International Finance Ministers and central bankers are meeting today in a two-day conference held at the spa town of Baden-Baden in Germany. The main theme of the talks would be American protectionism, particularly, the new administration’s policies such as the border tax on imports.

What is the G20 summit

This G20 summit is a ministerial level meeting for Finance ministers and central bank governors. Another G20 summit is held at the level of heads of state and heads of government. They are both annual events. 

The G20 is a global forum for governments and central bank governors from the top 20 economies in the world. The G20 summits seek to promote global economic discussion and address policy issues in order to advance financial stability. The ministerial-level G20 was established in 1999 and helps to set out the fundamental issues for the summit of G20 leaders which will be held at Hamburg later this July and chaired by Angela Merkel. 

Main themes on the G20 agenda

Trump’s protectionism and anti-globalisation position

Strong dollar: plans of how to deal with the global repercussion of a strong dollar.

Global economic outlook: Brexit, China’s economy, Trump’s unpredictability and European elections in France and general elections in Germany have created uncertainty.

African investment: creation of long-term conditions for investment, promotion of infrastructure and education.

Mark Carney at the G20

The governor of the Bank of England (BoE) Mark Carney, who is present at G20 in his role as head of the Financial Stability Board, has warned about the global financial system’s risks and the measures that policymakers need to follow to avoid another financial crisis. In a letter released today and which is sent to G20 ministers and central bank governors ahead of their discussions in Baden-Baden, Mark Carney, the Chair of the FSB, has talked about risky derivatives trading and “shadow banking”—financial activities that are taking place by unregulated institutions or services offered outside normal financial regulations.

He has also warned against the risk of not implementing international standards which could cause fragmented funding and liquidity markets. 

The Financial Stability Board (FSB) is an international organisation that monitors and proposes measures for the global financial system. It was founded in 2009 at the London G20 summit as a successor of the Financial Stability Forum. 

In Carney’s letter, the four priorities proposed by the FSB regard measures to avoid financial risks and seek to address structural vulnerabilities:

1. Shadow banking: needs to be transformed into market-based finance. Market-based financial systems are usual in the US and UK. While, in bank-based systems, banks play a leading role in overseeing investment and providing risk management, in market-based systems well-functioning securities markets and banks are working together in easing risk management, imposing corporate control and providing customised financial arrangements. A market-based financial system is considered by its proponents better than a bank-based one because it promotes long-run economic growth.

2. Derivatives markets need to become safer by following reforms on over-the-counter derivatives markets and deliver “coordinated guidance on central counterparty resilience, recovery and resolution.” The derivatives market refers to financial instruments like options which are derived from other assets. A derivative is basically a contract between two or more parties whose value is based on a financial asset or security such as bonds, interest rates, mortgages, currencies, stocks, etc. For example, the “shadowy” market for derivatives has contributed to the financial crisis of 2008 with the Lehman Brothers’ bankruptcy and J.P. Morgan’s 2012 $6 billion trading losses in London.

3. A strict implementation of post-crisis reforms.

4. Need to address new vulnerabilities such as misconduct risks or climate-related financial risks.

Mark Carney has also insinuated that fining banking institutions is not a solution and individuals need to be accountable, too. His letter ended with a positive message and a warning: “A decade on from the start of the crisis, the G20 has made substantial progress in building a financial system that is more resilient and better able to fund households and business in sustainable way. As the global recovery gains strength, now is not the time to risk these hard-won gains.”