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UPDATED: October 24, 2011 NO. 43 OCTOBER 27, 2011
A Push for Economic Stability
G20 finance ministers reach consensus on stabilizing the banking system

MINISTERIAL EXCHANGE: Chinese Finance Minister Xie Xuren (left) is greeted by his French counterpart Francois Baroin at a meeting of the G20 finance ministers and central bank governors in Paris on October 15 (GAO JING)

Finance ministers and central bankers from the Group of 20 (G20) leading advanced and emerging economies issued a communiqué on October 15 after a meeting in Paris, their last meeting before the G20 Summit in Cannes.

The financial leaders stressed that the world economy faces growing downward risks, and more measures should be taken to maintain the stability of the banking system and financial markets to boost world economic recovery. Although they agreed to strengthen supervision over the financial industry, differences on other issues such as international monetary system reform remained.

Banking regulation

The meeting formed common views on the global economic situation and the evaluation of the European debt crisis, said Ren Dingqiu, a researcher with the Beijing Academy of Social Sciences. G20 finance ministers and central bank governors agreed on the general trend of the world economy. They pledged to encourage Europe's bigger bailout plan, strengthen supervision over the financial system and devise action plans to be submitted to the G20 Summit in Cannes in early November.

"We welcome the adoption of the ambitious reform of the European economic governance and the completion by the euro-area countries of the actions necessary to implement the decisions taken by the euro-area leaders on July 21 to increase the capacity and the flexibility of the European Financial Stability Facility (EFSF)," said the communiqué. "We look forward to further work to maximize the impact of the EFSF in order to address contagion."

The 440-billion-euro ($602.6 billion) EFSF fund is expected to comfort investors owning sovereign bonds of euro-zone countries caught in the sovereign debt crisis, so as to reach the goal of stabilizing global financial markets, said Ren.

G20 financial leaders agreed to "ensure that banks are adequately capitalized and have sufficient access to funding." European banks' solvency and liquidity are considered key elements to sustain the euro-zone debt test.

The communiqué also confirmed the enhanced role of central banks, saying that they "stand ready to provide liquidity" to commercial banks if required.

In early October, Dexia, the Franco-Belgian lender, became the first European bank to be split up after it failed to get short-term funding due to concerns over its exposure to Greek sovereign debt.

Wei Liang, an assistant research fellow with the Institute of World Economic Studies at the China Institutes of Contemporary International Relations, pointed out the European debt crisis has created possibilities for a crisis in the banking system. Banks of systemic importance, like Dexia, which own sovereign bonds of debt-ridden states, are particularly prone to the debt crisis.

Because these banks have maintained connections with many other banks, their troubles could easily infect banks cooperating with them. Many banks now refuse to provide loans to these banks. Since they cannot get financing from the market, banks with high exposure to sovereign debt may need to get assistance from governments or be reorganized by other banks.

"A possible banking system crisis will further devastate global financial markets," Wei said. So the G20 has required that banks of systemic importance increase their capital adequacy ratio to prevent such a crisis.

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