On October 10, 2013, more than 200 leading financial and economic leaders gathered together for the Bretton Woods Committee’s 30th Anniversary International Council Meeting to explore the Road to Financial Stability and Economic Growth.
As the world marks five years since the economic collapse of 2008, a shared roadmap to lead the global community toward its desired destination –systemic and economic stability – remains elusive. Economic, regulatory, and financial sector reforms are progressing, but may be taking divergent paths. Leaders considered whether the actions and incentives driving monetary and fiscal policies, regulatory reforms, and financial market participants are sufficiently aligned to sustain global growth.
The program began with International Monetary Fund (IMF) Managing Director Christine Lagarde discussing what the Fund characterizes as “great transitions,” including the shifting patterns of economic growth between advanced, emerging, and developing markets and the reforms being implemented across the financial sector. She also shared her perspectives on regional and national priorities, urging the U.S. to first rectify its fiscal uncertainty and then manage the smooth tapering of unconventional monetary policies in the medium term, despite the global implications. She also urged progress on banking union for the Euro zone and a focus on structural reforms in Japan, and indicated that emerging market economies need to prepare to “brave the coming storm” from the withdrawal of aggressive stimulus in advanced economies.
Raghuram Rajan, newly appointed Governor of the Reserve Bank of India, and Tharman Shanmugaratnam, Deputy Prime Minister and Minister of Finance for Singapore, discussed the global recovery and its implications for emerging markets. Moderated by Gillian Tett of the Financial Times, the discussion centered on how emerging market countries can prepare to weather the volatility of “outsized capital flows.” Minister Tharman highlighted that moral hazard is now globalized as a result of large scale unconventional monetary policies in advanced countries and suggested that the IMF’s Flexible Credit Line could prove a useful tool. Governor Rajan stated that India deserves the media attention it is getting both for its strengths and its challenges; but, he urged markets to focus on India’s fundamentals, including its improving debt situation and the fact that it is embarking on financial sector reforms, deepening financial markets, and providing support to underserved populations. He stressed that India would neither need nor accept bailout funds from the IMF.
Next, Bretton Woods Committee Co-Chair James Wolfensohn interviewed Daniel Tarullo, Governor of the U.S. Federal Reserve System, about the state of U.S. and global financial reforms. Governor Tarullo cited a good deal of progress made toward the global financial regulatory reform agenda, while urging further progress on cross-border resolution issues, as well as in short-term wholesale funding markets. He stressed the need to fully integrate new Financial Stability Board (FSB) members into global regulatory committees and to ensure that members continue to have the opportunity to engage together informally through fora such as the FSB, in order to speak more candidly about pressing international issues. He noted that - through effective communication – global regulatory bodies can improve global governance and avoid the potential for overlapping or duplicative efforts.
In the first of two late afternoon panels, Fahad Almubarak, Governor of the Saudi Arabian Monetary Authority, Colm Kelleher, Chairman of Morgan Stanley International, Haruhiko Kuroda, Governor of the Bank of Japan, and Sir David Walker, Chairman of Barclays, along with moderator Guillermo Ortiz, Chairman of Grupo Financiero Banorte, considered the choices shaping the future of the global economy. Governor Kuroda discussed Japan’s 15 year struggle with deflation and how the Bank of Japan’s distinctive “Quantitative and Qualitative Easing (QQE)” approach will increase inflation to the global target by imparting strong and clear signals that Japan will overcome its deflationary environment. Governor Almubarak urged continued implementation of Basel III reforms and greater international cooperation, recognizing that price stability alone is not sufficient for financial stability. Chairman Walker echoed Governor Almubarak’s sentiment and called attention to two issues straining the financial system: the capacity of major banks affected by the myriad of accounting practices and regulatory definitions and the issue of financial fragmentation, which has trapped capital and limited broader efforts among global policymakers to promote sustainable and balanced growth. Chairman Kelleher was encouraged that financial reforms have helped ensure that the pre-crisis banking model of “risk and leverage” has been replaced with a model based on “risk-adjusted returns,” but was concerned that the inconsistencies across regulatory jurisdictions were taking their toll on financial companies and the functioning of markets. He noted that lending between banks and corporations in Europe was at its lowest point since 2008.
The meeting drew to a close with a lively panel discussion on the impact of financial reform on the real economy, moderated by Nouriel Roubini, Chairman of Roubini Global Economics, and featuring speakers Mohamed El-Erian, CEO and co-CIO of PIMCO, Stefan Ingves, Governor of Sveriges Riksbank and Chair of the Basel Committee on Banking Supervision, and Brian Moynihan, CEO of Bank of America. Throughout the conversation, all three speakers agreed that decent progress had been made to address several big systemic risks – primarily through increased capital and liquidity buffers – and felt the U.S. stress tests have proven important for restoring confidence in the banking sector. At the same time, they expressed concern about future volatility when the United States begins paring back its aggressive fiscal stimulus. “Emerging markets aren’t back to the old days,” El-Erian said. “When you have the supplier of the global reserve currency, the deepest, most predictive for financial markets, being subject to the sort of political issues they are subject to today, you will impart that instability.”
The Committee is grateful to the following organizations for their generous support of this event: