June 27, 2010 / 12:16 AM / 9 years ago

G20 gives banks a break on new capital rules

TORONTO (Reuters) - World leaders agreed to a flexible timetable for banks to adopt toughened capital rules, according to a draft G20 communique that offered concessions to a still-fragile financial sector.

The Group of 20 emerging and advanced economies plan to finalize an overhaul of bank capital and liquidity rules by November this year, and were aiming to have banks implement them by the end of 2012.

Banks have pushed back and said tough requirements to rebuild their capital reserves when economies are still emerging from recession would limit their ability to lend and slow the recovery. Clearly taking note of that, the G20 draft said countries would have options over how fast to introduce new capital rules, and whether to adopt a bank tax to fund future rescues.

The new capital rules, outlined in a draft communique obtained by Reuters on Saturday, are a crucial plank of the G20’s vow to rein in banks and prevent another global financial crisis. But G20 leaders meeting in Toronto this weekend fear the recovery remains fragile and are wary of forcing tough new rules on banks too fast.

“Phase-in arrangements will reflect different national starting points and circumstances,” the draft communique said, Countries will phase in the new requirements “over a timeframe that is consistent with sustained recovery and limits market disruption.”

Finance officials meeting last month in South Korea had conceded they could not agree to stick to the 2012 deadline.

Banks argue that a regulatory crackdown on banks could cut 3 percent off economic growth over the next five years in the United States, the euro zone and Japan. The sector has called for more clarity on the intended reforms.

The G20 leaders provided some guidance, signaling they will give banks more wiggle room than previously expected for building up their core Tier 1 capital levels, the most important backstop against losses and something European and Japanese bankers wanted.


“The banks will obviously try to get a better deal than regulators are likely to be willing to give them,” said Paul Masson, a professor at the Rotman School of Management, University of Toronto. “Lobbying and negotiations will continue, perhaps beyond the November deadline.”

Masson said the G20 flexibility made sense given the uncertain outlook, leaving some countries and banks in worse shape than others.

G20 finance ministers had signaled some flexibility when they met in Busan, South Korea this month, but the leaders explicitly endorsed the idea in the Toronto communique.

In a sign the crisis-forged G20 unity has frayed, the G20 draft bluntly killed further debate on another contentious issue, a global bank tax: “Some countries are pursuing a financial levy. Other countries are pursuing different approaches.”

Regulation across the world is taking different paths too. Washington passed a sweeping overhaul of financial legislation on the eve of the G20, while Britain, France and Germany have vowed to go ahead with a levy of their own. But Canada and others say their banks stayed afloat during the crisis due to prudent practices and should not be punished with a tax.

“We have unfortunately no common position in the G20 neither on a bank levy nor on a financial-transaction-tax,” said German Chancellor Angela Merkel.

Bank of Canada Governor Mark Carney mused that if countries get the core capital reforms right, there would be no need for a tax.

Daniel Schwanen, an analyst with the Center for International Governance Innovation, agreed.

“More countries will see that they will not need to follow the European lead of a bank tax because they might say this (capital requirement) is sufficient,” he said.

Reporting by G20 team; Writing by Louise Egan;

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