Macroeconomic Stability and Financial Regulation: Key Issues for the G20
The current crisis is not only systemic, but global: it involves the advanced countries, emerging market countries, and poor countries. There is no decoupling, and solutions must involve reciprocal commitments and actions. The G20 process and the London Summit process offer the prospect of concrete, implementable results that can restore confidence and lead the way to recovery.
The essays in this eBook, first presented at a seminar with the G20 Deputies on 31 January 2009, analyze a range of reform proposals:
� Address global imbalances by creating insurance mechanisms for countries that forego reserve accumulation and stimulate domestic expansion; and by accelerating the development of financial systems in emerging markets, in particular local currency bond markets and foreign currency hedging instruments.
� Use macroeconomic policy to meet any threat of deflation promptly, with a zero interest rate policy and quantitative easing, and an inflation target to avoid expectations of deflation.
� Design fiscal stimuli cooperatively, so that they internalise the effective demand externalities of the stimulus while reflecting each country's 'fiscal spare capacity'.
� Mitigate procyclicality by adjusting the Basel II capital requirements using a multiplier based on macroeconomic conditions.
� Create a centralized clearing counterparty for CDS trades without further delay. Consider requiring that CDS be exchange-traded and prohibiting naked CDS.
� Sever the link between credit rating agencies (CRAs) and issuers, so that a CRA's rating cannot be influenced by the prospect of future business with the issuer. Prohibit indirect payments by issuers to CRAs in the form of the purchase of consulting or pre-rating services.
� Consider eliminating the 'hard wiring' of the CRAs in the regulatory system - less rather than more regulation here.
� Force greater disclosure of information about the underlying pool of securities for structured instruments.
� Establish a harmonized bankruptcy regime for banks, based on US-style 'prompt corrective action', giving the supervisor strong powers over bank managers and shareholders before the bank is technically insolvent.
� Consider the creation of an International Financial Stability Fund that takes equity positions in the financial institutions of participating countries and monitors their activities.
