Implications: A major focus was the future of financial regulation and the scope of agreements in this area is wide-ranging. However, much of the fine print and scheduling remains vague and some areas of disagreement had to be glossed over.

Outlook: The Pittsburgh summit achieved enough to bolster confidence about the sustainability of the global economic recovery, but there is still clearly a danger that complacency will set in and undermine reform momentum.

Showing Resolve

After wrapping up business at the UN General Assembly in New York, key world leaders moved onto the one-time heart of the United States' steel industry, Pittsburgh, for the Group of 20 (G20) Summit. This was arranged as a follow-up to the summit held in London in April 2009 and focused on the world economy. Since April, recovery has thankfully taken root, but leaders were keen to show that they have not forgotten the lessons of the crisis. The latter took hold around a year ago when the U.S. financial system suffered profound instability in the wake of the collapse of investment banking giant Lehman Brothers. This sent shockwaves round the world and showed how far-reaching the effects of the U.S. sub-prime meltdown were. The crisis showed that financial risk-monitoring was inadequate and that many lenders had behaved irresponsibly. Leaders consequently sought in Pittsburgh to agree on a new financial regulation framework (see below for more), but they were also there to discuss how to keep the economic recovery on track. There were pledges to rethink economic policies in a co-ordinated fashion and address key imbalances. These are most evident when one compares the export dependence of the likes of China and the debt-laden import reliance of the likes of the United States. The G20 leaders acknowledged that the current situation is creating dangerous stresses and that policy changes are required on all sides. U.S. President Barack Obama emerged from the summit upbeat: “We have achieved a level of tangible, global economic co-operation that we’ve never seen before."

The economic policy commitments are unsurprisingly light on specifics, but key goals for the United States will include increasing its savings rate, decreasing its trade deficit and narrowing its budget deficit. The likes of China, Japan and Germany are expected to reduce their export dependence by stimulating more domestic consumer spending and investment. These ideas are nothing new, but importantly governments have now agreed to "peer review" by fellow G20 members and the International Monetary Fund (IMF). This is a big step given the sensitivity many governments have about outside criticism. Another broad economic agreement was to revive efforts to wrap up the troubled Doha Round of multilateral trade negotiations by the end of 2010. This is promising talk, but negotiations have shown that leading countries remain stubborn on key issues such as agricultural support. There is also scepticism about the current U.S. administration's commitment to free trade. Finally, leaders agreed to keep their emergency economic support in place until sustainable recovery is assured. This rather vague commitment does not answer the burning questions the markets have about when interest rates will start rising.

Re-Regulating the Financial System

The need for new measures to strengthen international co-ordination and regulation of the financial system was one of the principal conclusions of the G20 summit held in April 2009. Responsibility for this task was given to the newly-established Financial Stability Board (FSB). Since then, momentum in favour of further action has been building, although the extent and nature of what steps need to be taken has become a controversial political question. The G20 Summit in Pittsburgh last week agreed to support a programme of new rules developed by the FSB, which include the following:

• Strengthening the global capital framework for banks. New rules will be set out by end-2009, calibrated in 2010 and phased in as financial conditions improve and recovery is assured.
• Making global liquidity more robust. A new minimum global liquidity standard for banks will be issued by end-2009 and measures that could mitigate cross-border liquidity problems at a national level will be reviewed. (Measures governing liquidity and capital are expected to be a source of contention and may impede early implementation of any agreement.)
• Reducing the moral hazard posed by systemically important institutions. Measures will be developed over the next 12 months that can be taken to reduce the systemic risks that these institutions pose. (This includes the development of so-called "living wills" by means of which banks would be forced to stipulate in advance how their operations could be wound down in a crisis and how their assets might be distributed. It is hoped that such clarity and preparation might help to avoid a repeat of the disruption that followed the collapse of Lehman Brothers last autumn.)
• Strengthening accounting standards. Further work is encouraged to improve standards on valuation and provisioning, and to achieve a single set of high-quality global accounting standards.
• Improving compensation practices. The FSB recommends that a ‘"substantial proportion" (at least 50%) of bankers’ salaries should be deferred for at least three years, subject to potential claw-back in the event of future poor performance.
• Expanding oversight of the financial system. Work is progressing to ensure that all systemically important activity is subjected to appropriate oversight and regulation, including relating to hedge funds and credit rating agencies.
• Strengthening the robustness of the Over-the-Counter (OTC) derivatives market. Standards will be strengthened and consistently applied to address systemic risks, including covering capital requirements to reflect the risks of OTC derivatives and further incentivise the move to central counterparties and, where appropriate, organised exchanges.
• Re-launching securitisation on a sound basis. The official sector must provide the framework that ensures discipline in the securitisation market as it revives.
• Promoting adherence to international standards. The FSB is developing a system of peer reviews of regulatory and prudential standards and of policies agreed in the FSB.

The Board states that much has already been achieved and much is under way that, when implemented, will create a more disciplined and less pro-cyclical financial system that better supports balanced, sustainable economic growth. However, policy development is not complete and detailed implementation of the full set of needed reforms will take time and perseverance, according to the FSB.

G20 Succeeds G7/8

In future, the G20 will become the premier forum for discussion among leading economic powers, superseding the Group of 7/8. This helps mollify big emerging markets who felt they should have a seat at the table; indeed, it made little sense to discuss the global economy without the likes of China and India present. However, there is some concern that the forum is becoming too big for the kind of informal bonding for which the G7/8 was prized. The G20 comprises the old G7 (United States, United Kingdom, France, Canada, Italy, Germany and Japan) and Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia (which was already in the G8), Saudi Arabia, South Africa, South Korea and Turkey. The G7/8 members will still get together for security-focused summits, but this is now portrayed as a sub-group of the G20. The growing influence of fast-industrialising economies was also reflected in agreements to give them a greater share of voting at the International Monetary Fund (IMF) and the World Bank. States in Asia have complained that their clout in these institutions has not kept up with their financial contributions.

Protest Arrests

Major economic summits have long been the focus of noisy protests and Pittsburgh was no exception. Some 110 people were arrested on 25 September 2009, many of them students from the University of Pittsburgh. Police used pepper spray and smoke canisters to disperse crowds, as they did the previous night. The protests were not as large or as disruptive as those seen in London or at other recent summits, however. Total numbers at each protest registered at most in the low thousands, according to the authorities, and were focused in the streets close to the university, with only the occasional violent clash with police officers. There were also peaceful daytime marches, with numerous themes in evidence, ranging from Tibet to Palestine and corporate greed.

Outlook and Implications

The Pittsburgh summit produced some wide-ranging agreements and strong commitments (particularly on financial regulation), but the vagueness of many of the proposals and the timetabling are cause for some concern. Banks are anxious about how the financial reform commitments will be translated in practice. It is clear that different countries have different priorities on this front. For example, the United States has pressed for global rules on leverage as a determinant of capital adequacy, whereas France and Germany want capital to be assessed under the risk-weighted rules of the Basel II guidelines. The outlook is further clouded by imminent elections in a number of countries and political pressure for more radical action focused on more populist issues, such as bankers' bonuses.

The focus of global economic diplomacy moves next month to the IMF meetings in Istanbul (Turkey), then to a G20 finance ministers' meeting in Scotland in November 2009, before the crunch climate change summit in Copenhagen (Denmark) in December 2009. The next full G20 summit will be held in June 2010 in Canada, followed by November 2010 in South Korea.