International finance: worlds apart
In 2018, global economic conditions confirmed divergent growth paths among G20 countries. Nationalism in global finance pushed forward by some G20 countries, such as the United Kingdom and the United States, could reduce regulatory coordination and create arbitrage and risks. Over the past decade, since the first G20 summit in Washington in 2008, the G20 has succeeded in strengthening financial regulations following the 2008 global financial crisis.
At the Pittsburgh Summit in 2009, the leaders addressed the most relevant weaknesses in the financial system at that time, in particular systemically important financial institutions (SIFIs) and over-the-counter (OTC) derivatives. The virulence of the financial crisis forced authorities to downsize SIFIs, which had grown thanks to the originate- to-distribute model of banking. But moral hazard proliferated: Bear Stearns, Fannie Mae and Freddie Mac, Northern Rock and Monte dei Paschi di Siena are a few examples of expensive rescues by G7 governments. OTC derivatives contracts were considered to be at the root of the global financial crisis, and the Financial Stability Board imposed a centralised counterparty system with the aim of reducing counterparty risks.
Engendering transparency
Information is the most valuable asset in financial markets. Ten years after the subprime crisis, the remaining challenges of the global regulatory financial infrastructure are still related to opacity.
In Argentina, the G20 leaders should focus on strengthening the global regulatory system and introducing proper incentives for unregulated intermediaries and markets. Their first policy action should address non-regulated financial products (for example, cryptocurrencies) and intermediaries (for example, fintech). The heavy burden of regulation on financial institutions has succeeded in downsizing banking and financial institutions, but it has also reduced their profitability, and it has also contributed to the spread of non-regulated institutions. Financial services have created incredible value for G20 economies in the past decades, but the evanescence of digital finance should not translate into massive rule avoidance or fraud.
Profits should be shared widely. Economists know that history repeats itself – the market price for cryptocurrencies experienced a remarkable rise and fall in 2017–18, similar to what has happened before in the stock market; fintech services are growing rapidly in G20 countries, but their opacity can severely reduce their benefits, similar to shadow banking.
The G20’s second policy action should be to strengthen the global regulatory financial system to explicitly consider the risks created by the trade of OTC derivatives by non-financial operators, especially governments and local administrations. In 2017, no government disclosed detailed information on its OTC trading despite the European sovereign debt and the Greek crisis after 2011. This oversight can undermine financial stability; global accrual-based accounting standards can help manage public expenditures and debts.
The G7 Bari policy agenda, set out by the G7 finance ministers in 2017, suggested fiscal policy as a growth-inclusive policy tool, but a larger group of countries, as in the G20, could effectively achieve this goal. The third policy action at Buenos Aires should thus reduce tax arbitrage among countries, and not only in the financial sector. The shape of the European financial services industry will change after Brexit, and tax competition and arbitrage will inevitably increase. The race to the bottom induced by corporate tax competition among G20 countries has destroyed wealth.
