G20 and Financial System Reform

The birth of the G20 in 1999 and the up-grading of the G20 to summit level (high-level conference) in 2008 was motivated by the global response to the financial crisis. The role of the G20 is often referred to as a crisis responder during a crisis and a steering committee for post-crisis recovery and reform.

The 2008 global financial crisis caused extraordinary disruption to financial markets, financial systems and the economy. The G20 together with the Financial Stability Board (FSB) and Standard Setting Boards (SSBs) are reforming the financial system regulatory and supervisory framework to address regulatory vulnerabilities and gaps.

As stated in the G-20 Toronto Summit Declaration (2010), there are five main principles in guiding global financial system reform, namely: strengthening transparency and accountability, improving appropriate regulation, promoting financial market integrity, encouraging international cooperation, and updating architecture. finance.

Priorities for financial sector reform after the global financial crisis include four focus areas, namely: building the resilience of financial institutions through strengthening prudential regulatory standards, mitigating too big too fail problems, dealing with over-the-counter (OTC) derivatives market risks, and overcoming shadow banking ( non-bank financial intermediaries/NBFI issues). Apart from that, reforms were also carried out in several other important areas, such as macroprudential frameworks and tools, credit ratings, and accounting standards.

The main elements in the area of building the resilience of financial institutions are strengthening the quality and quantity of capital as well as banking liquidity cushions through the Basel III reforms. In addition, in order to mitigate excessive risk-taking behavior due to excessive remuneration and compensation practices, compensation standard reforms were carried out.

Reforms related to too big too fail are aimed at making the resolution of systemic financial institutions (SIFIs) more effective by minimizing the use of public funds and the potential for moral hazard. Reforms include standards for the total loss-absorbing capacity (TLAC) of SIFIs, as well as increasing the effectiveness of supervision of SIFIs.

In order to overcome the complexity of the interconnection of OTC derivative transactions which makes it difficult to monitor risk concentrations and increases the contagion effect, reforms include standardized OTC derivative trading which is encouraged to be carried out via exchanges or electronic trading platforms (ETP), settlement of transactions via central counterparties (CCP), reporting to trade repositories, as well as increasing capital requirements for non-centrally cleared derivatives.

Reforms related to shadow banking/NBFI are aimed at regulating financial activities outside the formal banking system such as money market funds (MMFs), securitization, securities financing transactions (SFTs) such as repo and securities lending, as well as the asset management sector.

The Covid-19 pandemic is the biggest test for the stability of the financial system after the 2008 global financial crisis. In general, the financial system has stronger resilience as a result of reform. Banks have larger capital and liquidity cushions and smaller leverage so they can absorb macroeconomic shocks. The financial market infrastructure, especially the CCP, is also functioning well.

Good financial system resilience, combined with orchestrated policy responses in the fiscal, monetary and financial sectors, has helped countries face the crisis as a result of the Covid-19 pandemic. This is demonstrated by minimizing pressure on the financial sector, maintaining the functioning of financial intermediation, and maintaining financial system stability.

As noted by the FSB in its report entitled Lessons Learned from the Covid-19 Pandemic from a Financial Stability Perspective, the Covid-19 pandemic provides lessons about the importance of continuing the financial system reform agenda. The Covid-19 pandemic has proven that jurisdictions with more advanced implementation of financial system reforms have better financial system resilience.

Indonesian Presidency

Indonesia's G20 Presidency in 2022 will continue the financial system reform agenda. This agenda is very much in line with the theme of the Indonesian presidency, Recover Together, Recover Stronger. The financial system reform agenda was discussed in several working groups/workstreams on the Finance Track, especially the FSB and IFA WG (International Financial Architecture Working Group).

Post-pandemic global economic recovery efforts need to be supported by better functioning of international financial standards and reduced pro-cyclicality of the financial system in order to encourage more balanced and stronger financial intermediation. The Indonesian Presidency will emphasize the importance of strengthening effective policies in overcoming the Covid-19 scarring effect in the financial sector, not only in the context of men

maintain the resilience of financial intermediation, but also to ensure the recovery of business activities in order to encourage economic growth.

The Indonesian Presidency will emphasize the importance of strengthening effective policies in overcoming the scarring effect of Covid-19 in the financial sector, not only in the context of maintaining the resilience of financial intermediation, but also to ensure the recovery of business activities in order to encourage economic growth.

Financial system reform will seek to balance the benefits of digital innovation and strengthening its risk mitigation, by anticipating risks originating from innovation in crypto-assets and stablecoin activities, Decentralized Finance/DeFi, as well as cyber risks and operational resilience. The Central Bank Digital Currency (CBDC) will also be discussed, with the hope that principles for CBDC development can be formulated.

Reforms related to NBFI resilience are also an important topic of discussion. In 2019, the NBFI sector made up 49.5% of the global financial system. The turmoil that occurred in global markets in March 2020 underscored the importance of strengthening the resilience of this sector, especially the structural vulnerability of liquidity mismatches in money market funds (MMFs) and open-ended funds (OEFs) in meeting redemptions amidst high uncertainty. For this reason, it is important to strengthen assessments and mitigation efforts for various factors that contribute to the impact of shocks in order to understand the potential systemic risks of NBFIs and provide effective policy responses.

Lastly, the issue of climate change in the financial sector. The financial reform agenda will look at the financial risks that may arise due to climate change. These include overcoming data gaps, scenario analysis, and identifying regulatory approaches with a macroprudential focus and ensuring consistency of climate-related financial disclosures.

Disclaimer:

• Source: INVESTOR DAILY (published January 3 2022, with the title 'G20 dan Reformasi Sistem Keuangan')
• The author's views do not represent the views of the Institution