Banking on Cooperation: The Role of the G-20 in Improving the International Financial Architecture

INTRODUCTION Largely dormant in its first decade of existence, the Group of Twenty (G-20) in 2008 began to play an instrumental role in coordinating a global effort to adopt measures for the prevention of future economic crises. (1) U.S. President Barack Obama (2) and other world leaders (3) have declared that the G-20 is the new premier forum for international economic coordination, effectively replacing the Group of Eight (G-8). (4) Commentators have hailed the landmark achievements of the recent G-20 summits (5) and have said that the G-20 is without question the new game in town in respect of global governance. (6) Since assuming its more powerful role, the G-20 has articulated specific policy objectives, set deadlines for progress, and monitored the work of the main international financial regulatory bodies, especially the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS). (7) Meanwhile, member countries have begun implementing internationally consistent reforms at the domestic level. In the aftermath of the 2008 Global Financial Crisis, the G-20 must continue to assert its leadership of the reform effort or risk squandering the gains it has made thus far. (8) With many financial regulatory challenges still ahead, now is an appropriate time to gauge the G-20's successes and failures and to assess its ability to accomplish its mandate of strengthening the international financial architecture and preventing future regulatory lapses. (9) Part I of this note will explore the interaction among the G-20, FSB, BCBS, and other international financial regulators, as well as evaluate the G-20's efforts to construct a coherent framework for financial reform. Part II will analyze the hard soft law nature (10) of G-20 declarations and argue that the G-20's current layered policymaking structure is preferable to alternative structures for international financial regulation. Part III will delve into more detail with regard to two key reforms--the adoption of a new capital and liquidity framework and the regulation of systemically important financial institutions (SIFIs)--and contend that these reforms, despite their flaws, are key examples of the G-20's ability to achieve success. I. THE G-20'S FRAMEWORK FOR FINANCIAL REFORM The politically powerful G-20 has marshaled the technical expertise of the FSB and BCBS to establish a framework for financial reform that stresses four approaches: (1) strong regulatory controls, (2) effective supervision, (3) enhanced methods for addressing resolution and systemic institutions, and (4) transparent international assessment and peer review. A. Origins of the G-20, FSB, and BCBS In the late 1990s, the Asian Financial Crisis exposed fissures in the international financial architecture that had uniquely harmed capital-absorbing Asian countries. (11) The G-7 formed the G-20 in an effort to give voice to a more diverse array of countries in high-level discussions on key economic and financial policies. (12) For the first decade of the G-20's existence, the G-20 was merely a forum for finance ministers and central bankers, (13) but when the Global Financial Crisis suddenly deepened in 2008, the G-20 transformed into a forum for heads of state to meet regularly and discuss pressing economic and financial issues. (14) Global leaders attended summits at Washington, D.C., in November 2008, London in April 2009, Pittsburgh in September 2009, Toronto in June 2010, Seoul in November 2010, and Paris in November 2011. (15) The G-20 had two main objectives: reignite the economic system through bailouts and stimulus packages and improve the regulation of global financial markets. (16) In the late 1990s, the G-7 also created the Financial Stability Forum (FSF), an inter-governmental body whose original mandate was to improve financial sector surveillance and foster stability in the international financial system. …

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