The G7 has given inconsistent, reactive attention to financial regulation, but faced with a global crisis the group is well positioned to respond to the shock-activated vulnerability of COVID-19 with coordinated action, writes Hélène Emorine, director, Paris office, G7 Research Group
The world is looking at the G7 to lead in providing a globally coordinated response to mitigate the financial and economic consequences of the COVID-19 crisis that is creating an unprecedented global economic slowdown.
In an increasingly complex global financial system, financial regulation has a key role to play in the economic crisis response and recovery. Yet financial regulation will only be truly effective if it is coordinated on a global scale.
The G7 leaders must thus leverage their work to support a globally coordinated COVID-19 recovery strategy, with a key component focused on financial regulation.
The G7 first addressed financial regulation specifically in 1977, by welcoming the work being done on international agreements prohibiting illicit payments in international trade, banking and commerce.
However, the G7’s governance of financial regulation has been reactive, prompted by shocks and subject to peaks and dips in attention. In 1995, G7 leaders dedicated 1,000 words to financial regulation, the most since their first summit in 1975, in response to the Asian and Latin American economic crises. They addressed the key weaknesses in the international financial system that the crises brought to light.
As these crises continued to be front of mind, the G7 devoted a substantial amount of words over the next five years, with 710 words in 1997, 1,092 in 1999, 926 in 2000 and 748 in 2000. In 2002, attention abruptly disappeared.
The next peak occurred in 2009, as the G7 responded to the 2008–2009 American-turned-global financial crisis and sought to repair the financial system. The inconsistent pattern continued after 2009, with no words in 2010 and 97 in 2011, and the level remaining uneven ever since.
The G7 has never dedicated a separate document to financial regulation. Such inconsistent attention suggests that financial regulation was not a priority for the G7.
After its start in 1975, the G7 made 120 public, collective, precise, future-oriented and politically binding commitments on financial regulation. The issue has thus ranked 15th among the 32 different subjects the G7 made commitments on, as identified by the G7 Research Group.
The first commitment on financial regulation came at the Toronto Summit in 1988, when G7 leaders agreed to continue to cooperate with other countries to examine the functioning of the global financial system. The next commitment was not made until seven years later, at the Halifax Summit in 1995. The G7 continued to address the topic of financial regulation every few years thereafter.
The number of commitments peaked in 2013 with 29 commitments focusing on tax, declined to none in 2017, one in 2018 and none again in 2019.
Although commitments are important, they are only effective if they are complied with. The G7 Research Group has assessed eight commitments on financial regulation. It found that compliance averaged 78%, slightly above the 76% average across all subjects. The lowest compliance came from the 2001 summit at 43%. The highest score of 100% was for a commitment made in 2008 that had been set out in a previous statement by finance ministers and central bank governors and overseen by the Financial Stability Forum, and again for another commitment made in 2014.
Canada had the highest compliance with 94%, closely followed by the European Union and Germany with 88% each. The United States had the lowest compliance of 63%.
G7 performance on financial regulation is inconsistent and motivated by shock-activated vulnerability from financial crises. Its performance is based on reactive responses to mitigate the effects of a crisis rather than proactive actions to prevent one. Furthermore, the amount of attention paid to financial regulation indicates that it has not been a priority for the G7 relative to other subjects.
Nonetheless, the use of proven, low-cost measures, such as ministerial meetings and other accountability mechanisms, could help improve the G7’s performance on financial regulation. For example, for the 2008 summit commitment with perfect compliance, the leaders committed to implement the Financial Stability Forum’s recommendations as supported by their finance ministers and central bankers. This pre-summit ministerial meeting link with the Financial Stability Forum, an institution mandated to conduct compliance assessments, is an institutional mechanism that helped increase compliance.
After mid March 2020, the G7 finance ministers and central bank governors met weekly to coordinate their economic responses to COVID-19. G7 leaders are thus well positioned to respond to the shock-activated vulnerability of COVID-19 with coordinated and effective action.