G20 leaders agree to bank reforms in ‘new global compact’

Banks will be required, under rules agreed at the G20 summit, to set aside much larger capital reserves by 2012 to minimise the need for future bailouts, but it will be left to individual national regulators to set their own capital requirements.

While thin on detail, the agreement announced at the end of the G20 meeting in Pittsburgh last night cements a global compact of international co-operation and marks the emergence of a new, and still fragile, economic order.

The G20 leaders pointed to their considerable successes in setting the world on the path to recovery since their previous meeting, in London in April, when the world was reeling from a worldwide credit crisis.

“It worked,” they said simply.

This ebullience was underscored in the meeting’s confirmation that the G20 would become the permanent forum for international economic co-operation, with the G8 continuing to meet on matters of common importance, such as national security.

The G20 will next meet in Canada in June 2010 and then in Korea in November 2010, meeting annually thereafter, starting in France in 2011.

President Obama said that the G20 had “brought the global economy back from the brink”, and Gordon Brown said that the new economic regime would help to restore long-term balanced growth around the world.

Hu Jintao, the Chinese President, emphasised his commitment to continued co-operation, although he also underlined the need to reject protectionism and to “address the yawning development gap between the North and the South”.

The leaders said, however, that the process of recovery remained incomplete, with unemployment unacceptably high in many countries. “We will avoid any premature withdrawal of stimulus,” they said. They also agreed to restrictions on bankers’ pay to discourage excessive risk-taking of the type that many regard as a primary cause of the financial crisis.

“Where reckless behaviour and a lack of responsibility led to crisis, we will not allow a return to banking as usual,” their communiqué stated.

Yet leaders stopped short of French and German ambitions to impose a cap on bonus payments. Banks will be required to retain a larger part of their profits, to link pay more clearly to long-term performance, to conduct annual independent pay reviews and to provide greater transparency.

There are also provisions for clawing back pay from poor performers and for paying some bonuses in stock, as well as limiting bonuses to a set percentage of revenues in cases of banks with low capital.

The meeting agreed “strict and precise timetables” for these reforms, which include a commitment to “improve the over-the-counter derivatives market and to create more powerful tools to hold large global firms to account for the risks they take”.

The communiqué outlined steps to address the trade and financial imbalances in a new framework for sustainable and balanced growth, which would require countries to submit their economic policies to a “peer review” under the auspices of the IMF. In practical terms, this would lead to America saving more and bringing down its deficit, while Europe would increase investment and China would reduce its trade surplus and boost domestic demand.

The G20 meeting agreed in principle to a rebalancing of the IMF to give greater representation to China and developing nations, by transferring at least 5 per cent of representation to under-represented countries, although it stopped short of specifics.

It also confirmed a contribution of $500 billion (£313 billion) to a renewed and expanded IMF New Arrangements to Borrow.

The meeting agreed to phase out “over the medium term” government subsidies for the production and consumption of fossil fuels.

It stopped short of detailing how it would finance climate change mitigation, but it called on the G20 finance ministers, who will meet in Scotland in November ahead of December’s international climate change conference in Copenhagen, to develop a range of financing options.

The Pittsburgh meeting also announced a clampdown on “regulatory havens”, where the laxity or absence of proper financial regulation and reporting would threaten the integrity of the new rules agreed by G20 members.

The countries are understood to include those with lax corporate requirements, such as the Turks and Caicos Islands and Panama.

The leaders are expected to call for the drawing up of a blacklist of noncooperative jurisdictions. This follows agreement at the G20 meeting in April to “name and shame” tax havens.

Chinese warning

President Hu Jintao said that the global economic recovery from the worst financial crisis in decades was still fragile and the Chinese leader called for stepped-up efforts by developed and emerging economies.

Although financial markets were becoming more stable, Mr Hu said, “we are soberly aware, however, that the foundation of an economic rebound is not yet solid, with many uncertainties remaining. A full economic recovery will take a slow and tortuous process.”

Speaking at the G20 summit in Pittsburgh, Mr Hu called on all countries to maintain the intensity of their economic stimulus plans. (AFP) (Alexandra Frean, The Times) http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6850185.ece

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