Speech by Greg Medcraft, Director of Financial and Enterprise Affairs, OECD, at the 2020 Eurofi Annual Financial Services Policy Summit, 5 November 2020
Good afternoon ladies and gentlemen, and thank you Chairman for your remarks on the opportunities and challenges for financial markets.
Where I stand on this topic is clear: international convergence of effective and efficient financial regulation is important for two reasons:
- First, global convergence is vital to reduce the potential for regulatory arbitrage that contributes to destabilising cross-border contagion.
- Second, as global standards have proven effective in fostering deep well‑functioning markets and financial intermediation within and across borders, more is needed in innovative areas of finance to ensure that markets continue to support sustainable and inclusive economic growth.
How to get this balance right will be the theme of my discussion today, and my remarks will serve to:
- Provide a global perspective on how far supervisory and regulatory convergence has come;
- Identify key challenges that remain in the reform agenda, and;
- Suggest what more can be done to shape global regulatory policies in light of innovations in fintech and sustainable finance.
1. On the global perspective, substantial progress has been made to address major faultlines, but more needs to be done to get the balance right.
- Since the global financial crisis, regulatory reforms in bank and non‑bank financial intermediationhave made these activities more resilient to the materialisation of systemic risks:
- For example, in the banking sector, this includes higher capital and liquidity requirements combined with additional risk management for ‘Too-Big-To-Fail’ institutions.
- In non-bank financial intermediation, guidelines and measures for investment and money market funds, as well as stronger securitisation regulation has helped reduce the tendency of shocks to elevate to cross-border contagion.
2. However, implementation remains unfinished.
- At a global level, G20 financial reforms remain in progress for at least two reasons:
- First, implementation has occurred at different paces.
- While FSB members have agreed to allow much more flexibility on implementation during the crisis, progress will need to be more even across nations to enhance global financial resilience and reduce opportunities for regulatory arbitrage.
- Second, implementation of some reforms have led to unintended consequencesthat may have made parts of the system less resilient or agile with respect to financial intermediation.
- For example, capital and liquidity requirements in local markets have contributed to market fragmentation.
- At a regional level, much like the G20 - European financial markets have made progress to improve market integration and regulatory convergence, yet convergence is needed to reap the benefits of deep, well‑functioning markets for sustainable and resilient growth.
- As such, the work towards a Capital Markets Union in Europe is more relevant than ever, as unprecedented government intervention to support business and households affected by Covid-19 will need to be replaced by markets, alongside banks, to ensure a durable Exit.
- To further facilitate this, a range of market participants [from brokers, asset managers, to private equity] would benefit from a convergence of regulation across EU capital markets.
- What is concerning beyond fragmentation, is that banking systems can be subsidised by low policy rates and lack of competition, which can undermine the competitive environment for market-based intermediation.
3. On what more can be done, we need to get the balance right to ensure financial policies mitigate stability risks while fostering dynamic financial systems that support sustainable economic growth.
- I would like to highlight three elements: 1. Relevant OECD principles and frameworks; 2. convergence related to FinTech, and; 3. convergence related to sustainable finance.
- First, the OECD has a number of principles and frameworks that can help guide regulatory convergence at the global level. For example:
- The OECD Codes of the Liberalisation of Capital Movements help reduce market fragmentation while allowing countries flexibility to use macroprudential tools, when needed, that may temporarily impact capital flows.
- Also, for financial systems, our Policy Framework for Effective and Efficient Financial Regulation sets forth key principles to help policymakers ensure that regulatory tools are proportional to the risks.
- This is critical to ensure that financial systems are truly resilient and dynamic - not only to maintain financial stability, but to efficiently deliver ample financing and liquidity to support businesses of all sizes and economic growth.
- Moreover the Framework promotes open and competitive markets through the establishment of a level playing field.
- Second, on convergence related to Fintech.
- Financial technologies are an increasingly important driver of efficiency and competitive advantage in financial markets, contributing to productivity and economic growth.
- However, they also carry risks, given the global nature of fintech with incentives for regulatory arbitrage.
- Global convergence of principles and regulations will be important to ensure that the benefits from adoption of transformational technologies proliferate, while the risks to competition, stability, and investor protection are addressed by financial authorities across the world.
- Recently, the Financial Stability Board took swift action to address potential cross-border risks from global stablecoins to limit potentially destabilising regulatory arbitrage.
- At the same time, the FSB acknowledge that these recommendations do not address the full story, with a host of issues – from interoperability, competition, tax, financial consumer protection, and data privacy – yet to be addressed.
- Therefore, to further support this, the OECD has been contributing in several ways:
- First, we have published work that analyzes the benefits and risks of the tokenisation of assets, and more broadly the implications of the digitalisation of financial markets.
- Second, in the next year we will launch major policy work on data governance, including data privacy, mutual recognition and competition.
- Third, we are developing high-level principles to establish good practices for the use of blockchain with respect to interoperability, governance, compliance, and financial consumer protection, to support efficient and productive growth.
- Finally, on prospects for convergence related to sustainable finance and climate-related risks.
- Forms of sustainable finance -- namely ESG and financing the low carbon transition -- are increasingly shaping portfolio allocation in global financial markets.
- However, amid this phenomenal growth, practices and standards show the need for more policy work to ensure market resilience.
- On this, the OECD has published several studies on ESG, culminating recently in our 2020 flagship Business and Finance Outlook that shows:
- (i) strong growth in ESG Investing has encouraged a proliferation of disclosure frameworks, metrics, rating methodologies and investment approaches;
- (ii) currently, ESG practices vary so widely that they lack clear alignment with financial materiality, and there is little evidence that risk adjusted returns have kept pace over the past decade;
- (iii) Also, ESG practices lack clear alignment with societal values; for example, a number of highly rated ESG portfolios actually have higher total CO2 emissions and carbon intensity than traditional market‑weighted portfolios.
- Therefore, greater global coordination is needed to:
- Standardise ESG disclosure practices;
- Clearly align metrics with financial materiality, and;
- Ensure sufficient comparability of ESG methodologies.
- The OECD Committee on Financial Markets has developed high‑level considerations and is already engaging with global financial stakeholders to set principles and good practices for regulators, stock exchanges, issuers and investors alike.
- On climate transition, the proliferation of investment tools to support a transition to low carbon economies is entirely welcome.
- Yet, given the lack of verification processes or auditing to determine if climate transition plans are being met, international guidance may be needed to ensure the desired impact and to facilitate the broad-based shift to low-carbon activities.
- Importantly, despite legitimate regional differences in how climate policy should be regulated, it’s critical that common ground is found to ensure sufficient global regulatory convergence to support integrated global markets in sustainable finance.
In conclusion, the unprecedented efforts in global regulatory convergence have clearly helped make financial systems more resilient, including to withstand the current storm.
Yet, in the ways I’ve outlined today, regulatory convergence remains a work in progress, and could fall behind if we are under-preparing our systems for the emerging risks on the horizon.
Looking ahead, let us build on the current global coordination on Covid 19 to get ahead of the curve. If we can address existing gaps and strengthen practices regarding emerging activities and potential risks, financial systems will be much better suited to support resilient, sustainable growth for decades to come.