FACTBOX-G20 progress on financial regulation

Published: 21 Sep 2009 16:41:22 PST

Sept 21 - The G20 group of industrial and emerging market countries meet in the U.S. city of Pittsburgh on Sept. 24-25 to review pledges they made in April to strengthen financial regulation and apply lessons from the credit crunch.

Differences have emerged over how countries are implementing the pledges, raising concerns about unfair advantages for financial institutions in some countries.

No big new initiatives are expected in financial regulation but principles to rein in bank bonuses will be toughened up though likely to stop short of actual caps on individual pay.

The following is a state of play on the main regulatory pledges, most of which are not due to take effect until the end of 2009 or during 2010 and later:

BANK CAPITAL: Higher and better quality capital requirements: G20 wants banks to set aside more capital and that more of the capital should be in the form of common stock.

Extra buffers: G20 wants banks to build up extra buffers of capital during good times to tap in troubled markets and thus lessen the need for taxpayer bailouts. The Basel Committee of central banks and banking supervisors from across the world is formulating global principles for such a mechanism. European Union also consulting industry. No consensus on how and who has the authority to determine when an upturn begin, thus obliging banks to set aside more capital.

The U.S. Treasury Department has released an eight-point proposal on capital rules that is tougher than the Basel II rules now used, while also committing the United States to a Basel II adoption timetable.

Leverage ratio: Basel Committee also working on G20 request for a simple leverage ratio for banks. Europeans cautious, saying it should only be a backstop to the existing Basel II global accord on bank capital now being updated.

HEDGE FUNDS: More disclosure and accountability looks likely, although final action could be months away.

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

The EU has proposed a draft law that is dividing member states, with Britain saying it goes too far in restricting fund managers based outside the EU, while France wants tougher rules. [ID:nLH522318]

The Obama administration has proposed requiring hedge funds and other private capital pools to register with U.S. regulators, a step supported by much of the industry . Some funds already register voluntarily. Some lawmakers want sterner measures. The U.S. Congress has not yet tackled the issue.

DERIVATIVES: The G20 called for greater standardisation and central clearing of privately arranged over-the-counter (OTC) trades in credit derivatives.

Central clearing of credit default swaps traded in the EU began at the end of July and the EU's executive European Commission will make broader proposals by the end of December for regulating derivatives. This may include draft legislation to encourage standardisation of OTC contracts and setting up a data "warehouse". [ID:nL3594406]

The Obama administration and congressional leaders are thrashing out an agreement focused on moving "standardised credit " derivatives onto exchanges and requiring more reporting for "customized" derivatives. The U.S. House of Representatives is likely to tackle the issue in October, but the U.S. Senate's plans are unclear. [ID:nN20519974]

The United States is putting pressure on EU to insist on exchange trading as well to avoid business migrating across Atlantic.

ACCOUNTING: The outcome of a debate over fair-value accounting will be crucial to dealing with the toxic assest problem. G20 says fair value accounting rules amplified the credit crunch and should be changed by the end of 2009.

The International Accounting Standards Board (IASB) is fast tracking revision to the scope of its fair value rule to get key parts in force by the G20 deadline and ease pressure on banks to mark some assets at current depressed market prices. [ID:nLL149932]

The U.S. Financial Accounting Standards Board is talking of a reform that banks say would force them to price an even wider range of assets at fair value such as loans. [ID:nN13241453]

The difference in approach will make it harder to achieve another G20 goal, of making significant progress to a single set of high quality global accounting standards by end 2009. [ID:nLG543940]

SECURITISATION: G20 wants banks to start retaining some of the securitised products they sell by 2010. EU has adopted a law mandating retention of 5.0 percent, with United States considering a similar move. [ID:nL6306644]

LIQUIDITY BUFFERS: G20 wants stronger liquidity buffers at banks by 2010. Basel Committee working on how this could be done globally but Britain set to introduce new liquidity regime from October.

CREDIT RATING AGENCIES: G20 wants them registered and supervised by end of 2009. EU has adopted a law mandating registration and direct supervision. [ID:nLN968409]

The U.S. Securities and Exchange Commission adopted new rules this month that will require the agencies to disclose more of their ratings history. [ID:nN17202110]

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

EU's executive European Commission set to propose draft laws on Sept. 23 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 to work closely with the ESRB. [ID:nLE135187]

Fierce debate over what role the U.S. Federal Reserve should play in new American framework for monitoring systemic risk , with some lawmakers leaning toward vesting more power in an inter-agency council of regulators.

PAY: G20 endorsed principles devised to stop bonus schemes in banks from encouraging too much short-term risk taking, to take effect for 2009 bonus round.

The G20 summit in Pittsburgh is set to endorse detailed guidelines from the Financial Stability Board on how these principles should be applied in practice. [ID:nLF600494]

EU working on plans to give supervisors powers to intervene in bank pay policies if they encourage too much risk taking. The Basel Committee is also working on guidance for supervisors to enforce G20 principles on remuneration.

The U.S. Federal Reserve said on Sept. 18 it plans new bank pay rules. The Obama administration has appointed a "pay czar" for firms getting taxpayer aid. The U.S. House of Representatives has approved a bill to limit banker bonuses. But the U.S. Senate has not acted on the pay issue..