page_title: Global financial system
section_title: Reform efforts
hierarchical_section_title: Global financial system / Future of the global financial system / Reform efforts
caption_attribution_description: English: World leaders at the 2010 G-20 Seoul summit Left to right: Front row: Jacob Zuma (South Africa), Dmitry Medvedev (Russia), Nicolas Sarkozy (France), Susilo Bambang Yudhoyono (Indonesia), Luiz Inácio Lula da Silva (Brazil), Lee Myung-bak (South Korea), Hu Jintao (China), Felipe Calderón (Mexico), Cristina Fernandez (Argentina), Barack Obama (USA), Recep Tayyip Erdoğan (Turkey) Middle row: Bingu wa Mutharika (African Union), Herman Van Rompuy (European Council), Naoto Kan (Japan), Silvio Berlusconi (Italy), Angela Merkel (Germany), Manmohan Singh (India), Stephen Harper (Canada), David Cameron (United Kingdom), Julia Gillard (Australia), José Manuel Barroso (European Commission), Meles Zenawi (NEPAD) Back row: Pascal Lamy (World Trade Organization), Dominique Strauss-Kahn (International Monetary Fund), Juan Somavía (International Labour Organization), Saud bin Faisal bin Abdul-Aziz (Saudi Arabia), Lee Hsien Loong (Singapore), José Luis Rodríguez Zapatero (Spain), Nguyen Tan Dung (Vietnam, ASEAN), Ban Ki-moon (United Nations), Robert Zoellick (World Bank), José Ángel Gurría (OECD), Mario Draghi (Financial Stability Forum)
context_page_description: The global financial system is the worldwide framework of legal agreements, institutions, and both formal and informal economic actors that together facilitate international flows of financial capital for purposes of investment and trade financing. Since emerging in the late 19th century during the first modern wave of economic globalization, its evolution is marked by the establishment of central banks, multilateral treaties, and intergovernmental organizations aimed at improving the transparency, regulation, and effectiveness of international markets. In the late 1800s, world migration and communication technology facilitated unprecedented growth in international trade and investment. At the onset of World War I, trade contracted as foreign exchange markets became paralyzed by money market illiquidity. Countries sought to defend against external shocks with protectionist policies and trade virtually halted by 1933, worsening the effects of the global Great Depression until a series of reciprocal trade agreements slowly reduced tariffs worldwide.
context_section_description: Former World Bank Chief Economist and former Chairman of the U.S. Council of Economic Advisers Joseph E. Stiglitz referred in the late 1990s to a growing consensus that something is wrong with a system having the capacity to impose high costs on a great number of people who are hardly even participants in international financial markets, neither speculating on international investments nor borrowing in foreign currencies. He argued that foreign crises have strong worldwide repercussions due in part to the phenomenon of moral hazard, particularly when many multinational firms deliberately invest in highly risky government bonds in anticipation of a national or international bailout. Although crises can be overcome by emergency financing, employing bailouts places a heavy burden on taxpayers living in the afflicted countries, and the high costs damage standards of living. Stiglitz has advocated finding means of stabilizing short-term international capital flows without adversely affecting long-term foreign direct investment which usually carries new knowledge spillover and technological advancements into economies.
  American economist and former Chairman of the Federal Reserve Paul Volcker has argued that the lack of global consensus on key issues threatens efforts to reform the global financial system. He has argued that quite possibly the most important issue is a unified approach to addressing failures of systemically important financial institutions, noting public taxpayers and government officials have grown disillusioned with deploying tax revenues to bail out creditors for the sake of stopping contagion and mitigating economic disaster. Volcker has expressed an array of potential coordinated measures: increased policy surveillance by the IMF and commitment from nations to adopt agreed-upon best practices, mandatory consultation from multilateral bodies leading to more direct policy recommendations, stricter controls on national qualification for emergency financing facilities (such as those offered by the IMF or by central banks), and improved incentive structures with financial penalties.
  Governor of the Bank of England and former Governor of the Bank of Canada Mark Carney has described two approaches to global financial reform: shielding financial institutions from cyclic economic effects by strengthening banks individually, and defending economic cycles from banks by improving systemic resiliency. Strengthening financial institutions necessitates stronger capital requirements and liquidity provisions, as well as better measurement and management of risks. The G-20 agreed to new standards presented by the Basel Committee on Banking Supervision at its 2009 summit in Pittsburgh, Pennsylvania. The standards included leverage ratio targets to supplement other capital adequacy requirements established by Basel II. Improving the resiliency of the global financial system requires protections that enable the system to withstand singular institutional and market failures. Carney has argued that policymakers have converged on the view that institutions must bear the burden of financial losses during future financial crises, and such occurrences should be well-defined and pre-planned. He suggested other national regulators follow Canada in establishing staged intervention procedures and require banks to commit to what he termed "living wills" which would detail plans for an orderly institutional failure.
  At its 2010 summit in Seoul, South Korea, the G-20 collectively endorsed a new collection of capital adequacy and liquidity standards for banks recommended by Basel III. Andreas Dombret of the Executive Board of Deutsche Bundesbank has noted a difficulty in identifying institutions that constitute systemic importance via their size, complexity, and degree of interconnectivity within the global financial system, and that efforts should be made to identify a group of 25 to 30 indisputable globally systemic institutions. He has suggested they be held to standards higher than those mandated by Basel III, and that despite the inev
caption: World leaders at the 2010 G-20 summit in Seoul, South Korea, endorsed the Basel III standards for banking regulation.
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