Financial System (Desperately) Needs a Makeover, G30 Says
(February 11, 2013) — The Group of Thirty (G30), a policy group with members from both private and central banks, is urging G20 nations to address flaws of the financial system.
In the report, titled “Long-Term Finance and Economic Growth”, the industry body claims that major economies may need to raise almost $19 trillion in long-term investment funding by 2020, compared to just under $12 trillion in 2010. According to the group, the financing is needed for government and private sector infrastructure projects, education, research, housing and business expansion. The goal of the G30’s litany of recommendations is to address several issues ahead of the Group of 20 (G20) finance ministers’ meeting in Russia later this week.
“Far-reaching reforms in the international financial system will be needed to ensure that rising demands for long-term capital can be met efficiently,” said Jean-Claude Trichet, chairman of the Group of Thirty and former president of the European Central Bank, in a statement. He added: “The G30 landmark report…examines critical constraints on the supply of long-term finance and calls for reforms that can strengthen the flow of capital into long-term investments by governments, institutional and individual investors.” According to Trichet, fiscal consolidation, bank deleveraging, and the requirements of new banking regulations have created bleak prospects for long-term finance.
Others indicate that the regulatory environment must do a better job at ensuring that investors are better able to take a long-term horizon in their investment decisions. “We encourage the authorities to create new instruments to boost savings that can be channeled into long-term investments,” said Guillermo Ortiz, chairman of the Grupo Financiero Banorte of Mexico and the country’s former finance minister, who chaired the G30 steering committee that developed the report. “We are proposing approaches that strengthen the ability of the public sector to leverage private sector capital for long-term financing, including greater use of public-private partnerships and the creation of new dedicated long-term financing institutions. And, we explicitly address supporting the flow of cross-border capital, which is essential if emerging market economies are to raise sufficient long-term capital for their needs. For example, we anticipate that China alone will account for roughly half of the total increase in long-term capital in our sample of nine major economies by 2020.”
The group also notes that a wider range of instruments is needed, urging developing countries to forge ahead to set up capital markets in order to issue shares and other finance-raising instruments.
The G30 drew on research undertaken by the McKinsey Global Institute in its report. The institute found that long-term investment in nine major economies, which combine to account for over 60% of global GDP, totaled US $11.7 trillion in 2010. Annual demand on long-term investment in these countries—the United States, the United Kingdom, Germany, France, Japan, China, India, Brazil, and Mexico—could grow to around $18.8 trillion by 2020.
One way to encourage this long-term mindset, the report’s contributors say, is to have incentive pay for public pensions and sovereign wealth funds reconfigured to ensure a focus on longer-term returns. “Portfolio managers’ bonuses could be conditional on their performance over a defined period, for senior managers, a minimum of three years. This would support the goal of making smart medium-term asset allocation decisions in the context of a long-term investment horizons,” the G30 said.