Resolving global regulatory polycrises

India’s G20 presidency coincides with “polycrises” (as described by the World Economic Forum), several of which manifested in the financial system in recent months. Brinkmanship over the US debt ceiling impacted global financial markets; and developed country bank collapses and emergent risks like crypto — while seemingly contained at present — could have systemic global reverberations.

Heightened nervousness in financial markets and concerns over governance, sustainable growth, stability of markets, and rapid technological evolution have global regulators on tenterhooks. Generative artificial intelligence (AI) and machine learning (ML) and their (mis)use mandate urgent reskilling of regulators and policy makers. The extant climate crises require significant investment of sustainable finance for mitigation, adaptation and resilience, currently constrained by a patchwork of taxonomies and international protocols.
 

India should seize the moment of its G20 presidency to address the root causes of the universal crises, so that global regulators act much before there is “blood in the Street”.

G20 must be the forum to upgrade international regulatory architecture, create capacity and establish a robust institutional mechanism for international regulatory cooperation to deal with fast-paced developments. This global imperative led by India would be a tangible legacy of its presidency through the establishment of an International Institute for Regulatory Development (IIRD).

Catalysing its intellectual and technological prowess concurrently and capitalising its global credibility, India must utilise the opportunity presented by the current fragility in financial markets, leaving an indelible footprint during its G20 presidency in an otherwise deeply fractured global polity.

Created in response to the 1990s financial crises, G20 emerged as the principal forum for coordinating international responses to the 2008 North Atlantic financial crisis. Common to these crises was that India remained relatively insulated, despite being globally integrated – reinforcing trust in and the credibility of Indian regulators and policy makers.

The present crisis demonstrates the global regulators’ tendency to “fight the last war” rather than anticipating and addressing newer risks. The blurring binaries between monetary policy and financial regulation were evident in SVB’s portfolio, which caused a digital bank run and a domino effect.

Extreme volatility of interest rates has international repercussions. Regulatory arbitrage across jurisdictions and divergent approaches to the resolution of the banking crisis all point to an urgency for a global forum on regulatory cooperation. The write-down of AT1 bonds in the recent resolution of a major Swiss bank raises cross-border issues on regulatory powers in resolution, contractual terms and their enforcement.

Emergent risks from crypto need global consensus on foundational issues around property rights, custody, transfer, valuation and use cases. Concerns around weak governance, regulatory supervision and crypto insolvency exponentially compound the risks for financial sector regulators. Each of these risks and technological developments defy sovereign boundaries and neat sectoral silos. IIRD could forge such consensus and enable institutional cooperation on issues that transcend geographical boundaries.

On climate finance, there is inconsistency in international taxonomy between the Task Force on Climate-related Financial Disclosures released by the Financial Stability Board (FSB) at the request of G20 leaders and those of the International Sustainability Standards Board. IIRD, under G20’s aegis, can forge a consensus on international taxonomy and alignment. Further, it could raise the issue of proportionate application of such standards to emerging economies and reframe guidelines to facilitate the flow of sustainable finance from developed to developing countries.

On technology, IIRD could provide a platform for the alignment of ethical approaches for Big Tech regulation across a range of themes (anti-trust and openness, content moderation, participation in finance) as well as minimising harms and maximising opportunities from emergent AI technologies.

IIRD can pre-empt the international ramification of domestic events, and accordingly proactively develop calibrated responses to manage adverse global impact. This is G20’s raison d’etre — fostering global cooperation, prompting collective action and creating capacity for a contemporary international regulatory architecture for global public good.

G20 represents the world's 20 largest economies and 90 per cent of global GDP. Polycrises demand that G20 and a platform like IIRD repair structural concerns with existing regulatory architecture. IIRD could provide the physical and cognitive infras­tructure to constantly update regulations with real-time information, thus minim­ising contagion risk. It would enhance the accountability and autonomy of regulators while preserving their sovereignty.

IIRD would build on the existing, qualified success of FSB, serving as an umbrella for regulators to facilitate systematic and sustained cooperation. It would address challenges facing financial, digital and other sectoral regulators. The purpose of IIRD would be to: (a) equip regulators on emergent risks and opportunities (b) make responses to crises proportionate; and be proactive rather than reactive; (c) frame well-drafted and harmonised international standards and regulations (d) achieve economies of scale and scope; (e) undertake global research and development; (f) upskill and re-skill global regulators to align them 

with fast-emerging risks; (g) renovate the global regulatory architecture and create capacity. Drafting of flawless regulations across regulatory institutions is a skill in short supply and will require constant embellishment.

IIRD, established under the aegis of G20 and FSB, will be a distinctive contribution from India during its presidency. India’s soft power and leadership on issues of digital public infrastructure and digital finance equip us for this role. India’s G20 presidency could solidify this leadership mantle by creating international regulations, being participative (involving emerging economies and the Global South), proactive, pre-emptive and proportional.

This is a unique opportunity to “tropicalise” regulatory framework incorporating emerging markets’ context, rather than transplanting them from Trans-Atlantic nations — hitherto the default in global regulatory development. Emerging economies look to India to take the lead in fostering a contemporary, equitable, inclusive and forward-looking global regulatory architecture that centres their realities as well. Time is of the essence.

Sunil Mehta is chairman, IndusInd Bank; former chairman, PNB & YES Bank; chairman & MD, SPM Capital Advisers Pvt Ltd.

Richa Roy is partner, Public Policy and Finance, Cyril Amarchand Mangaldas and Chevening Gurukul fellow. Views expressed are personal.