G-20 Renews Vow on Shadow Banking Amid Talk of China Risk

Global finance officials renewed their promise to address risks from unregulated lending and said their drive to end bailouts for large banks should be nearly finished this year.

Group of 20 finance ministers and central bank governors meeting in Sydney over the weekend said they are focused on “substantially completing” efforts to prevent lenders from becoming too big to fail and addressing the risks of shadow banking before a summit of the nations’ leaders in November.

In their communique, the officials included wording on shadow banking that was similar to language used in a G-20 declaration in September. The statement referred to “ending too-big-to-fail,” more assertive than the previous promise to make progress toward that goal.

Talks to coordinate financial regulations were overshadowed during the weekend by negotiations over an economic growth objective. The group agreed to target collective gross domestic product that’s more than 2 percent higher after five years than the trajectory implied by current policies.

Shadow banking, financial activity that occurs with little or no regulatory oversight, attracted attention in Sydney because of its role in China’s economy.

Chinese Stresses

Investors are focused on financial stresses in China after the near-default last month of a high-yield trust product. The bailout of Credit Equals Gold No. 1, distributed by the nation’s largest bank to its wealthy clients, averted what would have been the biggest default in a decade in the country’s $1.8 trillion market for trust products.

Chinese Finance Minister Lou Jiwei said shadow banking in his country is less risky than in western nations because it’s more closely linked with economic growth.

“Shadow banking in our country is still related to the real economy,” whereas in western economies products such as credit-default swaps are “far from real economic activities on the ground,” he told Bloomberg News in Sydney.

Unregulated lending poses “systemic risks” to the global financial system, according to the Financial Stability Board, the Basel, Switzerland-based body that’s responsible for strengthening global financial rules on behalf of the G-20.

U.S. Treasury Secretary Jacob J. Lew said Feb. 21 that he thought the size of the shadow-banking industry in China was manageable.

“We’ve seen China take steps over the last six months that show that they’re concerned about this and they’re not just going to let it continue to grow without any kind of oversight,” Lew said.

Lew’s Push

Lew has been pushing for global regulators to move more quickly on cross-border agreements on how to shut down failing banks.

“The failure to work out such arrangements now could pose a major future risk to our financial system,” Lew said in a letter to his G-20 colleagues before the weekend meeting.

European Union Economic and Monetary Affairs Commissioner Olli Rehn said Feb. 22 he expects Europe should reach an agreement by the end of next month on legislation to create a fund to handle failing euro-area banks.

“We may see some incremental improvements and we will conclude the work before the end of March” on the Single Resolution Mechanism bill, he said.

The European Parliament has been deadlocked on issues relating to the fund, including how it would be filled to its 55 billion-euro ($76 billion) capacity. The bank-failure legislation is the next phase of the EU’s banking union project, which begins when the ECB becomes the euro area’s single supervisor in November.

Tax Agreement

The G-20 also agreed to implement a global standard for automatically exchanging information between tax authorities by the end of next year, the Organization for Economic Cooperation and Development said.

The endorsement is a step toward putting an end to “banking secrecy as we know it,” Pascal Saint-Amans, director of the OECD’s center for tax policy and administration, told reporters yesterday in Sydney. A decision on the technology needed and detailed rules on how governments will swap tax data is likely to be made at a G-20 meeting in September, he said. The new standard would have countries automatically exchange information gathered from their financial institutions.

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