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Monday, June 28, 2010

G20 Market Reform Efforts Start to Splinter


The Group of 20 countries vowed last year to sing from the same hymn sheet on regulating banks, But the tune from Toronto this weekend sounds increasingly like a line from the Frank Sinatra signature song, "My Way".


Any determination to introduce a common tax on banks to shield taxpayers from paying for another bailout -- an approach favored by Germany and its EU partners -- formally fell by the wayside on Sunday. G20 leaders agreed there are a range of policy approaches for making banks pay a "fair and substantial" contribution toward any government interventions.

"Some countries are pursuing a financial levy. Other countries are pursuing different approaches," the summit's communique said tersely.

It marks a victory for host Canada, along with Japan, Brazil and Australia, who balked at piling a tax on their banks, which required no bailouts during the financial crisis.

Any tax now introduced in Germany, France and Britain will have to be modest or else risk banks shifting operations to more tax-friendly locations.


The Toronto G20 endorsed a long phase-in for the new Basel III bank capital and liquidity rules. This marks a significant setback to last year's pledge to increase by 2012 the amount of capital banks must hold to absorb shocks. The phase-in is now more open-ended, allowing different speeds for different countries. If countries can effectively pick and choose their path, it will be a messy prospect for global banks.

The G20 is under intense pressure from banks and countries like Japan, Germany and France to delay elements of Basel III, for fear that building up capital would reduce lending and harm a fragile recovery.

The Financial Stability Board, tasked to coordinate the G20 reforms, swung behind a longer phase-in on Sunday, saying 2012 should be seen as merely the start date. FSB Chairman Mario Draghi is betting the delay will make it harder to argue for diluting the rules, a strategy that may well falter in coming months when the reform is finalized by November.

"If you don't have a coordinated approach to regulatory (systems)... then there's the risk of regulatory arbitrage," Deutsche Bank Chief Executive Josef Ackermann said.


The "My Way" doctrine may also be required to make progress over how governments handle banks deemed too big to fail. The FSB is working on a string of recommendations by November. So far there is no consensus on whether big, interconnected banks should face capital surcharges or "structural constraints" or other types of remedies to discourage risky activities and shield taxpayers from the cost and damage of a government bailout. The betting is that a menu of options will be finally agreed giving G20 countries plenty of leeway.


Hopes for a single set of global accounting rules by the mid-2011 deadline are also in doubt. The world's top accounting standards setters have reached no agreement on when banks should price assets at the going rate or cost, known as mark-to-market or fair-value accounting.

The G20 reiterated its call on Sunday for a single set of standards but made no mention of the 2011 deadline.

The U.S. accounting board wants to widen the use of fair value. But the International Accounting Standards Board, whose rules are mandatory in the EU, has effectively narrowed the scope of fair value, in response to calls from European policymakers. The FSB said on Sunday it backed the narrower approach, but its appeals may well fall on deaf ears and a Band-Aid solution will be needed if a single set of global rules is to emerge.


U.S. financial reform, heading for a final vote in Congress this week, incorporates many of the G20 pledges, including requiring credit rating agencies and hedge funds to register, improving supervision of markets and curbing risk in derivatives trading. It goes even further than the G20 proposed. The bill forces structural changes on banks by requiring the spin-off of some derivatives trading and barring proprietary trading.

The sweeping U.S. overhaul puts pressure on the European Union, which has yet to approve rules implementing many of the G20 pledges. Europe is not expected to copy U.S. initiatives.

Britain will be pleased that the G20 communique calls for nondiscriminatory crackdowns on hedge funds -- a swipe at the EU's draft law that could make it much harder for U.S. and other non-EU hedge funds to operate in the 27-nation bloc.

The FSB also noted on Sunday there has been no full implementation of G20 principles to curb bank pay.