G20 agrees regulatory framework

After two days of meetings in London, the Group of 20 finance ministers and central bankers agreed the broad outlines of a tough new regulatory framework for financial institutions that stops short of setting caps on bankers’ bonuses but leaves open the possibility that regulators will have a say on pay.

In broad terms, the group agreed three major points about banking regulation: banks must raise much more capital once the financial crisis has passed, complex financial institutions should develop “living wills” to plan for their unwinding should that ever become necessary and banks should be required to retain some portion of loans they repackage and sell as asset-backed securities.
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The group also made an implicit plea for banks to limit payouts to shareholders, saying: “We call on banks to retain a greater proportion of current profits to build capital, where needed, to support lending.”

The group also agreed that it is far too soon to begin unwinding the unprecedented amounts of fiscal, monetary and financial sector support which have been poured into the economies of member states, with US Treasury Secretary Tim Geithner saying that unemployment remains “unacceptably high”. The US unemployment rate reached 9.5 per cent last month according to figures released on Friday.

In a press briefing following a full day of meetings, UK Chancellor Alistair Darling, said the group believes that although “decisive and concerted policy action has helped to arrest the decline and boost global demand,” stimulatory policies will need to remain in place “until recovery is secured.”

But it is not too soon to discuss an orderly unwinding of that stimulus, Mr Darling added, saying that the G20 has agreed that what is needed is “a transparent and credible process for withdrawal of the stimulus.”

In addition to the measures announced, Dominique Strauss-Kahn, the International Monetary Fund Managing Director, said that the IMF had raised $500bn in funding, which was promised at the April G20 summit.

“We’ll be just over the $500bn figure,” Mr Strauss-Kahn said. “We have experienced an unprecedented level of cooperation among countries.”

Members appear to have passed some of the thorniest issues surrounding reform of bank regulation and the matter of payouts to bankers into the arms of the Financial Stability Board, an international group of central bankers and regulators.

The group stopped short of setting caps on bankers’ bonuses as some nations – France particularly – had pressed it to do. Instead, it has asked the FSB to help it draw up guidelines that incorporated the principles of transparency and improved corporate governance of banks including greater independence of remuneration committees.

It also agreed that compensation packages must have an element in which rewards are deferred for some time, clawback of payments is possible in cases where early profits lead to later losses and there are limits on guaranteed bonuses.

Mr Darling said that banking regulators may have a role in limiting bonuses. “We agreed to look at the total amount set aside for the bonus pool,” he said. “A regulator could look at that in light of the strength of the institution,” he added, implying that banks with highly risky strategies or those facing large losses could be forced to scale back total bonus payments.

The most important thing, Mr Darling said, was that any agreement on bonus structure must be embraced by all member states. “Quite clearly, you don’t want to get into a a situation where banks can play one country against another,” he said, adding that banks that do not adhere to the rules “will face sanctions.”

“You have to balance the bonus payment against the health of the firm,” he said. He added that there was unanimity among finance ministers and central bankers that “every single banker has to realise that they would not be here except for actions that were underwritten by taxpayers.”

On the much larger and more significant issue of bank reform, both Mr Darling and Mr Geithner sought to underscore a determination not to return to the pre-crisis world.

“We cannot put the world in the position where things might go back to where they were at the start of the boom,” Mr Geithner said at a press briefing. And although some may argue that tough capital rules mean that banks will not be as profitable as they had been in the past, Mr Geithner said there are good questions about just how profitable these really were once risks were accounted for.

“They created a mis-leading impression of profits,” he said. “People are worried that things are going to go back to where they were. That’s just not going to happen.”