Some of the world’s largest economies would be dangerously exposed in the event of a fresh banking crisis, PwC has warned, as it calls for emerging economies to push forward on reforming their financial sectors.
With commodity prices volatile and GDP growth slowing, PwC has raised fears that the developing world has not made sufficient progress on insulating governments and taxpayers from widespread failure in the banking industry.
Richard Boxshall, senior economist at PwC said:
The next challenge is for policymakers around the global to put in place measures that reduce banks’ exposure to financially stressed governments. If this can be achieved then the two-way link between government finances and the financial sector will be weakened further, which could have benefits for financial stability at an individual economy and global level.
Because the economies in what PwC has dubbed the “E7” - China, India, Brazil, Mexico, Russia, Indonesia and Turkey - did not suffer as severe a financial crisis as the developed world, the impetus to address factors like “too big to fail” and minimise the need for government-funded bailouts has been sluggish.
PwC is calling for “tighter banking regulation” to bring the standards of E7 rules in line with the G7.
According to its analysis, every single member of the G7 has implemented reforms over both recovery planning and resolution planning for systemic banks. All except Canada and Italy have also fully implemented reforms linked to things like “bail-in” procedures to limit the wider financial liabilities of bank failure.
By contrast, no member of the E7 has finished introducing bail-in systems, and only Mexico has mechanisms in place for recovery and resolution planning. India has failed to make progress on any of the three fronts - bail-ins, recovery planning and resolution planning - PwC believes are crucial to protecting taxpayers from bank failures.