to achieve stable and sustainable world economic growth, should play an important leadership role in supporting the continuing implementation of international standards and codes in a manner and at a pace that reflects each country’s unique development and reform priorities, and institutional characteristics. Consistent with this objective, we agreed that:

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Ottawa, Canada, November 16-17, 2001
Communiqué

The reduction of capital flows to emerging markets underscores the need for sound policies to provide and to maintain a positive investment environment in member countries. We remain committed to this endeavour. Adopting the best practices embodied in international standards and codes also will help support strong, stable growth and reduce the risk of future financial crises. A majority of G20 members have already participated, on a voluntary basis, in assessments under one or both of the IMF/World Bank-led Financial Sector Assessment Program (FSAP) and Reports on Observances with Standards and Codes (ROSCs) consistent with our undertaking at our inaugural meeting in Berlin in December 1999. We will continue to promote adoption of international standards and codes for transparency, macroeconomic policy, sound financial sector regulation and corporate governance in consultation as appropriate with relevant international bodies and with the private sector, and thereby strengthen the integrity of the international financial system. We will continue our work on appropriate exchange rate regimes, prudent liability management, and orderly liberalization of the capital account. These efforts reduce susceptibility to financial crises.

Borrowing countries, creditors and the international community have a common interest in efficient and well-functioning international capital markets. We would welcome the earliest possible resolution of Argentina's debt problem. We recognize that lenders are increasingly differentiating between different international borrowers, be they private or sovereign. Good communication between borrowers and their creditors can play an important role in sustaining capital flows to emerging markets. Building on the recent G20 Roundtable with private sector representatives on promoting efficient international capital markets, we have asked our Deputies to report to our next meeting on improving the way financial crises are resolved, taking into account the lessons learned from experience in emerging markets. A common objective is to reduce uncertainty and ensure the sustainability of capital flows to emerging markets.

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Delhi, India, November 23, 2002
Communiqué

We, the Finance Ministers and Central Bank Governors of the G20, held our Fourth Meeting today on 23rd of November 2002 at New Delhi, India. We reviewed the global economic situation and outlook, and deliberated on matters concerning crisis prevention and resolution, globalisation, the challenge of achieving sustained growth and development and combating the financing of terror. We reaffirm our conviction that increasing integration of the global economy is producing benefits, including improvement in living standards and reduction of poverty, and our commitment to maximize these benefits through domestic policies, strong institutions, and enhanced international cooperation.

Economic Situation and Financial Stability

We met against the backdrop of continued uncertainty concerning the global economic outlook. The global economy faces significant challenges and problems associated mainly with slower than expected recovery and heightened risk aversion. However, we have confidence in the underlying prospects and potential of our economies, and in our capacities to achieve higher growth and prosperity. Recent events reaffirm our belief that sound macro-economic policies, strong institutions and good governance are critical for realising this potential while containing vulnerability to financial crises. Stronger and more effective international institutions can contribute significantly towards the creation of a robust global economic environment, thereby complementing national efforts for sustained growth and prosperity.
Interdependence among national economies and increased integration of financial markets have brought significant advantages and enormous opportunities for enhanced growth in many countries. However, countries have become more exposed to external shocks and susceptible to the consequences of inappropriate domestic policies. Recent experience has demonstrated the need to strengthen our capacity to prevent financial crises and to develop efficient, expeditious, and socially and economically effective responses to a financial crisis when it occurs.

We believe that effective and accountable International Financial Institutions (IFIs) and worldwide surveillance are essential for a healthy global financial system. Sustainable exchange rate regimes, prudent asset-liability management, and implementation of agreed standards and codes are important components of an effective strategy for crisis prevention. We agreed on the need for sound national financial systems, effective supervision, and corporate governance in line with global best practice. We also agreed that capital account liberalisation should proceed in an appropriately sequenced manner.

A more orderly process of crisis resolution would help to mitigate the social and economic costs of financial crises and to maintain, or restore more quickly, access to international capital markets. We therefore support further work by the international community, in consultation with debtors and creditors, on comprehensive and market compatible approaches to crisis resolution, including collective action clauses, a sovereign debt restructuring mechanism (SDRM), and a code of good practices. We note that proposals are to be tabled by the IMF at the Spring Meetings, 2003.

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Morelia, Mexico, October 26-27, 2003
Communiqué

Our understanding of the significance of institution building in the financial sector has benefited from a number of case studies provided by members on this subject. By reviewing these case studies, we have compiled a number of valuable lessons to assist countries in attaining the benefits of globalization. In particular, the case studies highlighted the positive effects on the whole economy of reforms in the financial sector and provided insights into the appropriate management of the process of reform. Increased financial liberalization, integration, and effective regulatory policies and supervision, with due regard to the appropriate timing and sequencing, are means to enhance the development of the financial system. Our analysis has underlined the fact that solid institutions and sound, deep and sophisticated domestic financial markets are key elements to maximize the benefits of globalization, promote growth and significantly reduce the risk of financial crises. We will continue to address these issues in our future agenda.

We reaffirm our mandate to review and promote crisis prevention and resolution measures. We encourage the IMF to continue to enhance its capacity to identify vulnerabilities, such as currency and other balance sheet mismatches, and provide advice to member countries on policy reforms. We welcome the increasingly widespread use of collective action clauses (CACs), and we support their inclusion in future sovereign bonds issued under foreign jurisdiction. We also encourage the adoption of the best practices embodied in key international standards and codes, which will help support strong, stable growth and reduce the risk of future financial crises. With a view to promote the development of a workable code of conduct, we encourage an inclusive group of issuers and market participants to engage in further discussions, with G20 members participating on a voluntary basis. We ask G20 Deputies to review the progress made by the issuers and market participants at the next G20 Deputies meeting in March. We discussed the future of the CCL and the role that precautionary facilities or arrangements, conditioned on sound economic policies, could have in crisis prevention. We urged the IMF to continue its work on these issues.

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Berlin, Germany, November 20-21, 2004
Communiqué

8. We reaffirmed the importance of an international financial architecture that sets incentives for pursuing sustainable policies and prudent risk-taking. In this regard, we welcomed the results achieved between issuing countries and private-sector participants on “Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets”. Such principles, which we generally support, provide a good basis for strengthening crisis prevention and enhancing predictability of crisis management now, and as they further develop in future.

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Berlin, Germany, November 200-21, 2004
G20 Accord for Sustained Growth

• The domestic financial sector must be able to withstand economic shocks without giving rise to systemic problems which impair the allocation of savings to investment opportunities and the processing of payments in the economy. Excessive borrowing in foreign currencies for domestic activities has been identified as a major cause of international financial crises. Currency mismatches could be diminished by strengthening domestic banking systems and capital markets. Strong domestic financial sectors can reduce the need for foreign currency borrowing and become an alternative channel of external funding by attracting foreign investors into domestic currency instruments. High priority must be given to implementing the relevant internationally recognized standards and codes.

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Xianghe, China, October 15-16, 2005
G20 Statement on Reforming the Bretton Woods Institutions

2. It is our shared view that more innovative approaches and renewed commitments are needed to cope with dynamic issues, such as growing international interdependence and interactions through trade and financial integration, uneven progress toward alleviating poverty and achieving the development goals of UN Millennium Declaration, prevention and resolution of international financial crises, and external shocks. Within this context, we agree upon the strategic importance for the BWIs to reinvigorate their fundamental missions and roles in meeting new challenges in a globalized world economy.

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Xianghe, China, October 15-16, 2005
Communiqué

10. We noted progress has been made recently in increasing the use of Collective Action Clauses (CACs) in international bond markets. We welcome the efforts by borrowing countries and private-sector creditors to broaden the consensus on the Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets, which could contribute to strengthening crisis prevention and enhancing predictability of crisis management.

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Kleinmond, South Africa, November 17-18, 2007
Communiqué

Global Outlook

3. The recent financial market disturbances have highlighted the importance of sound macroeconomic and financial policies and continued vigilance. While the immediate policy priority has focused on restoring and maintaining orderly conditions in financial markets, we concur that recent events have emphasised the need for greater effectiveness of financial supervision and the management of financial risks as well as to increase transparency among financial intermediaries. The nature of the recent turbulence also suggests that there may be important new lessons for understanding the origins of crises, the way financial shocks are transmitted; and the respective roles of regulators, rating agencies, the private sector and the international financial community. We agreed to pursue further work to improve our understanding of these issues and their application to G20 members, in the year ahead.

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Washington, DC, October 11, 2008
Communiqué

In accordance with the G20’s core mission to promote open and constructive exchanges between advanced and emerging-market countries on key issues related to global economic stability and growth, the Ministers and Governors discussed the present financial market crisis and its implications for the world economy. They stressed their resolve to work together to overcome the financial turmoil and to deepen cooperation to improve the regulation, supervision and the overall functioning of the world’s financial markets. They emphasized that the global implications of the current crisis reinforced the need for international cooperation as well as continued actions, in countries where necessary, in key areas such as macroeconomic policy, liquidity provision, strengthening financial institutions and protecting retail depositors.

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Sao Paulo, Brazil, November 9, 2008
Communiqué

We, the Finance Ministers and Central Bank Governors of the G20, held our tenth annual meeting in São Paulo, Brazil. We met at a time when the global economy is facing its most serious financial crisis and economic slowdown in decades. We discussed the causes of and policy responses to the global financial crisis, and shared perspectives on scenarios going forward, with a particular focus on ensuring financial stability, supporting global growth and maintaining recent achievements in poverty reduction and social inclusion.

3. We noted that the current financial crisis is largely a result of excessive risk taking and faulty risk management practices in financial markets, inconsistent macroeconomic policies, which gave rise to domestic and external imbalances, as well as deficiencies in financial regulation and supervision in some advanced countries.

4. The key challenge is to resolve the financial crisis in a durable manner and to mitigate the impact of the crisis on global economic activity through comprehensive, coordinated and timely measures as appropriate. Measures must be designed not only to restore growth and financial stability, but also to minimize the negative social impact particularly in emerging and low income countries. The G20, with its broad representation of major systemically important economies, has a critical role to play in ensuring global financial and economic stability, and, with that purpose, is committed to enhancing collaboration.

7. We expressed concern over the impact of the spreading international financial crisis on the real economy through trade, credit and currency transmission channels. We considered in particular the severe challenges it poses to short-term growth. Advanced economies, where the crisis came into being, are slowing markedly and some are already close to or in recession. We are also seeing evidence of slower growth in emerging markets, and while overall these countries should continue to play an important role in supporting world growth, emerging economies are facing external financing pressures. We recognized that a pronounced lack of confidence has led to severe credit constraints, which affects consumption, investment and employment. We affirmed our determination to take all necessary steps to foster non-inflationary growth in a stable and sustainable manner according to the needs and available instruments in our respective countries, including through monetary and fiscal policy. We recognized the need to support the efforts of the emerging economies and, especially, to help them find additional resources for their development. We urged all countries to resist protectionist pressures, whether in respect of trade or investment, and reiterate our strong support for a prompt and ambitious conclusion of the Doha Development Round of trade negotiations.

8. One of the most deleterious aspects of the current crisis is the freeze in the private credit and equity markets and the tendency of capital to flow back to where the current crisis originated. We should explore ways to restore emerging and developing countries’ access to credit and resume private capital flows which are critical for sustainable growth and development, including ongoing infrastructure investment.

9. We noted that fiscal policies have served as an important instrument to address the current financial crisis, including through government support to the financial sector and have performed an important stabilization role and in mitigating further negative effects on markets and on economic activity. Some countries are also considering additional fiscal measures to stimulate the economy and we agreed that countries must use all their policy flexibility consistent with their circumstances, to support sustainable growth, while we recognize the importance of fiscal sustainability for macroeconomic stability and growth. It is essential that the recent gains in reduction of poverty and social inequality are not set back by the financial crisis and global economic slowdown. Less developed countries would probably need more flexible frameworks. Furthermore, in cases where severe market disruptions have limited access to the necessary financing for counter-cyclical fiscal policies, multilateral development banks must ensure arrangements are in place to support, as needed, those countries with a good track record and sound policies.

10. We recognized that many low income countries are particularly vulnerable to commodity price volatility and changes in investor sentiment due to the financial crisis. We agreed on the importance of maintaining official flows, including aid flows, to these countries in line with existing commitments and urge all multilateral development banks to work to sustain the momentum of infra-structure investment for development in low income countries.

13. At this juncture, the IMF, the World Bank Group and other international financial institutions have an important role to play, consistent with their mandates, in helping to stabilize and strengthen the international financial system, advancing international cooperation for development and assisting countries affected by the crisis. To meet this task, we should review the adequacy of the resources of the IMF, the World Bank Group and other multilateral development banks and stand ready to increase them where necessary. In this context, we welcome the use of the IMF´s emergency procedures to provide substantial assistance quickly to countries in need, and also the creation of a new short-term liquidity facility, which allows quick disbursements without traditional conditionality for countries with strong economic policy track records. We urge the IMF to continue to review and adapt its lending instruments to adequately meets its member needs and revise its lending role in the light of ongoing financial crisis.

14. We agreed that we must draw policy lessons from the current crisis and take all necessary steps to restore market confidence and stability and to minimize the risk of a future crisis. Given its near universal membership and core macro-financial expertise, the Fund should take a leading role in this task consistent with its mandate. We believe that the IMF must enhance its early warning capabilities with due regard to systemically important economies, in order to anticipate stresses and identify at an early stage vulnerabilities, systemic weaknesses and spillover risks across financial markets that can endanger both the international financial system and the global economy. We also underline the importance of strengthening the IMF surveillance and policy advice leading to appropriate and timely macroeconomic policy responses from all countries.

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Horsham, United Kingdom, March 14, 2009
Strengthening the Financial System

6. To further strengthen the global financial system we have completed the immediate steps in the Washington Action Plan and we welcome the Financial Stability Forum’s (FSF) expansion to all G20 members. We remain focused on the medium term actions, and make recommendations to the London Summit to ensure:

• all systemically important financial institutions, markets and instruments are subject to an
  appropriate degree of regulation and oversight, and that hedge funds or their managers are
  registered and disclose appropriate information to assess the risks they pose;
  
• stronger regulation is reinforced by strengthened macro-prudential oversight to prevent the
  build-up of systemic risk;
  
• financial regulations dampen rather than amplify economic cycles, including by building buffers
  of resources during the good times and measures to constrain leverage; but it is vital that
  capital requirements remain unchanged until recovery is assured; and,
  
• strengthened international cooperation to prevent and resolve crises, including through
  supervisory colleges, institutional reinforcement of the FSF, and the launch of an IMF/FSF Early
  Warning Exercise.

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