Taskforces
Financing for Growth and Development

Financing for Growth and Development

Guillermo Ortiz

Guillermo Ortiz

Chairman of the Board of Directors, Grupo Financiero Banorte SA de CV, México

Peter Sands

Peter Sands

Group Chief Executive, Standard Chartered, United Kingdom

Members:

Agustín Coppel
Carlos Danel
Ignacio Deschamps
Stuart T. Gulliver
Piyush Gupta
Steve A. Kandarian
André Laboul
Dennis M. Nelly
Vikram Pandit
Baudouin Prot
Alfredo Sáenz Abad

The B20 Task Force on Financing Growth and Development has proposed five “Priority Actions for Los Cabos” to G20 stakeholders. The shared agenda for the business community and governments is to foster growth that promotes jobs and development. Finance is the oxygen of economic growth, and the core focus of the Task Force on Financing for Growth and Development is to make concrete recommendations on how the financial sector can support growth, job creation, and economic opportunity. With a particular focus on emerging markets, this task force has taken a broad view of financial inclusion, looking at widespread access to formal financial services by promoting existing access points, including public networks and government offices, as well as innovative distribution channels, including third-party correspondent and mobile-service providers, in addition to access to credit and banking services for individuals and micro, small, and medium enterprises (msmes). The task force has also developed specific recommendations on how to promote financial education in order to develop financial capabilities and a savings culture among un-/underbanked groups.
The recommendations of the task force call for the regulation of certain activities to be more reflective of their risk, for actions to reduce risk, and finally, for a degree of risk sharing between government and the private sector when it is necessary for growth or development. The financial-services sector will be able to meet the needs of the financially excluded and help foster economic growth and development if these recommendations are implemented.
Two of the ideas that provide a significant opportunity for G20 stakeholders to make real progress in financing growth and development are outlined below, along with the priority actions.

B20 TASK FORCE RECOMMENDATIONS, CONCRETE ACTIONS FOR LOS CABOS

B20 TASK FORCE PRIORITIZED RECOMMENDATIONS

Trade finance: The G20 should recognize the low-risk nature of trade-finance activity and the value it provides for emerging economies and take action to reverse the unintended consequences of the capital and liquidity treatment of trade finance.

Rationale

Trade finance has an important role to play in helping to facilitate global trade, economic growth, and job creation. Trade finance is a low-risk activity: using a dataset of 60 to 65 percent of traditional global tradefinance activity (worth about $2 trillion to $2.5 trillion), the International Chamber of Commerce found fewer than 3,000 defaults in the full dataset of 11.4 million transactions. In light of the global economic slowdown and the low-risk nature of trade finance, the G20 should reverse the unintended consequences of the capital and liquidity treatment of trade finance. Actions to overcome the unforeseen regulatory and real-economy impact on emerging markets should be taken.

Concrete Actions

· Identify actions that lead to a more appropriate regulatory regime for trade-finance activity.
· Address restrictions to trade-finance activity in revised regulatory rules, in particular Basel III and Basel II. More specifically:
- Capital: A waiver of the one-year maturity floor for trade loans and receivables and agreement that there should be a harmonized approach to implementation. Creation of a trade-specific asset-value correlation or risk curve and a harmonized approach to implementation
- Liquidity: A defined liquidity requirement for trade contingents (letters of credit and trade guarantees) based on data from the International Chamber of Commerce. Recognition of trade-finance inflows from corporate counterparties at 100 percent
- Leverage: A consistent credit conversion factor of 20 percent for medium-/ low-risk off-balance-sheet trade-finance exposures and 50 percent for medium-risk off-balance-sheet exposures for the purpose of the leverage ratio, as Basel has been applying since 1998 (Basel I), as well as under Basel II for certain trade contingents Immediate action to start process: Consult on specific changes to capital, liquidity, and leverage requirements for trade finance.

Timeline

Launch consultation before the end of 2012 to align any changes with Basel III implementation.

Commitment needed

· Individual companies to provide data and input where required (This task force commits to supporting this process and engaging with the Financial Stability Board and governments as they move the study forward.)
· The International Chamber of Commerce to help coordinate industry-wide data.
· Government support to commission the study; G20 countries to take the lead in identifying the restrictions and to take action to reduce impediments to global trade.
· Basel Committee on Banking Supervision consultation and engagement.

II. Financial inclusion (SME): The G20 should support efforts by all countries to increase SME finance through better provision of data on SME credit-risk guarantee programs and a unified national agency that promotes this segment.

Rationale

SMES are the lifeblood of the economy, and it is essential they are able to secure the credit they need. G20 leaders should support efforts by all countries to improve data on sme finance. In particular, bank access to credit data will help banks reduce the costs and increase the availability of credit. The creation of credit bureaus and the expansion of their data are essential steps in the development of effective credit markets and will help to 15 reduce the risks to the financial system. Insufficient data are available to evaluate sme credit risk despite the fact that smes employ around 75 percent of employees and contribute between 30 and 60 percent of gdp and 45 percent of net new wealth. According to McKinsey, the presence of a credit bureau decreases the percentage of msmes reporting constraints in financing from 49 percent to 27 percent, increases the chance of loans being granted from 28 percent to 40 percent, and cuts default rates from 2.2 percent to 1.3percent for large banks and from 2.4 percent to 0.5 percent for small banks. And there is significant room for improvement: currently, only 5 to 30 percent of msme borrowers are covered by credit bureaus.

Concrete actions

· Accelerate development of credit bureaus through traditional and new providers such as telcos, with a particular focus on sme data.
· Develop partial-guarantee schemes for sme finance and microfinance institutions, including support for rural supply chains.
· Identify single national public entities to coordinate all sme support in a country, including government support programs, funding, and guarantees for SMES. Information from this entity will support data creation for credit bureaus.
· Create a requirement for all credit providers to submit data to credit bureaus.

Immediate action to start process: Targets to be established and an implementation timetable agreed on

Timeline

· Set ambitious targets under the Mexican presidency and agree on an implementation timetable.
· Develop framework by end of 2012.
· Identify options throughout 2013.

Barriers to implementation

· There are difficulties in gathering data and a need for passage of national legislation.
· There is an up-front cost implication as well as a need for a new oversight body.
· Many organizations are involved with smes that will still need to be engaged.
· It is necessary to capture nonregulated financial entities in the reporting process so that data provision is complete.
· There needs to be a process of supervision to guarantee the quality of the information reported to credit bureaus.

Commitment needed

· Building this system will require the support of governments to develop credit bureaus, and of financial institutions and financial-literacy providers (that is, academic and private institutions) to promote their importance. This task force calls on the G20 countries to take the lead in establishing or strengthening credit bureaus, ensure that all financial institutions are reporting client data to the credit bureaus, take concrete steps to develop partial-guarantee schemes for sme finance, and then establish and champion this work.
· Federal and regional government, sme, and export-finance input will be needed to build this system. G20 countries can take the lead and look to business for support. This task force commits to supporting the actions outlined above, and to promoting credit bureaus across all the markets in which we are based. Where there is expertise to help build the system, this group will engage in consultation and provide input to the development process to ensure that the most effective system is implemented and to increase access to funding for smes and microenterprises to help establish credit histories for an un-/underbanked sector.

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