During the Think 20 (T20) hosted by Japan in 2019 to prepare analyses and policy proposals for the G20, a specific working group of think tank experts (Task Force n.2: TF2) devoted its discussions and proposals to the issue of the adequacy of the International Financial Architecture. This has always been a traditional and central theme of the G20. The guiding idea of this Task Force has been to concentrate its analyses and advice on the most urgent and novel aspects and problems that mark the evolution of global financial markets and institutions. During the Tokyo T20 final summit a series of recommendations were handed to the Japanese government to be brought to the attention of the G20 meetings.
Due to the central role of the IMF in the architecture, TF2 advocates a continuous check of the adequacy of its instruments, the strength of its actions and the evolution of its governance. The complexity of global financial markets and interrelations, at a time when policy uncertainties and geopolitical risks can threaten financial stability, requires a very active and powerful IMF. It should be able to monitor in a timely and precise way the continuously growing international public and private indebtedness that can cause financial fragilities both in advanced and in emerging/developing economies. TF2’s discussions and policy briefs strongly recommend enlarging the size and refining the quality of the portfolio of IMF facilities available to cope with domestic and international financial imbalances, and with balance of payments crises. The reform of the governance of the IMF has also to be completed, by accelerating some of the plans that were drawn up in past years; in particular, the voting powers and roles of emerging economies should be substantially increased, to fully reflect the changing weights of countries in global production, trade and finance. Connections and cooperative programs between the IMF and other multilateral international financial institutions should also be reinforced.
As financial globalisation connects the capital and money markets of the whole world, the monetary and financial policies of different countries are deeply intertwined. In order to be effective these policies must therefore be coordinated. Uncoordinated policies conducted by individual countries tend to spillover in other countries producing undesired effects and often spilling back in the originating countries partly neutralizing the first desired impact of their policy moves. To monitor and manage spillovers and spill-backs it is crucial to engage in international coordination, ceasing to conceive of economic policies as impacting only on domestic variables and targeted only to domestic objectives. During last year’s Argentinian presidency, the think tanks’ experts recommended a method of official coordination of monetary policies. The recommendations stressed in particular the need to coordinate the so called “normalisation” of monetary policies, i.e. the process through which central banks tend to gradually abandon part of the exceptional instruments introduced to cope with the great financial crisis that exploded in 2008 and start to increase the interest rates which had been extremely low or pushed down even below zero. TF2 further reinforces last year’s recommendation and extends the call for coordination to the variety of policies directed towards supervising, enhancing and preserving financial stability. Coordinated decisions should also aim to obtain a gradual decrease of the ratio between total private and public debt and GDP. In fact the increase in this ratio keeps being a potential threat to the liquidity and solvency conditions of financial institutions and markets. A joint effort is required to avoid that excessive indebtedness generates dangerous episodes of international financial instability.
Global and regional cooperation is also recommended to collect information on cross-border capital flows to effectively monitor their origins and destinations as well as excesses that sometimes concentrate financing in certain countries. It is also key to minimize the risk that indebted countries be exposed to disruptive sudden stops of foreign financing that seriously destabilize their economies with bad consequences also for other countries connected with them. The G20 should therefore make sure that the IMF, the BIS and other international institutions reinforce their monitoring on global capital flows.
TF2 also makes several proposals to deal with one of the recent developments in financial markets: the introduction of complex technological innovation in the execution of financial contracts and in the payments and settlement systems. The so-called “Fin-Tech” has been recognized as a great opportunity as well as a source of potential new problems and risks that regulators and supervisors must monitor with care. The so called “crypto-assets” (bit-coin-type instruments and similar innovative assets) need the introduction of new regulations, including registration systems to enforce ‘Know Your Customer’ rules. With good regulation and surveillance Fin-Tech should be promoted and spread as it can enhance the efficiency of financial markets and enrich the provision of financial services. However, in the absence of adequate supervision these innovative financial technologies can facilitate frauds, decrease the transparency of transactions and destabilize financial markets.
Last but not least, recommendations also dealt with the theme of sustainable finance. The role of international financial markets to support models of sustainable growth can be very important. Sustainable development goals require investments to progress on environment and social grounds. From anti-pollution to water provision, from support for extreme poverty and hunger to investments for improving health and education, managing climate change and providing essential infrastructures to foster trade and growth, the G20 should ensure that international financial institutions provide a comprehensive conceptual vision: an evolving road map and a detailed action plan to involve various actors in the pursuit of the increased sustainability of the features with which private and public investors shape the growth model of the world.