Senator Oliver’s Speaking Points for
Session I: Current Risks to Economic Recovery, and the
Continuing Structural Imbalances in the Global Economy
The Global Response to the Financial and Economic
Crisis
·There is general agreement with the conclusion reached by the
leaders of the Group of Twenty nations at the recent Seoul Summit: “When we
first gathered in November 2008 …, we pledged to support and stabilize the
global economy, and … to lay the foundation for reform … . Over the past four Summits,
we have worked with unprecedented cooperation to break the dramatic fall in the
global economy to establish the basis for recovery and renewed growth. … Our
relentless and cooperative efforts … have delivered strong results. However, we
must stay vigilant. Risks remain.”
·Certainly, “the dramatic fall” has been broken. Equally, “risks
remain.” As recently as October 2010, the International Monetary Fund’s
World Economic Outlook noted that “… downside risks remain elevated. Most
advanced economies and a few emerging economies will face large adjustments.
Their recoveries are proceeding at a sluggish pace, and high unemployment poses
major social challenges. By contrast, many emerging and developing economies
are again seeing strong growth, because they did not experience major financial
excesses just prior to the Great Recession.”
·G20 leaders and the IMF seem consistent in their view: a
sustained, healthy recovery depends on strengthened private demand in advanced
economies – what the IMF has referred to as internal rebalancing – and an
increase in net exports in deficit countries coincident with a reduction in net
exports in surplus countries – what the IMF has termed external rebalancing.
·In response to the global crisis, governments and central banks took
various actions. Governments implemented fiscal stimulus measures, which
in a number of countries are in the process of being withdrawn, and central
banks took action as well, such as lowering their target for the overnight
interest rate and – in some countries – such other measures as quantitative
easing.
·It is widely agreed that the fiscal stimulus measures and the
actions taken by central banks were instrumental in helping the economic
recovery. That being said, critical efforts continue as parties work to create
regulations and other safeguards to prevent a recurrence. Financial system
regulation has been a key focus, and financial sector reform in advanced
economies was noted by the IMF in its most recent World Economic Outlook, which
urged acceleration in repair and reform of the financial sector to allow a
“resumption of healthy credit markets.”
·Consistent with the need identified by the G20 leaders at the
Pittsburgh Summit to increase capital requirements for banks, an important
initiative has been developed through the Basel Committee on Banking
Supervision. Through this Committee, central bank governors and other banking
leaders have agreed upon a Basel III Accord, which is designed to
prevent the overexposure of banks to risk. The safety and soundness of banks
must be assured, given the critical role they play in our economies.
·The Basel III Accord proposes to strengthen global capital and
liquidity regulations to improve the banking sector’s ability to absorb
financial and economic shocks. Although details have yet to be finalized and
final rules are not expected until the end of this year, the Basel Committee
and its governing body have made agreements regarding:
·a higher quality of capital, with a focus on common
equity,
·higher levels of capital to ensure banks can better absorb
the types of losses like those associated with the recent crisis,
·better coverage of risk, especially for capital market
activities,
·an internationally harmonised leverage ratio to constrain
excessive risk-taking and to serve as a backstop to the risk-based capital
measure,
·capital buffers, which should be built up in good times so
that they can be drawn down in periods of stress,
·minimum global liquidity standards to improve banks’
resilience to acute short-term stress and to improve longer-term funding, and
·stronger standards for supervision, public disclosure and risk
management.
·Regarding supervision and disclosure, it is important to note
that Pillar 3 of Basel II itemizes the quantitative and qualitative
disclosure requirements for affected institutions, which are linked to the
institution’s nature, size and complexity. In particular, disclosure
requirements exist in respect of corporate structure, capital structure and
adequacy, and risk measurement and management. These disclosures must be
public, although an audit by external auditors is not needed unless required by
another authority, such as accounting standards or securities regulations.
·In Canada, the Office of the Superintendent of Financial
Institutions supervises the safety and soundness of our banks, and provides
guidance about minimum expected standards regarding their asset-to-capital
multiple and a risk-based capital ratio. Notwithstanding these standards, the
Superintendent has the authority to require an institution to increase its
capital. As evidenced by Canada’s experiences during the recent global
financial and economic crisis, Canadian banks are characterized by safety and
soundness, and some have suggested that the Canadian financial sector model is
one from which many nations could learn.
·Although the nature and form of supervisory authorities vary
across countries, it is generally the case that supervision without “teeth” may
not achieve the desired goals. While rules are useful, they are only truly
helpful when supervisory authorities ensure strict adherence and apply appropriate
legal sanctions when requirements are not met. Self-assessment and peer
review are inadequate, and sanctions must be strong enough to induce the
desired behaviour. Political, international or institutional forces must not
play a role.
·The benefits of higher capital requirements must be considered in
the context of the tighter credit that will come with less leverage. Tighter
credit has implications for economic growth, which will likely be slower
although perhaps relatively more sustainable. Political pressure may be applied
by those who experience relatively greater borrowing constraints.
·International differences must also be avoided. Governments must
not be allowed to argue for less stringent requirements for their banking
systems. Equally, they should not be permitted to interpret the rules in a
manner that will advantage their banks.
·As well, implementation of standards must be consistent across
countries, and case-by-case exceptions or judgments to allow variation from the
minimum requirements must not be permitted.
·A rules-based, rather than a principles-based, approach
with strict and consistent enforcement as well as meaningful
sanctions must be the standard. Legislators must ensure the existence of
such an approach.
The Global Response, Developing Countries and the
Millennium Development Goals
·The global financial and economic crisis affected the world’s
most vulnerable people, although developing nations had no
responsibility for the crisis. The impact of the crisis on them has been
recognized by such organizations as the IMF. In the spring of 2009, IMF
Managing Director Dominique Strauss-Kahn noted that while most low-income
countries escaped the early phases of the global crisis, they were beginning to
be hit hard, mostly through trade as recessions in developed countries led to
reduced demand for goods imported from developing countries.
·Similarly, at the beginning of the crisis, it was expected that
the developing world would experience a 20% reduction in foreign direct
investment in 2009, relative unavailability of credit and a higher cost of
credit when available. There was also speculation about the extent to which
foreign aid was likely to fall because of fiscal pressures in donor countries.
These types of external shocks created budget crises in developing countries,
which were compromised in their ability to provide vital social safety
services.
·At the 120th Inter-Parliamentary Union Assembly in
Addis Abada, in April 2009, a unanimous resolution was adopted that
addressed the role of Parliaments in mitigating the social and political impact
of the international economic and financial crisis on the most vulnerable
sectors of the global community, particularly in Africa. The resolution urged
developed nations’ governments to “assume appropriate responsibility to help
remedy the negative effects on developing countries of the global financial
crisis.”
·This April 2009 meeting was followed by the IPU’s May 2009
Parliamentary Conference on the Global Economic Crisis. At that time, and
continuing the IPU’s focus on addressing the development cooperation agenda,
particular attention was paid to the need to mitigate the effects of the crisis
on development. The closing statement by the Conference’s President, Dr.
Theo-Ben Gurirab, spoke about some of the issues mentioned earlier, including
thorough reform and repair of financial systems, one aspect of which is the
Basel III initiative.
·In September 2010, the United Nations issued a report on
progress in achieving the Millennium Development Goals. It noted that – with
five years remaining – an “(e)xtra push (is) needed on aid, trade and debt to
meet global anti-poverty goals.” According to the report, despite a record
level of aid – $120 billion in 2009 – there is a shortfall of about $20 billion
in the annual level of aid as agreed to five years ago by the Group of Eight.
Moreover, it said that although aid is expected to reach $126 billion in
2010, that amount will be insufficient to meet the agreed target. The UN called
for a recommitment to the target of 0.7% of gross national income for donor
countries to be devoted to official development assistance. The report also
mentioned the need to “deal comprehensively with the debt problems of all
developing countries.”
·Legislators in all countries, but particularly in the donor
countries that are relatively more able to provide development assistance and
to forgive debt, must continue to assist the world’s most vulnerable people,
notwithstanding the fiscal situation that advanced economies may now be facing.
Certainly, such a focus is consistent with the commitment made by the G20
leaders, at the Seoul Summit, to achieve the Millennium Development Goals.
The Timing of Austerity, a Strengthened Recovery
and the Creation of Jobs
·As the leaders of the G20 nations, the IMF and others have noted,
the global economic recovery remains fragile. As well, the state of the
recovery and the extent to which jobs are being created vary across nations.
Some nations are beginning to wind down their fiscal stimulus measures, with
implications for the demand for goods and services, and some central banks are
beginning to increase their target for the overnight rate, which will also
affect demand.
·In this context, it is important to remember the conclusion
reached by the G20 leaders in Seoul: “Uneven growth and widening imbalances are
fuelling the temptation to diverge from global solutions into uncoordinated
actions. However, uncoordinated policy actions will only lead to worse outcomes
for all.” They also spoke about their commitment to “implement a range of
structural reforms that boost and sustain global demand, foster job creation,
and increase the potential for growth.” Importantly, they also highlighted bank
capital and liquidity standards, and more effective oversight and supervision.
·As nations begin to reduce their stimulus, they must be mindful
that, in many nations, economic growth remains relatively weak and many
thousands of people remain jobless or underemployed. In supporting the G20
leaders’ recognition of “the importance of private-sector-led growth and job
creation,” legislators in all nations must ensure the collaborative policy
actions – including fiscal consolidation – needed to safeguard the fragile
recovery and ensure strong economic growth with the creation of sustainable
jobs.