G20: Reforming the Global Financial Architecture | Financial Stability | G20 India | T20 India

Name: G20: Reforming the Global Financial Architecture | Financial Stability | G20 India | T20 India
Uploaded: 2023-05-23T15:00:10.000Z
Duration: 1 h 32 min 45 s

Introduction

In this section, the speaker thanks ORF and Samir for organizing the conference and introduces themselves as a representative of the history department at Shiv Nadar University. They also mention that economists in their department write economic history.

Financial Crises and History

In this section, the speaker discusses how financial crises occur frequently due to factors such as lack of macro financial regulation, greed, trust, or opacity. They recommend reading Kindleberger's book on financial crises and mention that leverage and opacity/trust are two factors identified as reasons for banking or financial crises.

Kindleberger's book has been updated to incorporate what happened in 2007-08.

The speaker mentions India's efforts to prevent spillover effects of loose monetary policy or quantitative easing on emerging markets like India.

The speaker talks about trade-offs between capital account convertibility and per capita income.

The speaker mentions another narrative during the financial crisis where surplus liquidity of China was seen as a cause of the global financial crisis.

G20's Role in Financial Crisis

In this section, the speaker poses questions to the panel regarding G20's role in stemming the 2008-09 crisis. They discuss how G20 is important for countries to coordinate and agree on something. The panelists talk about how regulations were reduced in the US for non-bank financial intermediaries responsible for cross-border flows due to political pressures.

The panelists believe that if there can be a global agreement among major countries through G20, it could help regulate volatility.

Can the G20 prevent future financial crises?

In this section, the panel discusses the potential for future financial crises and what can be done to prevent them. The conversation focuses on the role of smaller, unregulated financial entities and the structural flaws in the international monetary system.

Structural Flaws in International Monetary System

Robert Triffin identified a structural flaw in the international monetary system in which providing liquidity to the world through the dollar creates a dilemma for domestic monetary policy.

This has led to "dollar shocks" and is why Europe created the Euro as a defensive move against these shocks.

We are currently facing another dollar shock due to severe tightening, which will bring turmoil and choppy waters.

Banks are better capitalized but there is still concern about lesser fair instincts in Anglo-Saxon countries causing trouble.

Preventing Future Crises

The G20 created a task force in 2011 to deal with possible dollarization of the international monetary system.

Countries can protect themselves by implementing capital controls or having more sophisticated financial systems or a monetary union like Europe.

There needs to be new tools for addressing challenges such as digital transformation, energy transition, stabilizing countries with debt problems, and reforming multilateral development banks.

New tools need to be specific on how to address these challenges.

Interest Rate Cycle

There is research suggesting that raising interest rates may not be warranted at this time due to inflation generated by supply shocks and corporate benefit margins.

New tools are needed for addressing challenges faced during this new era.

The Role of Regulation in Innovation

In this section, the speakers discuss the trade-offs between laissez-faire and regulation in innovation. They also talk about the need for better coordination between the financial sector and real sector to prevent future crises.

Trade-offs between Laissez-faire and Regulation

There could be trade-offs between laissez-faire and innovation.

The first-order relationship is established, but the second order is not clear.

Need for Better Coordination Between Financial Sector and Real Sector

The 2008 crisis was largely due to a disconnect between the financial sector and real sector.

Even after 15 years, there is still not much appreciation of the linkage between fiscal policy and financial markets.

There is a lack of proper early warning signals for banking crises.

Public debt is crucial to fiscal monetary coordination.

Benefits of Coordination Between Fiscal and Monetary Policies

In this section, the speaker talks about India's experience with coordinating fiscal and monetary policies post-global 2008 crisis. He explains how this coordination has helped India become one of the fastest-growing large economies in the world.

India's Experience with Coordinating Fiscal and Monetary Policies

India has done extremely well compared to other countries in terms of growth post-global 2008 crisis.

This success can be attributed to good coordination between fiscal policy and monetary policies.

This coordination has prevented inflationary pressure despite significant fiscal stimulus.

Early Warning Signals for Banking Crises

In this section, the speaker discusses how there is a weak framework for understanding early warning signals in financial markets. He also emphasizes that domestic savings should be a focus for any country that wants to protect itself from spillovers.

Weak Framework for Understanding Early Warning Signals

There is a weak framework for understanding early warning signals in financial markets.

Heat waves can be predicted three months in advance, but banking crises cannot be predicted even after several weeks.

Importance of Domestic Savings

The role of domestic savings should be the focus of any country that wants to protect itself from spillovers.

Regulations and Macroeconomic Policies

The discussion focuses on the impact of regulations and macroeconomic policies on costs, volatility, and market distortion. The importance of flexible inflation targeting is also highlighted.

Impact of Regulations and Macroeconomic Policies

Regulatory discretion, delay, etc., can raise costs.

Macro Prudential has a fixed rule that dampens volatility with minimum market distortion.

Overreaction by central banks can aggravate crises.

Supply-side actions such as continual reform and tax cuts can help contain inflation and support growth.

Flexible inflation targeting is important to avoid overreaction in monetary policy.

Harmonization and Reform of Multilateral Institutions

The discussion centers around harmonization and reform of multilateral institutions. Examples of regional cooperation initiatives in ASEAN plus three are provided.

Harmonization and Reform of Multilateral Institutions

Overreaction is not only a feature of regulators but also markets.

Central banks need to consider spillover impacts on emerging markets when making decisions.

Regional cooperation initiatives in ASEAN plus three include developing local currency bond markets to insulate economies from shocks related to dollar exchange rates, as well as setting up a regional framework of currency swaps through the Chiang Mai initiative multilateralization.

ASEAN Plus Three Meetings

The speaker discusses the ASEAN Plus Three meetings and the need to improve mechanisms for financial integration across countries.

Improving Mechanisms for Financial Integration

The ASEAN Plus Three meetings are discussing how to improve mechanisms for financial integration across countries.

There is a discussion about why these mechanisms have not been used and what is preventing countries from using them.

Financial development promotes economic development, but it needs to be regulated properly.

Promoting Financial Integration Across Countries

The speaker talks about promoting financial integration across countries in terms of payment systems, but highlights the potential risks associated with this approach.

Risks Associated with Promoting Financial Integration

Promoting financial integration across countries in terms of payment systems can lead to flight of money during a banking crisis.

Controlling contagion across borders becomes harder when there is a loss of confidence in a bank.

Flight to other countries with better budget balances or debt sustainability can occur during a crisis.

Role of Regulators and Central Banks in Europe

The speaker discusses the role of regulators and central banks in Europe, particularly in relation to stemming crises.

Role of Central Banks in Europe

After the global financial crisis, central banks became powerful institutions that were seen as saviors.

In Europe, the European Central Bank (ECB) became the most federal institution after the Euro crisis.

There was debate about whether the ECB should move into climate change-related issues and green finance.

The ECB's latest research shows that profit margins of companies are pushing inflation up.

Adapting to a New World

The speaker talks about how central banks are adapting to a new world with three structural features that will be present for decades.

Adapting to a New World

Central banks are adapting to a new world with three structural features that will be present for decades.

Some people question whether traditional tools of interest rate hikes can tackle inflation, suggesting more targeted fiscal tools and price controls.

Central banks are adapting to a world where great power rivalry between the United States and China affects everyone.

Interlinking of Digital Sovereign Currencies and Global Financial Crisis

The discussion revolves around the interlinking of digital sovereign currencies and global financial crisis. The panelists discuss whether there will be more competition or cooperation between currencies, how digital currencies can create a new source of crisis, and the need for different rules to govern them.

Interlinking of Digital Sovereign Currencies and Global Financial Crisis

The G20 will discuss the interlinking of digital sovereign currencies and global financial crisis.

There is a possibility for more competition or cooperation between currencies in the future due to digital sovereign currencies.

Banks were responsible for the recent global financial crisis due to weak regulation. With digital currency, there may be more regulation or bailing out required.

Digital currency could create a new source of crisis that requires different rules than what currently exists.

Reserve Bank of India is considered a safe regulator compared to other countries. Central bank is piloting digital currency transactions in a phased manner.

Discussant's Perspective on Current Turmoil

Gulbin Sahin Beglue from Tepal Turkey shares her perspective as an old central banker on current turmoil caused by mismanagement and weak supervision.

Supervision and regulation pace did not catch up with the increase in balance sheet size (triple in four years).

Central banks increased rates to combat high inflation but there was underlook on supervision leading to mismatched asset-liability side of SVB balance sheet.

Central banks did their part but it was weak supervision that led to the current turmoil.

Minimum Set of Regulations

The panel discusses the need for a minimum set of regulations that can be applied to both large and medium banks. They also emphasize the importance of coordination between monetary, fiscal, and macro-prudential policies.

Importance of Coordination

Coordination is necessary between monetary, fiscal, and macro-prudential policies.

Early warning systems are in place but unable to predict crises despite being there.

Art of Central Banking

Overreacting or underreacting is bad; balance is the art of central banking.

Turkey's current strategy involves doing the reverse of inflation targeting framework.

Lessons from Crises

Sound banking system saved Turkey during 2008 crisis.

Crisis turned out to be an opportunity for establishing independent banking regulation in Turkey.

China as Second International Currency?

Vera from Brazil asks if China should be considered as a second international currency due to its status as the biggest exporter and importer in the world with huge reserves.

China's Status

China is currently the biggest exporter and importer in the world with huge reserves.

Panelists do not provide a clear answer on whether China should be considered as a second international currency.

Role of Monetary Policy in Stifling Growth

A question is asked about how monetary policy can stifle growth if governments fail to recognize opportunities presented by exponential technologies.

Role of Monetary Policy

The role of monetary policy in stifling growth is questioned.

Governments need to recognize opportunities presented by exponential technologies to push growth.

Trust in the Banking System

The discussion revolves around the impact of a billion-dollar loss by Saudi Bank on investor trust in the banking system. The conversation also explores potential regulatory mechanisms to enforce trust.

Investor Trust and Regulatory Mechanisms

The loss of a billion dollars by Saudi Bank has left investors hesitant to invest in the banking system.

Lack of trust can be addressed through regulatory mechanisms that enforce transparency and accountability.

Such mechanisms can include stricter regulations, penalties for non-compliance, and increased oversight.

China's Use of Remnb as Reserve Currency

This section discusses China's use of remnb as a reserve currency and its potential challenges.

Challenges with Remnb as Reserve Currency

While the use of remnb is expected to increase, it may not become a widely used reserve currency due to China's decision to keep its capital account closed.

Most financial transactions are done through financial transactions rather than trade transactions, making it difficult to move money in and out of China easily.

Although China has been slowly liberalizing its capital account, it is still far from fully liberalizing it.

There is back channel diplomacy going on by China to ensure that remnb becomes an international currency.

Internationalization of RMB

This section discusses how China is working towards internationalizing RMB.

Three Motorways Towards Internationalization

China has been building three motorways towards internationalizing RMB.

The first motorway is bilateral swap agreements, which have been providing emergency liquidity for certain countries and debt restructuring.

The second motorway is the new interbank payment system that they are building, which Russia is now using to circumvent sanctions.

The third motorway is the EU one, which they are supposed to be more advanced in terms of traditional Southern currency.

Diplomatic Channels

Countries that have signed the Belt and Road initiative have been supported more by China through diplomatic channels.

Central bank cross-border transactions can impose discipline on the dollar and make US policy more responsible.