G20 likely to beef up regulatory task force

Mon Oct 10, 2011 11:00am EDT

* Moves underway to give FSB more enforcement clout

* FSB set to update G20 this weekend on bank bonus rules

By Huw Jones

LONDON, Oct 10 (Reuters) - World leaders are likely to give their Financial Stability Board more clout next month to implement a welter of new financial rules as cracks and slippages emerge in the face of strong lobbying by banks.

The task force, made up of regulators, treasury officials and central bankers from the world's top 20 economies (G20), has increased its staff to 20 in the past year but is still tiny compared with national watchdogs and given the work it faces.

"It is time to make the necessary changes to the governance of the Financial Stability Board so as to underpin its monitoring function," European Commission President Jose Manuel Barroso and European Council President Herman Van Rompuy said in a letter to other EU leaders on Monday.

Two G20 sources said the plan is to give the FSB a stronger "institutional underpinning" with its own resources.

The aim is for the board to become more akin to the so-called Bretton Woods institutions -- the International Monetary Fund and World Bank -- who wield considerable clout, but it is not expected to have an international treaty as its basis.

Currently the FSB depends on the Bank for International Settlements in Basel, Switzerland, where the board is based.

"The FSB has no resources of its own and that question is of course related to the issue of its capacity to monitor implementation of rules," a G20 source said.

FSB Chairman Mario Draghi, who steps down next month to become president of the European Central Bank, will present G20 leaders in Cannes in November with his recommendations for reinforcing the FSB and who should be its next chairman.

The board has become a key driving force for getting global agreement on new bank capital rules known as Basel III called for by G20 leaders as their core regulatory response to the financial crisis.

But the acid test will be making sure that Basel III and a string of other new rules, from changes to derivatives markets, through forging a single set of global accounting rules, to curbing excessive bankers' pay, are properly implemented across all countries to avoid loopholes and regulatory arbitrage.

The accounting deadline of mid-2011 has been pushed back until the end of December and there are doubts that changes to make derivatives markets safer will be completed by end 2012.

TOO MANY RULES

There is distrust between the European Union and United States over implementing Basel III, as the former looks to tailor some elements while the latter's commitment to applying it at all is questioned by some EU lawmakers.

Banks warn that too many new rules will force them to crimp lending to the economy, while the planned capital surcharge on top banks has been described as "anti-American" by JPMorgan Chase .

Some policymakers worry that with the euro zone debt crisis and general economic downturn dominating the agenda, it will be harder to keep a focus on implementing financial regulations.

"I would say very much has happened, but it takes a long time ... somehow we have lost momentum on the financial sector reform agenda and this is wrong, clearly wrong," Joerg Asmussen, Germany's deputy finance minister and who has been a key negotiator with the G20, told the European Parliament on Monday.

Other contentious policies are also in the pipeline, such as regulating the "shadow" banking system and a fundamental reform of how bank trading books are supervised.

"A big question from the global governance perspective is: is the job half done with the FSB?" Bank of Canada Governor Mark Carney told Reuters Insider earlier this year.

The next FSB chairman will be endorsed by the G20, giving the holder strong backing to enforce rules the group has signed up to, though so far sanctions remain weak.

There is talk the chairman could become a full time role.

The G20's finance ministers and central bankers meet in France this weekend to prepare the ground for the November summit. The agenda will be dominated by the euro zone debt crisis but work will also continue on financial regulation.

The FSB will report to ministers and publish its follow up review of the G20's principles to curb excessively generous upfront bank bonuses that could encourage too much risk taking.

The board is also expected to publish a second review of how its December 2012 deadline for reforming off-exchange derivatives markets is facing some delays.

The FSB and its sister technical body, the Basel Committee, have just endorsed two other measures: a bank capital surcharge on the world's top 28 banks from 2016 and principles for dealing with cross-border bank crises in ways that shield taxpayers.

The FSB will update this weekend's meeting on the two measures ahead of final approval by G20 leaders next month.

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