G20 plans to reshape financial system


GROUP OF 20 members are committed to forging new rules for the financial system as the globe emerges from the worst banking crisis since the Great Depression, Financial Stability Board (FSB) president Mario Draghi said at the weekend.

The G20 has asked Mr Draghi to draft guidelines to control bank executives’ bonuses as part of his overall mandate to write a plan to reshape the global financial system and avert future crises. He will present a detailed plan to G20 leaders who meet in Pittsburgh later this month.

“There is very strong support by G20 governments and ministers in keeping momentum in the financial reform effort,” Mr Draghi told reporters in London at the end of a two day meetings of G-20 finance ministers.

Before deciding to pay out dividends, buy back stock or increase salaries, banks “should have in mind to use this window of opportunity to build capital stock”, Mr Draghi said. Compensation controls are “not the only issue”, he said. Compensation should be tied to risk, he said, while emphasising the need for banks to accumulate capital now that the credit crunch is subsiding.

His position was supported by both the US, which called for greater capital requirements, and the euro area, which sought to use compensation controls to appease public anger after taxpayer-funded bailouts of banks.

Mr Draghi said that the “sense is that conditions are improving” in the financial system and the economy. Though risks persist, it is a good moment to raise capital, he said.

US treasury secretary Timothy Geithner’s proposals to focus on international minimum capital requirements “are consistent with what is being discussed in” the FSB and in Basel.

Mr Draghi has been given a specific outline for drafting the compensation controls. According to notes handed out by the FSB, they are:

* Independent and effective world oversight of compensation policies and practices including through board level remuneration committees and the independence of board members in charge of compensation matters.

* Requirements on compensation links between the total bonus pool and the firm’s overall performance.

* Enhanced disclosure of compensation practices, covering compensation policies and practices at all levels of the organisation including how compensation relates to risk and performance over time.

* FSB principles cover the structure of compensation, not their levels. The level of compensation should be reduced.

G20 finance ministers also called on financial regulators and accounting bodies to target cross- border standards and to review principles that determine the valuation of impaired assets. The ministers said there needs to be a “convergence towards a single set of high-quality, global, independent accounting standards on financial instruments, loan-loss provisioning, off- balance-sheet exposures and the impairment and valuation of financial assets”,� according to the group’s statement.

Differences between rich and developing countries prevented the finance ministers from agreeing measures to curb global warming, casting more doubt on UN efforts to agree a new climate treaty. Industrialised nations sought progress on climate change financing at the London meeting but met resistance from emerging nations including China and India, who fear the proposals could stifle their economic growth, two G20 sources said.

Ministers said in their concluding statement that they would work towards a successful outcome at a UN meeting in Copenhagen in December which aims to draft a new climate change treaty to succeed the Kyoto agreement. – ( Bloomberg, Reuters)

Main points

1. A framework on bankers’ bonuses that will require greater transparency and limits. It will also require more independence of bank remuneration committees and better governance. Regulators can raise capital requirements for banks.

2. Contingency planning and living wills for systemically important firms to protect in case of failure.

3. A requirement for banks to raise more share capital “once recovery is assured” to better cushion against future financial shock.

4. Plans to limit the ability of banks to “game the system” by

creating off-balance-sheet entities.

5. Creation of safeguards

such as rules on mandatory ratios of liquid assets to total

assets, introduction of buffers that require capital raising

when times are good, and the development of contingent capital.

6. Convergence towards a single accounting standard on the fair

value of investments, loan loss provision and off-balance sheet


7. A new agreement on the oversight of credit-rating agencies, requirement for credit derivatives to be cleared through a central counterparty and a portion of securitisations to be retained by issuing bank. – Copyright The Financial Times Limited 2009