The G20's Reform of Bank Regulation and the Changing Structure of the Global Financial System
| Date | 01 June 2018 |
| Published date | 01 June 2018 |
| Author | Malcolm D. Knight |
| DOI | http://doi.org/10.1111/1758-5899.12556 |
The G20’s Reform of Bank Regulation and the
Changing Structure of the Global Financial
System
Malcolm D. Knight
Centre for International Governance Innovation
Abstract
The G20’sfinancial regulatory reform programme, underway since 2008, was designed as an integrated set of strengthened
regulatory measures to make the global financial system more robust and less crisis-prone. However, in practice the G20’s
stricter regulation of internationally active banks has not been matched by firmer oversight of other financial system partici-
pants that also take on large risks. The present article addresses the implications of this situation. Section 1 outlines the role
of the banking sector within the broader market-based financial system. Section 2 considers the dynamics of a crisis in such a
system. The measures that the G20 has agreed thus far to strengthen the G-SIBs, and regulators’intentions with regard to
strengthening other sectors of the financial system are summarized in Section 3. Section 4 describes how stricter bank regula-
tion may affect the resilience of market-based financial systems in conditions of stress. Section 5 discusses how the focus on
strengthening bank regulation, combined with slow progress in extending regulation to other sectors, has accelerated struc-
tural change in the financial system and offers some conjectures on how this may alter financial risks, the way the financial
system may respond to stress, and the implications for macroprudential regulation.
Policy Implications
•Because of the high level of interconnectedness among financial institutions, the scope of the G20’s regulatory reform pro-
gramme must extend to all major sectors of the financial system, not just banks.
•Stronger regulatory measures should be taken to reduce interconnectedness in funding and lending relationships between
banks and non-bank financial institutions.
•Regulatory oversight should be extended to innovative financial activities through oversight of the financial product
approval processes that have been established in G-SIFIs.
•Macroprudential regulation should play a key role in identifying emerging sectoral risks that could be amplified into finan-
cial system-wide turbulence.
The G20 leaders held their first Summit in Washington DC
on 14–15 November 2008 in the depths of the Great Finan-
cial Crisis (GFC). The goal of the meeting was to address the
crisis and prevent the near-meltdown of the financial sys-
tems in several advanced countries from endangering the
global economy.
At the meeting the leaders reached a historic agreement
to implement a comprehensive programme to reform the
global architecture of financial regulation. They also set in
motion major changes in the governance of financial regula-
tion at the international level. Under the guidance of succes-
sive G20 Summits and meetings of finance ministers and
central bank governors, the Financial Stability Board (FSB)
cooperates closely with the International Monetary Fund
(IMF), the Bank for International Settlements (BIS) and
national financial regulatory agencies in the G20 jurisdictions
and beyond (see Knight, 2014 and Knight and Ortiz, 2015).
It coordinates the work of the Basel Committee on Banking
Supervision (BCBS) and other key international groupings of
financial regulators and standard setters.
The G20’s programme is designed as an interrelated set
of strengthened measures to regulate international finance
and make it more secure. As such, it is a major step towards
achieving a robust and less crisis-prone global financial sys-
tem. In principle, it is directed at strengthening the solvency,
liquidity and risk management of all the key elements of
the system –banks; non-bank financial institutions such as
insurance and reinsurance companies, pension funds, asset
managers, money market mutual funds; the markets for all
types of financial instruments (both cash and derivatives);
and the systems for payment, clearing and settlement that
allow huge flows of financial transactions to take place effi-
ciently and securely.
In practice, however, the main outcome of the G20’s
reform effort thus far has been to greatly strengthen the
solvency, liquidity and risk management of banks in the G20
Global Policy (2018) 9:Suppl.1 doi: 10.1111/1758-5899.12556 ©2018 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 9 . Supplement 1 . June 2018 21
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