G20 papers over cracks on bank capital, pay

By Huw Jones - Analysis

LONDON (Reuters) - The G20 made progress on Saturday in toughening up financial rules but vague compromises over bank capital and pay curbs indicate that fundamental issues remain unresolved.

The crash of Lehman Bros that brought the world's financial system to its knees last September was uppermost in minds at the April G20 meeting, which adopted pledges to make it harder for banks to mess up economies in future.

Translating pledges into concrete action is proving to be more painstaking as vested national interests emerge and economic recovery takes the heat out of pressures to reform.

Still, the mood music at Saturday's meeting contrasted with the tense summit five months ago when fear stalked the corridors of governments and banks were on tenterhooks as to their fate.

"Then, we were meeting after two quarters of (economic) freefall, unprecedented in world history. Today everyone was in a calmer mood," said Russian Finance Minister Alexei Kudrin.

A senior G20 official said there "were no big emotional battles, no fists on the desks and no shouting."

Ministerial bag carriers were only up until the early hours of the morning to thrash out a common agreement, rather than staying up all night in previous summits.

The G20 set up, revived last year to pioneer global financial regulation initiatives, appears to be bedding down, making it easier to focus on detail.

"What's been very important is the very strong support that the G20 expressed toward keeping momentum in the financial reform effort," said Mario Draghi, the Bank of Italy governor who heads the Financial Stability Board, which the G20 has told to implement its financial reform agenda.

"Much has been done but ministers and governors recognized it's not time for complacency and more is in the making," Draghi said.

HOW TO MEASURE RISK

The core lessons of the crisis are still seen as the need to monitor system-wide risks caused by banks and for banks to hold much higher levels of capital than before.

But Saturday's meeting arrived at no precise figure on how high bank capital should be once economic recovery is assured, now forecast for 2010 or 2011. Canada's Finance Minister Jim Flaherty said it will be up to individual countries to determine capital levels at banks.

This may help avoid the years of squabbling that led to the current Basel II capital rules, but it could spark regulatory arbitrage between jurisdictions.

For banks, it may make little difference in practice.