Banks will be forced to more than double capital levels for the riskiest parts of their operations as a result of the key regulatory reforms at the heart of the G20 summit's conclusions.
Although the international body – which is to replace the G8 as the world's leading economic forum – last night stopped short of placing specific minimum requirements for both capital and liquidity, world leaders agreed the Basel Committee on Banking Supervision will draft new rules for each by the end of this year.
The change is part of the drive to strengthen the global banking system to withstand shocks and make it less likely to rely on government capital in the event of future crises.
Full details of banks' new commitments were contained in the final report of the Financial Stability Board (FSB), details of which were released shortly after the final communiqué was issued.
On capital, banks were put on notice that they should be retaining profits now to meet those future capital requirements, by restricting dividends, share buy-backs and compensation where necessary. For trading books, banks were told that the capital they hold to cover positions will be likely to at least double by the end of next year.
The rules are aimed at increasing both the amount and quality of capital that the banking system requires, so that banks holding minimum required levels will be viable in the event of a future economic crisis.
As a result, the quality and consistency of core tier-one capital – the classic regulatory measure – will be increased, and the Basel framework will also require banks to be counter-cyclical, building up capital in the good times to provide a buffer in the bad.
On liquidity, the Basel committee will draft rules by the end of the year for a "minimum global liquidity standard," introducing a liquidity coverage ratio to be applied across international borders. This aims to ensure global banks have assets that are of a high enough quality to be able to continue to fund them should there be a further downturn.
The measures on capital and liquidity, along with those on compensation, sit at the centre of the reforms adopted by the G20, which also included commitments to strengthen accounting standards and surveillance of over-the-counter trading, as well a system of peer reviews of regulations and standards.
As part of the reforms, the FSB itself will be institutionalised, with a permanent executive, led by chairman Mario Draghi, put in place.
The G20 itself will become the permanent economic council for world leaders, something which Prime Minister Gordon Brown said was necessary given the current make-up of global financial institutions has not really evolved since 1945.
However, when asked how such a plan would work without countries discussing currencies, Mr Brown said that although "imbalances are clearly an important issue," they are "not the only issue."
No reference was made in the final communiqué to the value of China's yuan against the US dollar – the key imbalance – although Chancellor Alistair Darling confirmed that the Chinese delegation had been willing to discuss it at the summit.
The G20 also committed to widening the group of countries who are members of the exclusive International Monetary Fund "club" in order to give developing countries such as Brazil and India a seat around the table, and to reflect China's importance in the world economy.
But the two-day summit stopped short of delivering actual changes to the make-up of the IMF, instead giving a commitment that the organisation itself will agree the changes by 2011.
The summit ended without any fresh commitment on global trade, other than a reaffirmation of the need to end the World Trade Organisation's current Doha round "as quickly as possible."
Lawyer Dan Horowitz at Holman Fenwick Willan said that international leaders' undertaking is too vague, and that it should have committed to a firm timetable for the conclusion of the talks.
Saturday, 26 September 2009
G20: Banks to be forced to double capital levels
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