G-20 Signals Delay on Forcing Banks to Boost Capital

June 5 (Bloomberg) -- Group of 20 finance chiefs signaled they will delay introducing new rules aimed at forcing banks to raise the quality and quantity of capital they hold to buffer against financial crisis.

Finance ministers and central bankers conclude talks in Busan, South Korea, today in agreement that banks need to keep more assets on hand, yet split over the scale and timing of capital increases. With euro-area officials expressing concern that haste would hurt economic growth, U.K. Chancellor of the Exchequer George Osborne echoed U.S. Treasury Secretary Timothy F. Geithner in pushing for the new rules to be agreed this year, with the provision that enactment be delayed.

“Implementation is a variable,” Canadian Finance Minister Jim Flaherty, who is co-chair of this weekend’s meeting, told reporters in Busan. “I think that can be worked out over time. There could be a compromise over that.”

At stake for banks is the potential need to raise as much as $375 billion in fresh capital under the proposals being discussed, according to estimates by UBS AG. Companies from Deutsche Bank AG to Bank of America Corp. warn that forcing them to build up reserves quickly could lead them to cut lending, threatening their profits and imperiling the global recovery.

G-20 officials are debating how to define capital, Flaherty said. The issue is nevertheless too “complex” to be settled as soon as when President Barack Obama and his fellow G-20 leaders convene in Toronto this month, he said.

‘Right Direction’

“If we get some more work accomplished here this weekend, then I would expect the leaders in Toronto would be able to express with assurance that we’re going in the right direction, that we’re on time,” Flaherty said.

Leaders are scheduled to meet again in South Korea in November, the new target for a deal agreed to by Geithner yesterday. Geithner told South Korean Finance Minister Yoon Jeung-hyun that he backs crafting a final framework by then, according to a South Korean official speaking to reporters on condition of anonymity.

Osborne told reporters in Busan yesterday it was important to “end the uncertainty” facing financial markets by agreeing on a blueprint for reform this year even if its introduction may be postponed.

“There’ll be a delay in the implementation,” French Finance Minister Christine Lagarde said. “We also need to do a lot of technical work on the quality of the rules. These subjects are too complicated to be rushed.”

Global Recovery

Both the U.S. and Europe are advocating regulatory models that build on their own existing rulebooks and so would give their banks a competitive edge if implemented globally. Nations such as the U.S. whose economies are largely financed by markets want banks to hold more assets on their balance sheets. Policy makers in continental Europe, where banks provide more financing, are concerned too-high reserves would choke growth.

In a dinner session late yesterday in Busan, G-20 members agreed that global growth is coming back, with variation by region, Lagarde told reporters. She also said that the majority of the group now views deficit reduction as the top priority, with a minority arguing that measures to support growth should take precedence.

‘Grave Situation’

The officials gathered just as a slide in Hungary’s currency served as the latest reminder of investor angst over indebted governments. The forint fell to a 12-month low against the euro as the government warned of a “very grave situation.”

China’s central bank Governor Zhou Xiaochuan told reporters yesterday that his nation is “confident” the European Union and the European Central Bank will be able to contain the risks from the region’s debt crisis.

As they return to profit after governments spent $11 trillion aiding them through the credit crisis, banks are already warning regulators that forcing them to enhance capital levels could backfire if it hurts their ability to lend to customers and consumers. They want more time to be spent gauging the economic fallout from the new regulations.

“It is unrealistic to expect such significant capital raising to occur without a significant impact on lending, businesses and ultimately growth and employment,” Andrew Procter, Deutsche Bank’s global head of government and regulatory affairs, wrote in an April 16 letter to the Basel Committee on Banking Supervision, which is overseeing the rule- writing.

JPMorgan Chase & Co. predicted in February that annual earnings at 13 of the largest banks would drop by $20 billion.

Bank Levy

Banks should increase the quality of the capital they hold by the end of 2012, the Basel Committee said in a report on bank capital and liquidity published in December. The panel said banks must increase the amount of equity and retained earnings they hold to cope with losses better.

G-20 officials also indicated divisions over a proposal backed by the U.S. and some European nations to impose a levy on banks to cover the cost of potential future bailouts. India’s Finance Minister Pranab Mukherjee said in an interview in Busan yesterday that using regulatory measures “instead of taxing the banking system is better.” Flaherty said he saw no “evidence” of a consensus for a bank tax.

Still, German Finance Minister Wolfgang Schaeuble said he’s confident the U.K. and “many others” will join Germany in introducing a European levy in the absence of a G-20 pact.

“We will throw our weight behind European regulation and we won’t be alone in that,” Schaeuble said in an interview.

Japan’s delegation refrained from publicly backing the proposal.

“We have no intention to do something new for the time being,” Vice Finance Minister Naoki Minezaki said today. “Japan has already set up various systems,” including a deposit insurance system. “We should take positively that other countries set up such systems.”

The G-20 accounts for about 85 percent of global GDP. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., U.K. and EU.