G-20 Summit: Financial Reform Is Needed. but How Fast?

By Murphy, Dan | The Christian Science Monitor, June 18, 2010 | Go to article overview

G-20 Summit: Financial Reform Is Needed. but How Fast?


Murphy, Dan, The Christian Science Monitor


As G-20 summit to focus on a split over approach: Will reining in spending cut debt, or stall jobs and growth?

The heads of state for the Group of 20 (G-20) - a body that seeks to coordinate financial regulation and standards across some of the world's largest economies - will hold a two-day summit in Canada starting June 26 at which almost all participants are expected to call for more banking regulation but where some, echoing St. Augustine's famous prayer, are expected to say "please, not yet."

While most agree major change is needed - the term "radical reform" is often bandied about by policymakers - they disagree on timing.

The divide between G-20 countries like the United States, which would like a tough regulatory regime enacted soon to limit the ability of banks to speculate in financial markets, and countries like France and Germany, which agree with the approach in principle but want more time, echoes a debate raging from Dublin to Tokyo.

For two years, industrialized nations have watched their deficits soar, thanks to bank bailouts and stimulus spending designed to head off economic free fall. The question now is whether it's time to rein in spending and start reducing government debt. Some say yes, but others fear spending cuts could fuel unemployment and drive economic growth down.

A key component of economic growth is lending, which boosts consumption and encourages business expansion. But the mooted new rules would require banks to hold more cash in reserve and lend less of their capital in hopes of obviating the need for future government bailouts.

That, some critics say, could be another destimulative measure at a time when countries across Europe are planning steep budget cuts.

"The argument is that this will very significantly add to the cost of doing business, be passed on to the consumer, and reduce growth," says Uri Dadush, a former senior economist at the World Bank who is now at the Carnegie Endowment for International Peace in Washington. "There's a prima facie argument that there will in fact be serious costs and that will have to be balanced against the insurance that [governments] are buying against future financial crisis."

Banking industry's case

In mid-June, the banking industry made its case that regulation will undermine growth. The Institute for International Finance (IIF), a 350-member group of most of the world's large banks, argued in a report that the new rules would reduce economic growth by 3 percent in the US, Japan, and Europe and cost more than 9 million jobs over five years.

"The point of this report is not to argue against regulatory reform," Peter Sands, CEO of the UK's Standard Chartered Bank and an IIF official, told reporters at the time. "But there is a price for making the banking system safer and more stable, and that price will inevitably be borne by the real economy . …

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