What role can Australia play in improving the effectiveness and legitimacy of the G20? A Case for facilitating financial regulatory reform

Laura attended the 2013 Y20 Summit in Saint Petersburg where she represented The Australian National University. Laura is a Masters of Law Student and Masters of of Diplomacy student and was also a legal committee delegate at the World Model United Nations in Vancouver last year.

Abstract

The G20s evolution can be characterised as a movement of the G20 from a technocratic to a highly political international institution. This paper addresses the criticisms of the effectiveness of the G20 and the reality that domestic politics plays a role in states compliance with asserted international commitments. The primary criticisms of the G20 to date include the forums lack of effectiveness and its inability to reach and implement consensus and produce tangible mechanisms for improving international financial regulation. This paper discusses the unique position Australia has in facilitating consensus and developing state accountability. Proactive steps on Australia’s part in 2013 can further lay the groundwork for greater progress during Australia’s 2014 presidency.

Recommendations

  1. As a nation with the capacity to act as a facilitator of consensus, Australia should endeavour to reiterate the commonality and collective self interest framed in shared objectives and the interconnected nature of G20 economies as greater gains can come from collective action.

  2. Australia must engage with one of the political impediments to the G20’s progress so far, namely inconsistencies in individual domestic legal and political spheres for implementation of financial regulatory reform.

  3. Australia could look to formalising the G20 secretariat structure to provide for greater coherency from year to year.

  4. Finally, Australia should look to facilitating consensus on the formalisation of an effective international accountability mechanism which will ensure compliance through reporting transparency and enforcement.

Introduction

Since the G20’s initial success in managing the immediate Global Financial Crisis [GFC] in 2008, the forum has undergone significant criticism of both its effectiveness and legitimacy as a body for amongst other competencies, international financial regulatory reform. States were promised that in exchange for domestic reforms, there would be reforms of international financial institutions, promotion of global trade and investment, and a rejection of protectionism,1 but these promises have yet to come to fruition. One important aim of international financial regulatory reform is to mitigate against future crises through amending the existing financial architecture which was found to be so inadequate in managing the risks which brought about the GFC.

Australia is in a unique situation to be able to facilitate consensus and promote the efficient and effective financial regulatory reforms agreed upon including Basel III, and to push for a more stringent accountability of G20 member states to accordingly undertake the domestic financial regulatory reforms with which they have committed. Australia’s position of influence is unique due to its relative success in financial crisis mitigation at the domestic level,2 and through its ability to facilitate agenda setting through its role on the current G20 Troika and in the future through the G20 Presidency in 2014.3 Further, it is in Australia’s political and strategic interest to maintain an active status and voice in the development of G20 consensus. Australia has already put considerable effort into assisting the evolution of the G20 institution into an organisation with the capacity and mandate to engage with formerly technocratic which have evolved into highly sensitive high-level policy making at the forefront of global governance.

The first section of this paper will look at Australia’s unique position as a facilitator as a stable middle power with relationships with the major powers of the G20 to facilitate implementation of the financial regulatory reform decisions made in previous G20 summits. The second section looks at Australia’s strategic interest as a facilitator, and the implications for Australia assuming this role now for Australia’s G20 presidency in 2014. The third section looks at the lack of consistent implementation of G20 regulatory reforms at the domestic level with G20 member states, and how this lack of action is detracting from the prestige, effectiveness and legitimacy of the G20 in the eyes of the international community. This section explores the proposed Basel III reforms’ attempts to provide a higher threshold for regulation and accountability in order to achieve collective outcomes. The final section will look forward to the impact of this process on the positioning of Australia for the 2014 G20 Presidency.

Part I: Australia’s capacity as a facilitator

For the purposes of this paper, the role of ‘facilitator’ is focused on reinforcing the importance of cooperation of member states at the G20 forum, “...emphasising shared objectives and priorities as well as the mutual gains from collective action.”4 Australia has the capacity to undertake this facilitative position for several reasons.

First, a ‘facilitative culture’ has already been established through the work Kevin Rudd undertook on behalf of Australia during the G20’s management of the financial crisis, and subsequent upgrading of the G20 to a “summit where heads of governments would meet and discuss their shared problems and steer the economic governance.”5

Second, Australia is an historical ally of the traditional powers and shares many trade and strategic regional relationships with emerging powers.6 This enables Australia to have productive relationships with China, Russia and the US, and be in position to influence agendas and facilitate consensus through “bridg[ing] the gap between very different groups of countries.”7 Further, Australia’s middle power status attributes Australia with a character that does not aim to compete with the major powers, yet places Australia in a position of influence and alignment with the agenda and direction of middle power nations such as Canada. This is assisted by the positive predisposition these major powers have towards the G20 as an organisation. For example, China has praised the G20 as a more representative and fruitful global organ as it has a more balanced representation of emerging economies than previous international forums including the G8,8 and the US and UK have utilised the G20 as a “high level coordinating mechanism”9, whilst undermining the UN General Assembly’s attempts to offer similar leadership and coordination.10

Finally, Australia has domestic economic stability, advanced political and diplomatic experience and networks as a middle power moderator which gives it legitimacy and perceived impartiality. American economist Joseph Stiglitz has said that Australia had “probably, the best designed stimulus package of any of the countries, advanced industrial countries”.11 Further, there is self-evident contrast between Australia’s resilient economic fundamentals, robust banking sector which was “...far less exposed to toxic assets”12 during the GFC. The success of this practice is reflected in Australia’s “...solid growth, low unemployment, contained inflation, record high investment or strong public finances,”13 and other countries systemic economic difficulties and unsustainable sovereign debt.

Further, Australia’s relatively successful management of the GFC has been attributed to the actions of some key institutions. Australia’s management plan for the crisis was developed by the Council of Financial Regulators which encompasses the Reserve Bank, APRA, Treasury and ASIC prior to the crisis using analysis from the Asian Financial Crisis and predictors of the impact such a crisis would have on Australian Financial Institutions.14 Significant groundwork had been consistently developed by these institutions, promoting a reform agenda which placed Australia in a very positive pre-crisis position of relative economic strength,15 with the flow on benefits of political credibility in giving other nations advice on effective international financial regulatory reform. It must also be noted that Australia’s resilience to the crisis was also due in part to a fortunate booming resources sector whereby “...the huge dividends provided by the resource sector and mining exports to China significantly helped Australia to dig its way through the GFC.”16 Notwithstanding this assistance from the resources sector, Australia’s relative success in managing the GFC domestically gives Australia credibility and the legitimacy to give advice on the importance of states implementing the agreed upon international financial regulatory measures of Basel III.

Part II: Australia’s strategic interest as a facilitator

If Australia can successfully facilitate the implementation of international financial regulatory measures at the domestic level, the country will enjoy the flow-on legitimacy and credibility generated by the success. The G20 was conceived of as a ‘club of equals’ whereby there are significant benefits to being a member of such a club, including the “prestige of being one of the systemically significant countries, the domestic political rewards that can accrue from attendance at its meetings...[and]... the ability to shape the new global order in a way a member thinks best.”17 By bridging the gap between major powers Australia remains relevant, and maintains a seat at the table of global economic governance.18 Australia is subject to international rules and decisions as a nation engaged with international law through being a party to key international treaties which have varying levels of impact on domestic law, and through its participation in international organisations.19 It is thus important to actively shape these rules in the interests of collective regional and international self-interest, and a well-functioning international regulatory system contributes to Australia’s peaceful prosperity.

Further, a proactive membership of the G20 has been attributed with relationship building between states. G20 meetings can “...increasingly foster enough of a relationship among ministers and central bank governors so that a member can telephone others when a crisis loom... forg[ing] interpersonal bonds.”20 It was recently identified in the 2013 Defence White Paper that “[t]he relationship between the United States and China, the region’s and the globe’s two most powerful states, will more than any other single factor determine our strategic environment over coming decades.”21 The G20 may provide a forum whereby Australia can assist in improving relationships between these two major powers. Australia thus has the skills, experience and incentive to build relationships within the G20 forum to facilitate consensus and tangible progress in order to lift the G20’s capacity to achieve meaningful international financial regulatory reform.

Part III: Key illustrations of the need for facilitation

Characterisation of the international financial regulatory sphere

Successful regulatory reforms in the international financial sphere attributable to the G20 to date include the IMF receiving a trebling of resources and an increase in Special Drawing Rights22, and extensive reform of transnational bodies such as the Basel Committee on Banking Supervision, the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions.23 The FSB has undergone substantial reform from its previous structure, yet its powers are limited to monitoring and making recommendations.

Despite these achievements, the present financial regulatory system can be characterised as being highly fragmented, with a range of international organisations in control of different aspects and areas of regulation with a varying level of enforceability. Some commentators have argued that the G20’s informal structure, lack of a secretariat and administrative structure was responsible for limiting the execution and enforcement of its financial regulatory directives, bringing about the fragmented implementation at the domestic level.24 Even overarching institutions such as the FSB have a monitoring and research role, yet have demonstrated little ability to guide the existing institutions,25 generating instead non-binding, ‘soft law’ provisions26 through the “...production of global standards and codes.”27 The lack of enforcement power of such institutions is brought about both by G20 member states’ reluctance to subjugate sovereign regulatory power to an international organisation when the domestic implications of the regulations are unclear, as well as the lack of faith in international financial organisations due to their fragmented nature.

The rationale for international financial regulation

The failure to sufficiently regulate internationally expanded financial markets was attributed as one of the key reason for the GFC28 due to the existing formal rules lacking sufficient certainty and accountability, allowing for circumvention and deviation, and the population of markets with ‘toxic’ assets. Toxic assets and lack of effective regulation is indicated by the lack of the requirement for banks to “...retain on their books part of certain securities they issued; hedge funds and private equity firms were not required to comply with the capital standards of Basel II; and the over-the- counter (OTC) trade of derivatives did not have to be registered.”29

Key issues of international financial regulation which have become of central importance in recent international discourse include the “...structure and practice of supervision, as well as the formulation of new rules, the amendment of existing laws, and the modification of existing standards taking place at different political levels.”30 In the instance of Basel III, the overall objective of the Accord is to promote a better balance between banking sector stability and sustainable credit growth.31 To achieve this, the Accord “...demands higher levels of capital reserves and combined with the introduction of new measures to moderate the credit cycle.”32 Further, a fundamental and unprecedented aspect of the accord is the requirement of “...full, timely and consistent implementation...aided by the Basel Committee [putting] in place the Regulatory Consistency Assessment Programme (RCAP) to monitor, review and report on Basel III implementation.”33 It was noted that this regulatory process was necessary to build a resilient financial system, maintaining public confidence in regulatory ratios and to providing a level playing field for internationally active banks.34

The role of the G20

The G20 by its nature includes traditional and new powers which have varying and occasionally highly disparate interests including different domestic financial and political institutions and historical grievances. This has often resulted in ‘in principle’ agreement which has not been implemented to a sufficient extent, thereby detracting from the perceived legitimacy and effectiveness of the G20. The diverse nature of financial systems across the G20 must also be noted, with some domestic systems requiring considerable reform and others requiring ‘rescue’ or ‘bailout’ in the near future including Cypress and potentially Slovenia.35 This adds an additional layer of complexity to the existing domestic political considerations which may delay or block international regulatory directives from the G20 to member states. The question must also be asked as to the appropriateness of the international regulatory reforms and the disparate impacts these reforms may have on specific nation’s financial systems. It should be noted that the G20’s structure reflects cognizance of this priority as it is made up of many non-major powers, and was constructed to “constitute not merely a continuing coalition of convenience, but a club with known members with well-understood collective responsibilities and rights.”36

Thus a model which provides the principled reform yet allows for nuanced domestic implementation may be the most prudent course of obtaining greater compliance, as long as it encompasses a range of external enforcement or accountability measures requiring consistent reporting subject to monitoring and reporting by central bodies such as the IMF, FSB and Basel Committee. In a recent Basel Report, the members reiterated the need for “[s]ound supervisory and industry practices along with rigorous enforcement and analysis of intended prudential outcomes...for effective implementation of the Basel III framework.”37

The interconnected nature of the international financial system means that changes to financial policy and respective impacts often have a spill-over effect into neighbouring economies. Thus, “...spillovers between countries may make policy coordination mutually beneficial...two countries can both be better off if they take policy decisions jointly—with concern for the welfare of both— rather than each pursuing its own goals independently.”38 Further, nations must ensure that “...national regulatory frameworks avoid cross-border conflicts, inconsistencies, gaps and duplicative requirements”.39 The focus for a facilitator should therefore be to reiterate the commonality and collective self interest framed in shared objectives and the interconnected nature of G20 economies as “...greater gains can come from collective action.”40 This is not an easy task, as negotiations where trust is lacking between the parties can result in the fear of the possible negative consequences of stricter regulation, with representatives taking action solely within the national interest of their state and not the collective interest of all parties. Given the “...absence of even a single truly supranational agency with regulatory competence going down to the level of individual market actors, international negotiations tend to end in a so-called joint-decision trap: a situation producing compromises and lowest-common-denominator solutions.”41

A further dynamic which Australia must consider when facilitating consensus and a focus on implementation at the G20 is the legislative power to implement G20 directives is concentrated at the national level. There is thus a complex political and legal dynamic with the G20 and international organisations making rulings which affect national decision making, yet in a vastly different political and legal context which may result in conflicts of interest among the key actors. Australia itself it subject to constitutional and parliamentary processes which require the passing of legislation to give legal character and enforceability to an international political guarantees and instruments signed by a nation’s delegate. Thus an international financial regulatory directive which receives consensus at forums such as the G20 must be palatable for the domestic population and lawmakers otherwise it will not receive the support to be implemented domestically. Further, domestic implementation takes considerable time42, as illustrated by the formation of the Office of Financial Research under the Dodd-Frank Act which is only in the process of implementation two years after the legislation’s creation.43

Part IV: Looking forward: Australia’s 2014 G20 Presidency

Australia is able to use the current G20 to formulate the groundwork for Australia’s G20 presidency in 2014. The ability to facilitate effective consensus to swiftly implement regulatory reform is useful for Australia’s international credibility, but also provides a unique opportunity for Australia to identify fundamental governance arrangements which are inhibiting a sustained agenda and follow up of decision making in the G20 which could be improved upon during Australia’s presidency. One example may be the lack of a permanent secretariat, so Australia’s presidency could look to formalising this structure to provide for greater coherency from year to year. This may address some of the criticisms directed at the G20 including for its failure to produce a “...rigorous accountability mechanism, including a baseline set of standards, accurate and consistent shared information, and an agreed set of consequences for non-compliance.”44 Clearer formal structures with a means to ensure accountability may be a useful way forward for the Australian presidency, provided consensus can be developed. This consensus building will be assisted by the evidence that since the FSB has been accorded a permanent secretariat, the “...more permanent administrative structure means that the FSB is more robust than its predecessor.”45

Further, Australia must engage with a fundamental impediment to the G20’s progress so far, namely the reliance on individual domestic legal and political spheres for implementation of financial regulatory reform. There is a crucial link between the “...technical work to implement financial regulatory reforms and the political task of holding this work accountable to parliaments and publics [which] has yet to be fully explored or developed.”46 It is important for the G20 to “...seize the new dynamics of domestic politics in the global age and use them within the G20 to generate better domestic economic policies that are both more effective at home but more coherent and mutually reinforcing internationally.”47

Conclusion

Australia is in a unique situation to be able to facilitate consensus and promote the efficient and effective financial regulatory reforms agreed upon including Basel III, and to push for a more stringent accountability of G20 member states to accordingly undertake the domestic financial regulatory reforms with which they have committed. The interdependent nature of the global economy has been seen to be an insufficient driver for increased cooperation. Thus it is essential for states like Australia with excellent qualities for facilitating consensus to emphasise “shared objectives and priorities as well as the mutual gains from collective action.”48 This can be furthered in Australia’s G20 Presidency in 2014 through streamlining the agenda and reiterating the G20 shared goals whist transitioning the G20 institution into an organisation with the capacity and mandate to engage with and resolve the fundamental concerns of the present era.

Bibliography

Books

Markus Brunnermeier, Andrew Crocket, Charles Goodhart, Avinash Persaud and Hyun Shin (eds.). The Fundamental Principles of Financial Regulation. [London: Center for Economic Policy Research, 2009.]

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Chapters in Edited Books

Jennifer Hill, “Why Did Australia Fare So Well in the Global Financial Crisis?”, in Eilís Ferran, Niamh Moloney, Jennifer G. Hill, and John C. Coffee, Jr. [Eds] The Regulatory Aftermath of The Global Financial Crisis (Cambridge University Press, 2012).

Renate Mayntz, “Institutional Change in the Regulation of Financial Markets: Questions and Answers” in Renate Mayntz (ed.) Crisis and Control: Institutional Change in Financial Market Regulation [Publication Series of the Max Planck Institute for the Study of Societies, Cologne, Germany, Volume 75, 2012.]

Journal Articles

Kenneth Abbott and Duncan Snidal, “Hard and soft law in international governance”, [2000] 54(3) International Organization 421.

Lawrence G. Baxter, “Fundamental Forces Driving United States and International Financial Regulation Reform” 2021 6[2] Sungkyunkwan Journal of Science & Technology Law 105.

Colin Bradford, “The next phase for G20 summits” 1 (2012) G20 Monitor: Challenges Facing the G20 in 2013, (Dec, 2012)

Mike Callaghan, "Strengthening the Core of the G20: Clearer Objectives, Better communication, greater transparency and accountability" 2013 The Lowy institute for international policy, 2.

Xu Yi-Chong, “Australian Participation in the G20”, G20: Perceptions and Perspectives for Global Governance, 16.

Kevin Davis, “Financial Regulation after the Global Financial Crisis”, [2009] 42[4] Australian Economic Review, 453.

Gruen, D. and Clark, C. “What have we learnt? The Great Depression in Australia from the perspective of today” [2010] 40[1] Economic Analysis and Policy 3-20.

David Held and Kevin Young “Global governance in crisis” [2013] 50, International Politics 309.
Jeff Horwitz, Grand Vision for New Data Agency Meets Bureaucratic Reality, AM. BANKER (Sept. 10, 2012).
Anne-Marie Slaughter, “International Law in a World of Liberal States” [1995]6 European Journal of International Law 1.

Jakob Vestergaard and Robert Wade, “The Governance Response to the Great Recession: The “Success” of the G20, [2012] XLVI [2[ Journal of Economic Issues 481.
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[2011] 11[1] Public Organization Review 77.
Ngaire Woods, “Global governance after the financial crisis: A new multilateralism or the last gasp of the great powers?” [2010] 1[1] Global Policy, 51.

Newspapers [Online]

Mingjiang Li and Gang Chen, “China’s search for a multilateral world: Dilemmas and desires” [2010] 45[4] The International Spectator 12.

Robert Wade, “Marginalizing the united nations as a forum for debate about the financial crisis: The west’s success”, [2012] Le Monde Diplomatique, August.

Peter Campbell and Tim Shipman, “Slovenian bailout 'is inevitable': Second tiny EU state caught in fallout from Cyprus banks crisis”, Mail Online 29 March 2013.

Reports

Communiqué: Meeting of Finance Ministers and Central Bank Governors, Moscow, 15-16 February 2013.

Paul R. Masson and John C. Pattison “Financial Regulatory Reform: Using Models of Cooperation to Evaluate Current Prospects for International Agreement” [Toronto: Rotman School of Management, 2010].

Kevin Rudd, “Australia’s Foreign Policy Priorities and Our Candidature for the UN Security Council”, Speech to the National Press Club, Canberra, 1 June 2011.

Wayne Swan, Deputy Prime Minister and Treasurer, “Treasurer’s Economic Note” Friday 19 April 2013.

Report to G20 Finance Ministers and Central Bank Governors on monitoring implementation of Basel III regulatory reform Basel Committee on Banking Supervision April 2013, at 10.