G20 leaders say tough bank funds rule on way

LEADERS OF the world’s largest economies insisted yesterday on implementing tough capital rules to force banks to hold sufficient funds to guard against a future crisis, but they signalled a delay before they take would effect.

At the Toronto summit, the Group of 20 nations pledged that banks must hold sufficient capital to withstand future losses in a crisis as severe as that which brought the world’s leading banks to their knees in 2008.

Seeking to inject new political momentum into the ongoing technical discussions, the G20 communique stated: “The amount of capital will be significantly higher and the quality of capital will be significantly improved when the reforms are fully implemented.”

There are still considerable disagreements over what will count as a capital buffer but, in a bid to resolve differences and aim for tight standards, the G20 has watered down the previous target of achieving the new capital standards by the end of 2012. That date is now downgraded to an “aim”.

In striking a trade-off between tighter capital standards and rapid implementation, leaders followed the advice of Mario Draghi, chairman of the Basel-based Financial Stability Board.

“We should provide transition arrangements that enable movement to robust new standards without putting the recovery at risk, rather than allow concerns over the transition to weaken the standards,” he wrote in a letter to G20 leaders.

To keep individual countries with weak banks happy, though, the phase-in of the new global rules “will reflect different starting points and circumstances with initial variance around the new standards narrowing over time as countries converge”, the communique added.

Striking the same tone as the international consensus, US officials signalled that large American banks, including Citigroup and JPMorgan Chase, could face a more draconian overhaul than they anticipated.

Neal Wolin, deputy US treasury secretary, said: “There’s no doubt that the legislation on its way towards enactment in the Congress will require some of these firms in a range of ways to raise more capital, better quality capital.”

The new push for tighter fiscal rules was the main achievement of a weekend of G8 and G20 summits.

Meanwhile, European sources said the number of European banks subjected to stress tests was likely to rise significantly. Sources suggested that as many as 100 institutions would be involved in a broader exercise to shore up market confidence.

European Union leaders have already agreed to publish stress test results for 26 banks next month – mainly big, cross-border institutions – to address concerns about the euro-zone’s exposure to sovereign debt.

One German government official though said those tests, which are being conducted by the Committee of European Banking Supervisors, would be expanded to cover “significant market share” in each market – about half of all bank balance sheets in each country.

While the total number of financial institutions to have stress tests published remained open, the German official also said the country’s eight Landesbanks had agreed to publication.

The weakened Landesbanks had resisted publication up until now, arguing that testing their ability to withstand sovereign defaults would send the wrong signal to bond investors.

The German government had long supported this line on stress tests, too, but has come round to viewing publication as a potentially important confidence-building exercise.

European authorities have come under mounting pressure to widen the tests to include second-tier banks thought to be most at risk, including the Landesbanks and Spain’s cajas, or smaller saving banks. – Copyright The Financial Times Limited 2010