(Reuters) - Central bank governors and regulators endorsed new global rules on Sunday that will require banks to set aside more capital to withstand shocks.
The “Basel III” package is the cornerstone of the Group of 20 leading countries’ response to the global financial crisis, which forced governments to shore up the banking system. G20 leaders are expected to approve the reform in November.
Following is a list of other G20 initiatives to strengthen global financial regulation.
FINANCIAL SUPERVISION: The G20 called for closer supervision of systemic risk at local and international levels.
The United States has decided to set up a council of regulators chaired by the Treasury with the Federal Reserve playing a role.
The European Union has approved a measure to create a European Systemic Risk Board, chaired by the European Central Bank; it will be in place by January 2011. Three new pan-EU supervisory authorities for banks, financial markets and insurers will work closely with the ESRB from January 2011.
DERIVATIVES: The G20 called for greater standardization and central clearing of privately arranged, over-the-counter (OTC) contracts by the end of 2012 to cut risk. Contracts should be traded on an exchange or other platform where appropriate.
U.S. legislation this year put strong emphasis on exchange trading as well as central clearing of contracts, and the rules are now being fleshed out.
The EU is due to present two draft laws on September 15, the first on OTC derivatives and clearing, the second on curbing abusive short-selling; the latter will affect derivatives such as credit default swaps.
HEDGE FUNDS: The G20 agreed hedge funds above a certain size should be authorized and obliged to report data to supervisors.
U.S. reforms are in line with the G20 pledge. A draft EU law has gone much further by including private equity groups and restrictions on non-EU fund managers seeking European investors. Approval of the EU measures has been delayed until October.
ACCOUNTING: The G20 set a June 2011 deadline for creating a single set of 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 the IASB and the FASB over accounting for financial instruments, and the two boards said on June 2 that they would not be able to have a full set of common standards by the G20 deadline.
SECURITISATION: The G20 wants banks to start retaining some of the securitized products they sell by 2010 as an incentive to raise underwriting standards. The EU and the United States have both approved rules mandating retention of 5.0 percent.
CREDIT RATING AGENCIES: The 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. U.S. legislation passed this year includes similar provisions.
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, a claw-back mechanism, payment in the form of shares rather than cash, and avoiding multi-year guaranteed bonuses. European countries and the United States have generally introduced rules based on the principles.
“TOO BIG TO FAIL”: Several measures are being considered to avoid taxpayers having to bail out very large banks because their collapse would be too destabilizing for markets.
Systemically important firms should start to develop contingency and wind-up plans known as “living wills” by the end of 2010, the G20 said. Britain is running a pilot program for this, but most countries have not made final decisions on reforms in this area.
The Financial Stability Board, an international body tasked to implement G20 pledges, will make recommendations in November which will include possible “surcharges” on systemically important firms and “structural” remedies.
Reporting by Huw Jones; Editing by Andrew Torchia
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