Thank you for the invitation to speak to this summit about the critical work Australia is undertaking through its Presidency of the G20 this year.
Obviously, things have changed a great deal since I was here just over twelve months ago as Opposition Treasury spokesman. None the least there have been significant changes in the global economy, the investment environment and in the geopolitical landscape.
The world is different and so is the need for appropriate policy responses.
This year the G20 Finance Ministers and Central Bank Governors have changed the direction of their discussions. We are now more focused on delivering jobs and growth.
Almost six months ago at our first meeting in Sydney, the G20 was able to agree on an unprecedented ambition to boost global growth by an additional two per cent by 2018. Commentators and critics were skeptical about putting a number on our collective ambitions but, the agreement was made.
The changes in the economy over the last few months have made the job harder but it has not diminished our collective resolve.
In fact, in discussions with fellow finance ministers, it has become clear that the depth of determination to earn growth through new policy reform is more necessary now than ever.
Whether we reach the two per cent or not – the G20 is committed to promoting further growth and to creating more jobs.
We must recognise however that fiscal stimulus has, in many cases, reached the limits of its manageable capacity.
We must also recognise that there is, in the main, limited capacity for monetary stimulus as well.
So growth over the longer term must be earnt through policy reforms such as deregulation of trade and labour markets, fairer competition policy and tax and trade reform.
The first priority is to meet head on the existing demand for new and upgraded infrastructure.
Given that governments simply do not have the budgetary capacity to match the massive demand for new capital, we must turn to the private sector to fire up its enormous cash reserves to fund new investment in roads, rail, ports and energy and water production.
This partnership will help to create millions of new jobs and will boost the productive capacity of the global economy.
The second priority we have is to apply the principle that multinational companies pay tax where they earn their income.
We are determined to improve the integrity of the global tax system by addressing the erosion of our collective tax base through work undertaken by the OECD. In addition we are supporting a Common Reporting Standard for the automatic exchange of financial information.
So that no country is left behind, we will all work together to help emerging economies with their participation in these initiatives.
Ladies and Gentlemen, it will be some time until we have a benign economic environment in which to implement reform.
Just last night the OECD released downgraded growth forecasts for a number of countries, including the United States, Japan, France and Germany, as well as the Euro area.
At the same time, and consistent with the G20s 2 per cent growth ambition, the OECD noted that structural reforms are essential for strong and sustainable growth.
In its concluding remark, the OECD said:
“The continued failure of the global economy to generate strong, balanced and inclusive growth underlines the urgency of ambitious reform efforts.” (OECD Interim Economic Assessment Sept 15 2004.)
Well, we all agree.
To address a matter close to the collective hearts of this audience, I will today address the lingering and essentially unresolved issues relating to financial sector reform and stability.
Because of the ongoing potential impact of financial instability, the G20 continues to prioritise its work on financial regulation.
The G20’s financial regulation agenda, driven by the Financial Stability Board (FSB), is critical in addressing the fault lines revealed by the global financial system.
Let’s not forget the major disruption which we experienced in 2008 which led to the global financial crisis. It led to the unpopular but necessary need for many governments to bail out financial institutions using tax payer funds.
In response the FSB, along with other standard setting bodies such as the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions, has set about executing the mandate we set.
Our focus in the G20 this year has been to bring to completion the priority 2008 policy initiatives that remain unresolved.
Building resilient financial institutions
As a result of previous decisions, banks are now generally better capitalised.
Through Basel III strong liquidity arrangements are in place and an agreement has been reached on a backstop to prevent the build-up of excessive leverage in the banking system (leverage ratio).
Together, new capital and liquidity requirements will make banks more resilient to short-term disruptions.
In the lead up to the G20 Leaders Meeting in Brisbane in November we are working to deliver consistency in the treatment of risk weightings applied to bank assets.
The Basel Committee will present a plan to help the market better understand how risk weightings are applied across jurisdictions.
In addition, the FSB will establish a backstop to better manage longer-term funding risks for banks (net stable funding ratio).
Ending too-big-to-fail
We have also identified global banks and insurers that are so large, complex and interconnected that their failure can cause significant dislocation in the financial system, disruption to the global economy and risk massive taxpayer losses.
We have applied additional capital requirements to 29 globally systemically important banks, and the FSB will be considering new proposals known as TLAC, or total loss absorbing capacity, which protect taxpayers from serious loss should these banks fail.
The FSB has also made good progress on a basic capital requirement for systemically important insurers, which will be presented to Leaders at the Brisbane Summit.
We will also finalise the process for how we identify other systemically important financial institutions such as finance companies and hedge funds, by the Brisbane Summit.
Address shadow banking risks
Our work has also focused on ensuring that shadow banks, that is entities that perform bank-like functions, do not become a new source of systemic risk.
Since 2008 we have developed a plan for regulating and monitoring this sector – this has involved careful scrutiny of securitisations, money market funds, banks’ exposure to the shadow banking sector and securities financing markets.
This is an area we will continue to look at closely given the possible risks associated with lending activity moving from the more heavily regulated banking sector to the shadow banking sector.
I should add, that there is recognition that more onerous regulation can drive more lending activity towards unregulated entities. We must be mindful that excessive regulation is the enemy of free capital flows.
Making derivatives markets safer
The financial crisis highlighted structural deficiencies in the over the counter derivatives market and the systemic risk it posed for the wider economy. Banks and other market participants in many cases did not know their own risk exposures, let alone those of their peers, and regulators did not have the information needed to re-establish trust between them.
Since 2008 we have progressed reforms to mitigate risks in these markets by improving transparency, and through greater use of collateralisation and central counterparties.
As the world continues to transition from the most acute phase of the Global Financial Crisis, our focus will naturally turn to the implementation, monitoring and impact assessment of these financial sector reforms.
This transition will be supported by two initiatives:
- Firstly, the FSB is consolidating its work on monitoring implementation and impacts of the reforms into an annual report – this will help assess the effectiveness of the reforms and determine whether any unintended consequences have emerged.
- Secondly the FSB and international standard setting bodies will outline their processes for policy development and post implementation reviews.
This is expected to enhance the community’s understanding of the work these bodies do and how they execute the mandates we have set them. It is expected that it will also help build and maintain support for their work by demonstrating the intense processes that they undertake.
Although growth is generally expected to strengthen in 2015, it is clear that decisive reforms are needed across G20 economies to boost potential output and help ensure that growth is more balanced.
This is why the importance of our efforts this year cannot be understated.
Come the Brisbane Summit, every G20 member will present a comprehensive listing of their new policy actions to lift growth and create jobs.
And the support and leadership of international organisations and engagement groups in the development of these products will make them all the more robust.
Ladies and gentlemen,
Meaningful reform is never easy.
Governments and regulatory agencies around the world are asking participants in the financial system to continue to deliver the change necessary to strengthen our capital flows.
This collective effort will make our markets more transparent and our banks more robust.
I am confident our meeting in Cairns in the next few days will continue the journey for reform.
As a result our communities will gain the very real benefit of more economic growth and more jobs.
Ultimately it is the only successful formula that delivers greater prosperity across the globe.