Washington D.C., April 15, 2010 — The Institute of International Finance called on the Finance Ministers and Central Bank Governors, who will be meeting in Washington DC next week in the forum of the Group of 20 and in the International Monetary and Financial Committee (IMFC), to recommit to international coordination of economic policy and financial regulatory reform in order to secure economic recovery and strengthen the financial system.

IIF Managing Director Charles Dallara stated to the officials that the emergence of the G-20 Summit process as the premier forum for international economic cooperation has provided new energy at a critical moment for the global economy. He said, "While recent developments have strengthened the near-term economic outlook, there are risks to the durability of the recovery, and these are compounded by signs that the spirit of unity in addressing global challenges may be waning. Accordingly, next week's meetings pose a test for the G-20 of its continued willingness to pursue the high road of global economic and regulatory coordination."

The IIF, which is the leading global association of financial institutions with over 390 members headquartered in over 70 countries, called on the G-20 officials to commit to reform financial regulatory, supervisory, and accounting standards in order to lessen the risk of future financial crises, while preserving and reinforcing the financial sector's contributions to investment, innovation, and job creation.

Highlighting the economic policy themes of the IIF's letter, William R. Rhodes, First Vice Chairman of the IIF Board of Directors, and Senior Vice Chairman of Citigroup and Citibank, stated at a press conference: "The G-20 officials need to formulate a coordinated approach to dealing with the complex challenge of deciding how to withdraw emergency fiscal, monetary, and financial support measures without derailing the emerging recovery. Premature action on withdrawing stimulus as we saw in the 1930s can prolong the hardship of high unemployment, but delays in formulating strategies to address the large fiscal deficits can undermine confidence, generate market uncertainties and endanger growth prospects. The markets have been clear already in expressing their concerns about fiscal sustainability. In addition, high unemployment is feeding pressures for trade and financial protectionism and it is important that the G-20 both move to rollback protectionist measures and complete outstanding free trade agreements. Increased protectionism should not be the legacy of the the Great Recession."

Strengthening the Financial System and Reducing the Risk of Future Crises

Mr. Dallara noted at the press conference that the main elements of the regulatory reform proposals highlighted in Pittsburgh included increases in the overall level and quality of required capital, better management of liquidity risk, constraining leverage, and systemic issues related to large, global financial institutions. He said, "Broadly, the IIF and its members believe that the Pittsburgh Summit roadmap was-”and remains-”a sound overall approach. Nevertheless, we are increasingly concerned about the way the G-20 plan is being carried out. Our concerns fall in two broad areas: risks of fragmentation, and the potential impact on credit flows, growth, and employment."

The IIF said progress toward international agreement on a coherent set of regulatory standards risks being disrupted by uncoordinated proposals from individual jurisdictions that do not fit comfortably into the G-20 road map, such as, financial transactions taxes, ring-fencing liquidity, and restrictions on certain lines of business. These proposals introduce further uncertainty about the prospects for regulatory reform and add to the challenges financial institutions face in raising capital. "We urge a renewed focus by financial officials and regulatory authorities on a clear and integrated set of regulatory reform proposals, designed to establish a global and consistent level playing field for financial institutions, pulling away from regulatory fragmentation," said Mr. Dallara.

Further, the IIF called on the Financial Stability Board and the Basel Committee on Banking Supervision to intensify their already strong efforts to ensure that there is a coherent overall framework that ties together the key areas of regulatory reform. It emphasized that it will be important to have an assessment of the overall costs and benefits of reform proposals prior to their finalization. Initial findings of an IIF study are sobering. They suggest that, even in a scenario reflecting only the main Basel Committee proposals and no other national initiatives, there would be a significant adverse impact on unemployment and growth in the U.S. extending over several years; a more substantial effect is likely in the Euro-area, reflecting the greater relative importance of banks in the region's economy; and, there will be material effects on Japan and on emerging markets. Mr. Dallara said, "The impact worldwide would be exacerbated by regulatory changes that go beyond the core Basel proposals. These considerations underscore the importance of finding the right balance."

Mr. Rhodes stated, "There is also a pressing need to bring about harmonization of international accounting standards on the timetable set by the G-20. Additional uncertainty is being created by the failure so far of the accounting standard-setting bodies, the IASB and FASB, to agree on crucial issues such as provisioning for loan losses. The G-20 should continue pressing for global convergence on a single set of high-quality standards."

With regard to current discussions on large, global financial institutions, the IIF stressed that what is clear is that a new system is needed in which no financial institution should be considered too big to fail, and the taxpayer is protected. It noted that measures need to be developed that enable governments to let any financial institution close when it is no longer viable, without posing risks to systemic stability. The IIF stressed that officials should vigorously support a serious concerted effort to address this very complex issue, based on a globally-agreed framework for cross-border resolution. The financial industry is willing to engage with the official sector in the search for appropriate solutions.

Policies for balanced and sustainable global growth

On macroeconomic policy, the IIF emphasized the importance of balancing the growth impetus from the public and private sectors. It said the recent measures by the Greek authorities to restore fiscal sustainability, supported by the European Union and the international community, are an important positive step. It noted there is a broad lesson here for other mature market economies on the importance of timely and credible strategies to rein in structural fiscal deficits, while also addressing the near-term challenge of withdrawing emergency fiscal and monetary stimulus.

The IIF's letter pointed out that while the required mix of macroeconomic, exchange rate, and structural measures will differ across countries, global policy coordination could play a crucial role in promoting the reduction of global imbalances while sustaining economic growth. Mr. Dallara said, "To strengthen efforts to negotiate potentially-difficult tradeoffs among key players, the G-20 should consider establishing a coordinating body that would carry this issue forward on behalf of the entire group."

Mr. Dallara explained, "Such a Global Macroeconomic Coordinating Council of no more than 10 countries could be composed of Heads of State that, with the support of the IMF and other international organizations, would assess the need for policy changes, recommend remedial measures, monitor their implementation, and report regularly to the full G-20 Summit for appropriate follow-up action. This should make it possible to combine a more agile process for agreement on policy changes with the enhanced legitimacy of the G-20 in adopting the resulting strategy for balanced and sustainable growth."

Mr. Rhodes stressed that, "Emerging markets in general have been less affected by the crisis and many have benefited from following prudent policies. Nevertheless, a number of emerging markets are grappling with the challenges posed by overheating and strong capital inflows. A significant rise in capital inflows over 2009 in now in prospect for this year and a robust volume is also most likely in 2011."

In a new report today, the IIF today projected net private capital flows to emerging markets this year to total of $708.6 billion, up from $ $530.8 billion in 2009, and it forecast a volume of $746.4 billion in 2011. The IIF's estimates for both 2010 and 2011 are modestly below those released by the Institute in January of this year (by $13 billion and $52 billion, respectively).

The IIF commented on the relatively modest further rise in 2011 over the 2010 total. This reflects a variety of considerations including the taking stock of the rapid 2009 rise in asset valuations, some market concerns about capital controls, lack of strong emerging market corporate external borrowing needs given substantial domestic liquidity, the continuing de-leveraging mode of financial institutions in mature industrial economies, and the overall weakness in global investment spending relative to its pre-crisis peak.