Toxic assets missing from G20 bank action plan

LONDON (Reuters) - Efforts by G20 global leaders to rein in free-riding banks may have less immediate impact than suggested by their sweeping statements that the days of cowboy capitalism are over.

The financial crisis had made many of the reforms inevitable anyway. World leaders at the G20 Summit on Thursday declared greater bank regulation, stricter capital rules, a blacklist for tax havens and oversight of bonus policies.

But there was a lack of detail on how to cope with the estimated $2.2 trillion in toxic assets that lie at the core of the financial crisis, and their hit list smacked of political populism, some analysts said.

"The final communiqué has a very strong emphasis on regulation, and while the general principles are sound, the details sound more like a shopping list of the current favorite scapegoats -- hedge funds, tax havens, bonuses," said Marco Annunziata, chief economist at Unicredit.

Lack of coordinated plans at a global level for getting bad assets off the books of international banks and uncertainty over how to value them has bedeviled financial markets.

Dominique Strauss-Kahn, head of the International Monetary Fund, said a study of the 122 past banking crises shows "you never recover before the cleaning up of the banking sector has been done."

That leaves worries that billions more losses on toxic assets may still feed through the financial system, while leaders focus on issues that are easier to address -- such as tax havens and bankers' bonuses [ID:nL1230573].

"I'm expecting evolution rather than revolution," said Ian Gordon, analyst at Exane BNP Paribas.

"After all we've gone through with the recapitalizations and various support packages, I don't believe the regulatory authorities will overnight change the rules to trigger a new wave of required capital raising," he said.

Separately, the U.S. accounting board eased rules on how to banks value toxic assets -- a move not addressed by the G20 beyond calling for coordination globally on accounting [ID:nN02355900]

The G20 bolstered the role of the Financial Stability Board (FSB) of leading central bankers and regulatory bodies to oversee the world's financial system, including setting up colleges of supervisors.

That wants pay policies to be supervised by national regulators and unveiled changes to boost capital rules and reduce leverage among lenders.

But banks have known changes are coming, and pay policies are already being revamped to reduce risk-taking.

LOWER RETURNS

British Prime Minister Gordon Brown, host to the Summit, said leaders had agreed for the first time a common approach on how to deal with impaired assets to clean up bank balance sheets. But few details were immediately available.

Banks know they will need to hold more capital, including building a bigger cushion during boom years to prepare for downturns, and reduce their leverage -- steps that will make it unlikely they will return to the stellar profits they enjoyed before the crisis.

European banks earned a return on equity of 18-23 percent between 2003 and 2007, compared to 12-15 percent in the mid-1990s, according to analysts at Citi. Analysts expect returns to go back to that 12-15 percent range.

Increased leverage helped many banks deliver returns well above 20 percent in the last decade, but the financial crisis is forcing banks to deleverage.

Citi estimated the European bank sector's leverage -- or the value of their assets as a multiple of equity -- rose from 24x in 1995 to 39x in 2007. Adjusting for leverage, returns had flat-lined over the decade despite the benign credit environment, the analysts said.

Under the FSB's proposals the Basel Committee will propose a simple ratio to restrict leverage as a supplement to its current "risk based approach" to determining capital requirements.

Australia's Prime Minister Kevin Rudd said the G20 action draws a line under the past decade of excess.

"Today's agreement begins to crackdown on the cowboys in financial markets that have brought global markets undone with real impact on jobs everywhere," he said.