June 3, 2010 / 5:31 AM / 9 years ago

FACTBOX-G20 progress on financial regulation

June 3 (Reuters) - Finance ministers from the G20 group of industrial and emerging countries meet in Busan on June 4-5 to review pledges made in 2009 to strengthen regulation and learn lessons from the financial crisis.

The focus is on the European Union and United States, where much of the financial crisis has played out.

The United States aims to sign into law in July a sweeping piece of legislation that implements most of the G20 pledges.

The EU is implementing the G20 pledges in a string of individual laws on credit rating agencies, hedge funds, bank capital and supervision.

Following is the state-of-play on the main regulatory pledges, many of which are not due to take effect until the end of 2012.

BANK CAPITAL: G20 wants banks to set aside more capital, with a higher proportion in common stock or retained earnings by end of 2012. The Basel Committee on Banking Supervision put forward a package of Basel III reforms in 2009 and aims to finalise it by this November’s G20 summit. Most banks already hold more capital than under the existing Basel II accord, which the United States has yet to fully adopt.

Basel is seen as the litmus test of G20 resolve to toughen up financial rules. Banks are lobbying hard to delay introduction of Basel III and dilute some elements on deferred taxes and treatment of minorities. Some countries are also leery of proposed leverage caps. There are already signs of slippage in introducing separate, tougher capital rules on bank trading books from January.

HEDGE FUNDS: G20 agreed hedge funds above a certain size should be authorised and obliged to report data to supervisors.

U.S. reform in line with G20 pledge but the EU going much further by including private equity groups and restrictions on non-EU fund managers seeking European investors.

DERIVATIVES: The G20 called for greater standardisation and central clearing of privately arranged over-the-counter (OTC) contracts by the end of 2012 to cut risk. Contracts should also be traded on an exchange or other platform, where appropriate.

Japan has adopted such rules while the United States is well on the way but the EU won’t make formal proposals until July.

Germany unilaterally introduced a ban on “naked” selling of sovereign credit default swaps but other EU states won’t follow suit. The United States is keen on pushing derivatives onto exchanges as well as clearing while the EU is focusing more on clearing.

ACCOUNTING: G20 set a June 2011 deadline for creating a single set of high-quality accounting rules, which essentially means thrashing out common ground between the International Accounting Standards Board and the U.S. Financial Accounting Standards Board to give investors greater transparency.

There are significant differences between IASB and FASB over accounting for financial instruments and the two boards said on June 2 they won’t be able to have a full set of common standards by the G20 deadline.

SECURITISATION: G20 wants banks to start retaining some of the securitised products they sell by 2010 as an incentive to raise underwriting standards. The EU has adopted a law mandating retention of 5.0 percent, with the U.S. law set to do likewise.

CREDIT RATING AGENCIES: G20 wanted them registered and supervised by the end of 2009. The EU has adopted a law mandating registration and direct supervision that takes effect this year. The U.S. bill includes similar provisions.

FINANCIAL SUPERVISION: The G20 called for supervision of systemic risk at local and international level.

The EU’s executive European Commission has proposed draft laws to create a European Systemic Risk Board, hosted by the European Central Bank, due to be in place during 2010. Three new pan-EU supervisory authorities for banks, markets and insurers are to work closely with the ESRB.

The U.S. bill sets up a council of regulators chaired by the Treasury with the Federal Reserve playing a role.

PAY: The G20 has endorsed principles to stop bonus schemes in banks from encouraging too much short-term risk taking, such as deferral of part of a bonus, including a claw-back mechanism, payment in the form of shares rather than cash and avoiding multi-year guaranteed bonuses. Not all G20 members have applied the new principles.

“TOO BIG TO FAIL”: Several measures are mooted to avoid taxpayers having to foot the bill for future bailouts and end a belief among banks they are too big for governments to allow them to fail:

The International Monetary Fund has proposed two bank taxes to pay for bailouts but there is no G20 consensus so far.

The United States may adopt the “Volcker Rule”, a structural measure that bans risky proprietary trading at some banks but the EU has rejected such moves.

Basel III will force banks to build up extra capital buffers in good times to tap in troubled markets and lessen the need for taxpayer bailouts but there are arguments over who and what should trigger the build-up or draw-down of buffers.

Systemically important firms should develop contingency and resolution plans — “living wills” — by the end of 2010. Britain is already running a pilot programme.

Possible “surcharges” on systemically important firms. The Basel Committee still looking at this. (Reporting by Huw Jones, editing by Tomasz Janowski)

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