G20 papers over cracks on bank capital, pay

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.


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.

“We are already holding more (capital) than we need to under the Basel II rules in anticipation of changes,” an investment bank official said.

Much of Saturday’s communique on financial regulation reiterated pledges from April and refers to work already underway, such as beefing up the Basel II rules by requiring higher capital on trading books and including a leverage ratio.

There is renewed pressure on banks to come up with a “living will” -- a process lawyers warn could take some time as many banks have complex structures that would need simplifying.

Ministers also fleshed out how they want to see bank pay packages structured, largely by stressing the need to properly implement principles they already agreed in April.

Still, backing clawbacks of bonuses paid for performance which in hindsight proves unmerited marks a toughening of language, along with a crackdown on guaranteed bonuses.

However Paul McCarthy, a lawyer at Allen & Overy, said these new rules would make little practical difference to how banks already reach their pay packages.

“If you look at the pay structures they have at the moment, everything is there.”

Much to the relief of bankers, ministers declined to back French calls for a cap on pay and thus tackle the main target of public anger over banks -- the actual levels of pay, especially at banks propped up by taxpayer money.

Nevertheless, the FSB, a council of G20 member state finance ministry, central bank and regulatory officials, will study the issue of pay restrictions further and report back to the Pittsburgh summit on Sept 24-25.

Additional reporting by Louise Egan and Toni Vorobyova, editing by Stella Dawson