World leaders agree to step up financial oversight

By John Poirier and Rachelle Younglai

WASHINGTON (Reuters) - Leaders of the world's 20 largest economies vowed on Saturday to toughen oversight of the troubled financial system, but stopped short of calling for a global super-regulator or new restrictions on hedge funds.

At an economic summit hosted by soon-to-depart U.S. President George W. Bush, officials faulted regulators and policymakers for not tackling financial problems and agreed on a foundation for reform.

Rich and developing nations alike, many having recently bailed out their banking sectors, blamed credit rating agencies, complex derivatives, banks, accounting standards, executive compensation and regulators.

Leaders agreed that "colleges" of international supervisors were needed for all major global financial institutions, such as Swiss-based UBS AG or Goldman Sachs.

Financial industry experts said it was significant that the 20 largest economies met to discuss financial markets. However, they called the G20 statement vague and broad.

"In terms of the substance, it's remarkably bland," said Edwin Truman, senior fellow at the Peterson Institute for International Economics, a think tank in Washington, D.C.

"Even the description of supervisory colleges for large complex institutions is pretty vague," Truman said. "It's not much more than what goes on today."

Some financial industry reforms are already in motion.

U.S. and European securities regulators are taking steps to ensure that rating agencies such as Standard & Poor's, Moody's Investors Service and Fitch Ratings, avoid conflicts of interest, provide greater disclosure and differentiate ratings for complex products, such as mortgage-backed securities.

U.S. and EU accounting rulemakers have also begun working on standardizing global accounting rules and addressing weaknesses in accounting and disclosures for off-balance sheet items.

Regulators are already working on central clearing of credit default swaps, sophisticated instruments blamed for exacerbating the credit crisis. The swaps are used to insure against risk that a borrower will default on debt and are often speculatively traded.

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"Credit default swaps should be processed through central clearing houses," Bush said in a statement after the summit. His comments were a marked departure from the Bush administration's pro-business policies centered on the premise that free markets should police themselves.

On corporate executive pay, the group of 20 leaders told their finance ministers to come up with recommendations on compensation practices and said pay incentives should discourage excessive risk-taking.

Leaders said the Financial Stability Forum -- an advisory body of rich nations' central banks, regulators and finance ministries -- should expand to include emerging economies.