Mike Smith: three key steps for global growth and better governance

One of the issues we confront is the side effects of the cure. There is no doubt this was a terrible crisis. The financial system itself was precarious, the emergency measures taken by sovereign states in many cases created secondary debt crises, economic recovery has been stifled by ongoing anxiety at both the business and consumer level, structural reforms, many enacted under duress, continue to create uncertainty. 

But we are certainly in a better position today than five years ago, even three or one year ago. Now it’s now time to focus more on rehabilitation. On growth.

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The challenge is some of the – necessary – actions taken when the global economy was critical and some measures designed to prevent a relapse are actually impeding the return to health. 

The feedback we are getting from business is that markets are not working efficiently as they need to be at a time when we need global jobs growth. 

Regulatory uncertainty and complexity and the unintended consequences of sometimes conflicting new regulation around the world is not only diverting resources and hampering credit creation but introducing new risks. 

One of the many lessons we learned from the crisis is complexity clouds true understanding of risk. Complex and sometimes conflicting new rules obscure rather than enhance transparency in some cases. 

I am heartened that some regulators, and I note speeches by officers of the Reserve Bank, agree it is time to pause and properly understand where we are at with post crisis regulation. 

So a key recommendation of the B20 is G20 Leaders should “pause, take stock and align” global financial regulation. 

Rather than create new rules for every conceivable risk I believe outstanding reforms should be finalised allowing financial institutions to get back to financing growth which in turn is the only way to create jobs. 

ANZ is a large organisation, well resourced, but we operate in 33 countries and even for us the road to the new regulatory world has become a quagmire. 

I have seen reports, and I well understand them, that especially in emerging markets the growing effects of ongoing reforms are counter-productive for growth. These issues need to be examined and any rule adjustments necessary quickly made. 

Not only is this complexity an ongoing drag on growth but it introduces the danger of resentment in markets, particularly emerging market economies, where there is a belief they are paying a disproportionate price for the "North Atlantic financial crisis". 

At the very least these voices need to be heard at the rule makers' "table". 

The B20 has called on the G20 to ensure the current regulatory agenda to improve market stability is implemented effectively and that more consultative rule making processes are adopted in the future. 

I personally believe this recommendation is a very important one. As we emerge from the financial downturn, emerging market economies will play an increasingly central role to stimulating global trade and growth. 

Listening to and including emerging markets’ views when reviewing new rules will help these faster growing markets “take up the slack” of the still slowly recovering developed world economies. Countries like India, Indonesia and Vietnam need to be given a greater voice and weight. 

One of the major opportunities we can take advantage of, particularly with global financing costs so low, is new investment in productive infrastructure. For many G20 countries there is pronounced need for new infrastructure. Governments must think more creatively about ways to encourage Infrastructure financing. 

This is a priority for the Australian Government in its G20 leadership year. 

The B20 is very keen to help on this front – it is not just in our interests but everyone’s if we can get economies growing again and productive investment financed. Our conclusion, shared by the Institute of International Finance and the Group of 30, is governments must be prepared to share some of the risk with the private sector for these investments. 

There are a lot of things governments can do to create a more attractive infrastructure market. An appropriate sharing of risk between Governments and the private sector for these complex projects will be the catalyst for getting greater investment. 

The B20 does have an action plan which focuses on supporting the G20 governments moving from GFC crisis response to helping create economic growth and jobs. 

We have identified some problems which may slow the achievement of more growth and jobs and, importantly, how to “fix” those problems. 

For example, when investors look at rail tunnels under harbours and the like they ask two questions: what return will we get and how much risk will we need to take? Governments can help give them clear answer on both. 

Another example is anti-money laundering rules. Everyone agrees we need anti money laundering laws which rely to a great extent on the “know your customer“ rules. We do this through the production of identification documents. This is not always possible in some emerging markets. We recommend that international regulators look at ways of protecting markets from criminal activity while allowing business to operate without undue hindrance. 

It is matter of public record that correspondent banking relationships and trade finance are being inhibited by anti- money laundering and conduct rules. We call for an assessment of the impact of these global rules to see whether action can be taken to improve their operation – while acknowledging it is difficult to get the balance right between proper law enforcement and legitimate business activities in these areas. 

Meanwhile, a survey by the B20 and feedback from market participants indicates the combination of new prudential reforms and existing conduct rules can restrict the provision finance in areas like lending to SMEs, the provision of correspondent banking services and the transfer of remittances.

In summary, the B20 makes three central recommendations: 

• Complete the outstanding work on capital requirements, the enhanced capital for global systemically important banks, improve regulation of shadow banking activities and make derivatives markets fairer. That’s the key reform agenda that the G20 wants completed this year and we strongly support this. 

• Better processes for international rule setters. Processes that are more consultative with business and other groups. That way we will get quicker buy in and faster and smoother implementation by countries. 

• International rule makers should keep monitoring their work to make sure the rules are working as intended and unnecessary impediments to business are removed.  We want stripped away unnecessary or ineffective regulation, freeing up business to create growth.