Sunday, November 16, 2014

G20 Summit Review - Gunboats and Koala Bears

The G20 wraps up another summit. This year the summit was somewhat overshadowed by all the uproar over the arrival of Russian warships and tense exchanges with Russian leader Putin. Also reports that Putin was leaving the summit early due to all the blowback surfaced, but were denied by Russia. So did anything impacting monetary system change take place. Let's take a look. Below are some articles on the summit with some quotes just below the links. Then a few comments. Finally a little video to recap the summit.


BBC News Australia - A Summary of the Summit

This article just gives a summary of the main talking points from the summit. The headline
is a global agreement to try and boost global GDP by 2% to create more jobs. Other issues mentioned were global tax avoidance and a vague statement about climate change. This article was as much about all the drama surrounding Russian leader Putin as anything else. AU - G20 Summit, Was it all Worth it?

This article discusses whether the summit will actually achieve much. It also lists the main bullet points of the "Brisbane Action Plan" which are listed just below.

GLOBAL GROWTH — Raising growth to deliver better living standards is the highest priority. Nations said recovery is slow but committed to working together to boost resilience and strengthen institutions.
LIFT GDP — They announced a target to lift GDP by 2 per cent by 2018 for all the G20 nations. This is expected to add more than US$2 trillion to the global economy.
INFRASTRUCTURE — Create a Global Infrastructure Initiative to lift investment and match investors with projects. It will also include a hub based in Sydney.
TRADE — To lower costs of trade, reduce regulatory burdens and promote competition and innovation.
PARTICIPATION — Reduce the gap in participation rates between men and women in the workforce by 25 per cent by 2025.
YOUTH UNEMPLOYMENT — Create plans to get more youth in jobs and encourage entrepreneurship and apprentices.
POVERTY — Lifting investment in food supply systems and increase income inequality and jobs.
FINANCIAL SYSTEMS — Strengthen financial systems by making derivatives markets safer, delivering a framework on shadow banking and implementing regulatory reforms.
INSTITUTIONS — Strengthen institutions to represent emerging economies and ensure the IMF is well resourced. Create a strong trading system through bilateral and regional agreements to deliver growth and jobs.
ENERGY — Improve efficiency of energy markets and access to energy for those who don’t have it. Support effective action on climate change and work to create a global agreement in Paris in 2015.
EBOLA — Call on international institutions to assist countries in dealing with economic impacts and have “committed to do all we can to contain and respond to this crisis’.
My addded comment: Time will tell if the above is just a list of lofty talking points or some results are actually achieved. For example, it is not clear how the G20 will insure that a gap in the labor force between men and women will be reduced by 25% by the year 2025. Also, the IMF reforms mentioned yet again in the "Institutions" bullet point don't appear likely to happen any time soon as another example. The G20 says if the US Congress fails to pass them, the IMF should proceed ahead with other options without giving any idea what that means.

The Guardian - Final G20 Communique lists 800 measures for Growth

This article goes more into detail on the official communique. It also points out the "high degree of uncertainty" in quantifying the actual impact of these policies. Each country has to implement them and the outcome is uncertain as to how many will really be implemented and how effective they will be.

My added comments:

Before the summit Bloomberg ran an article which we noted here quoting a Zero Hedge article that said the G20 would announce new banking rules that would leave regular bank accounts in excess of FDIC protected amounts ($250,000) unprotected if a bank went into bankruptcy. This article in the Examiner also appeared on this topic also citing the Zero Hedge article. 

Here is the actual G20 Summit communique they issued. There is no direct mention of these banking rule changes in this document. There is however a reference to a report from the Financial Stability Board (FSB) attached to the communique with a link at the bottom.

The G20 communique says " We welcome the Financial Stability Board (FSB) proposal as set out in the Annex requiring global systemically important banks to hold additional loss absorbing capacity that would further protect taxpayers if these banks fail."

The link to the FSB report mentioned above (in the annex) is provided at the bottom of the G20 Summit Communique and you can go to it by clicking here. This is a very long and somewhat hard to read report for the average person. However, my take on it is that they want to impose new rules on banks that force them to hold a certain amount of capital at all times to be used in case the bank suffers sudden unexpected losses (what they call TLAC). 

This loss reserve capital is defined in the report as to what can be included in it. Basically it appears they want banks to issue long term bonds to raise this capital (I don't want to own any of these bonds). On page 16 of the FSB report linked above, they state that "insured deposits" should not be used as part of this reserve bank capital to cover losses

However, there is nothing suggesting that "uninsured deposits" are protected. In addition, earlier in the FSB report on page 7 they state:

"TLAC (the capital reserved for losses) should consist only of liabilities that can be effectively written down or converted into equity during resolution of a bank without disrupting the provision of critical functions or giving rise to material risk of successful legal challenge or compensation claims. To this end, the FSB term sheet proposes a set of specific criteria that liabilities must meet to be eligible as TLAC (see sections 8 to17 of the term sheet). However, recognizing that losses in resolution may exceed a banks TLAC, liabilities that are not eligible as TLAC or that are not included in a  banks TLAC remain subject to potential exposure to loss in resolution, in accordance with the applicable resolution law.' 

Here is my interpretation of the above paragraph. Banks should not include insured bank account deposits in their so called "TLAC" (as stated on page 16). The TLAC is the capital reserves to be used to offset losses if the bank gets into trouble. However, see the part in bold above from page 7. Even liabilities that are not included in the TLAC of the bank are "subject to potential exposure to loss in resolution, in accordance with the applicable resolution law".

My bottom line take on all this: 

Under these proposed rules by the FSB (endorsed by the G20 Communique), if your bank goes under, your bank account deposit should be protected for any insured amount. But any amount above the insured limit is not protected. However, even the insured amount could be subject to losses if a bank goes under depending on the "applicable resolution law". One assumes that in the US the "applicable resolution law" would protect insured deposits. But in a crisis, who knows what the prevailing "applicable resolution law" might be at that time.

It is also interesting that this report is basically buried in the official G20 Summit Communique with very little fanfare or attention given to it. You have to work hard to find it. Once you do find it, it is hard to read if you are the average person. But the average person could certainly be impacted by how these rules might be implemented if a banking crisis does happen and their bank goes under.

Update 11-17-14: I ran across this article written by former Kremlin adviser Alexander Nekrassov and published in Aljazeera if you want to read a Russian view of what happened at the G20 summit. 

Finally a fun video to summarize the Brisbane G20 Summit
(we'll call it Gunboat and Koala Bear Diplomacy)

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