Paul Noyer

Paul Noyer

G20 Commits To Revamping Global Financial Framework

Charles Malize

September 11th  2009

On the face of it, the G20 meeting in London over the weekend seemed to brew a bit of confidence amongst participants. This was evident from their statement: "Financial markets are stabilizing and the global economy is improving, but we remain cautious about the outlook for growth and jobs." The G20 Finance Ministers' (Finance ministers of the industrialized and emerging economies) have pledged to implement regulatory commitments and address bankers' pay structure. Details of reforms to bonus payments are to be presented at the G20 heads of government meeting during the Pittsburgh USA summit scheduled for September 28th. It is clear that some member states will find the new framework much harder to accept than others. According to Tim Geithner, U.S Treasury Secretary, "Some parts of this are harder for some countries than for others."

However, they were able to work out a far- reaching agreement to insulate global banking against a systemic shock. The main challenge for member governments that signed up for the arrangement is the work of ironing out the specifics.

Their upcoming re-union, planned for end of September, calls for the swift implementation of all the commitments reached on their April 2, 2009 meeting. They had agreed to keep stimulus measures in place until the recovery was tenable, although executive pay caps still remain an outstanding subject matter. (The challenge here is that this may prove difficult to enforce). Also on the agenda is the putting in place a transparent, credible and coordinated exit strategy from the fiscal and monetary surplus once recovery has been reached.

G20 statement: "We reiterated the need for swift and full implementation of all commitments made at the Washington and London summits and have agreed on further steps to strengthen the financial system as set out in the accompanying six points declaration"

The six point plan addresses:

1. Compensation;

2. Systemically important firms,

3. Prudential regulation,

4. Non-cooperative jurisdictions,

5. Implementation of international standards for actors outside the core bank system such as credit derivatives etc.

6. Convergence of international accounting standards

"More needs to be done" on:

1. Increasing transparency;

2. Global standards on pay structure, including on deferral, effective claw back, the relationship between fixed and variable remuneration, and guaranteed bonuses, to ensure compensation practices are aligned with long-term value creation and financial stability.

3. "We also ask the FSB (Financial Stability Board) to explore possible limits/approaches on total variable remuneration."

4. G20 governments will also explore ways to address non-adherence with the FSB principles."

The meeting also calls for addressing excessive commodity price.

New York Federal Reserve President William Dudley; "I think we can respond in a number of ways: First, we can do a better job understanding interconnectedness. This means changing how we oversee and supervise financial intermediaries. Second, we can change the system so that it is more self-dampening instead of self-reinforcing. Third, we can improve incentives (e.g. mandate automatically equity-convertible debt instruments as a form of capital). Fourth, we can increase transparency. Fifth, we can develop additional policy instruments. For example, we might give a systemic risk regulator the authority to establish overall leverage limits or collateral and collateral haircut requirements across the system. This would give the financial authorities the ability to limit leverage and more directly influence risk premia and this might prove useful in limiting the size of future asset bubbles."

Paul McCulley (PIMCO); "The most important elements of macro-prudential, or systemic, regulation are first, counter-cyclical capital/margin arrangements, replacing the pro-cyclical paradigm that has been in place; and second, a robust resolution regime, outside the disorderly bankruptcy process, for all systematically important financial institutions."

According to the International Monetary Fund the G-20 countries have committed $12 trillion to help pull the world out of recession.

Capital requirement

The drive to revamp regulation comes after excessive risk-taking by the global banks that led to $1.61 trillion in losses, write downs, taxpayer-funded bailouts and a global recession. With this in mind the global financial sector needs a significant change to avoid further mayhem. Some of the measures proposed by the finance ministers include new rules on bank capital requirements, the introduction of a leverage ratio, a minimum global standard for funding liquidity and a framework for smoothing bank vulnerability to economic fluctuations.

Banks should be required to hold more capital on their balance sheets. They should set aside more profits as a cushion against hard times and develop limits on how much debt they incur under proposed new global rules. This should give support to these institutions especially in the area of risk management while insuring and protecting them against market disruption and economic downturns. Tim Geithner had emphasized the need for higher capital requirements for banks across the board that should improve risk management practices. The French and the Germans want the G20 to limit the size of banks and tighten capital rules.

Their proposal of the introduction of leverage ratios limits the amount of debt banks can run up as a proportion of their capital. Its success hinges on it being introduced and harmonized internationally while adjusting for differences in accounting. The United States regulators have already introduced leverage ratios while their European counterparts have been more skeptical. Bank of France Governor Christian Noyer said recently that a simple leverage ratio was unlikely to work as long as there was no single accounting standard.

European banks face pressure to issue an increased number of shares in order to meet the global regulatory framework which calls for much bigger and better capital buffers against shocks. The move, outlined by the ministers, follows criticism that some European banks have relied too heavily on complex securities which have proved poor defenses against big losses. All banks will have to maintain bigger capital buffers once the financial crisis has passed. But continental European banks fear they will be harder hit by the measures because of stricter rules about what will count as an acceptable cushion.

They further agreed that banks should be required to retain some portion of the loans they repackage and sell as asset-backed securities. The French and the Germans stressed the need to continue fundamental reforms to ensure a responsible and transparent financial sector. In addition they emphasized the need to address at the Pittsburgh meeting that banks not be a burden on states when they have overextended themselves.

Skeptics

However, banks warned that prematurely increasing capital demands could negatively impact a recovery in lending. The fear is the new proposed regulatory framework is likely to alter the way banks borrow in the capital markets. Also there is growing anxiety that some banks may be forced to raise more equity capital, while hindering their returns.

Angela Knight, chief executive of the British Bankers' Association, said that banks were already under pressure to lend more. "You can't hold two times the amount of capital you already do and lend it at the same time," she said.

Hans Lorenzen, a credit analyst at Citi; "The need for regulatory reform and higher capital requirements is a no-brainer. But we're not convinced the market has internalized the full implications, not least for growth." He further lamented; "Further reductions in bank leverage and controls on shadow banking will have a significant impact on credit creation and the risk premia required to generate targeted returns on capital."

Bernd Brabander, managing director for economic affairs at the Association of German Banks, the commercial banks' lobby group, said proposals to cap the overall level of debt a bank could hold in relationship to its size could put European banks at a competitive disadvantage. "The bit about leverage ratios really makes me a bit nervous," he said.

Mr. Brabander added that absolute leverage ratios should be used as a "trigger for supervisors to target a bank for closer inspection, not as a hard leverage ratio, US-style." He further stated that the wording of the communiqué (statement) on capital requirements seemed open to interpretation.

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About the Author

The US China trade imbalance and currency wars With all the central bakers sitting on the same board FIXED?

http://www.bis.org/about/board.htm

Board of Directors

Christian Noyer, Paris (Chairman of the Board of Directors)

Masaaki Shirakawa, Tokyo (Vice-Chairman)

Ben S Bernanke, Washington, DC; Mark Carney, Ottawa; Agustín Carstens, Mexico City; Mario Draghi, Rome; William C Dudley, New York; Philipp Hildebrand, Zürich; Stefan Ingves, Stockholm; Mervyn King, London; Jean-Pierre Landau, Paris; Guy Quaden, Brussels; Fabrizio Saccomanni, Rome; Jean-Claude Trichet, Frankfurt am Main; Paul Tucker, London; Axel Weber, Frankfurt am Main; Nout H E M Wellink, Amsterdam; Zhou Xiaochuan, Beijing

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Bank of international settlement

-- And the people who control the money supply and interest rates of China Canada the US and others are all sipping tea together ?

You tell me

Is this one big fixed or manufactured crises ?

Yes it was. In fact you just hit the tip of the iceberg. Dig a little deeper. Research Bilderbergs, a group of international Billionaires who make Bill Gates look like a hobo, btw Bernanke is a member too.

Au coeur de ma misère - Paul Brunelle