G20 urges banks to boost capital

PITTSBURGH – The Group of 20 on Friday called for crackdowns on banker bonuses and a build-up in banks’ capital bases as leaders seek to get the battered global financial system back into fighting trim.

Whether member nations of the international body of top developed and emerging economies get with the programme remains to be seen. The G20 has no lawmaking power, but it sets the tone for institutions that do, and leaders at the summit appealed for nations to act.’Never again should we let the schemes of a reckless few put the world’s financial system and our people’s well-being at risk,’ said US President Barack Obama.Nations around the world have spent trillions of dollars to rescue their economies in the last year after risky investments put many major banks on the brink of failure.In addition to seeking curbs on banker pay, the G20 called for crackdowns on the over-the-counter derivatives market, widely blamed for amplifying the financial crisis, the worst in generations.If the G20’s proposals are embraced, ‘our financial system will be far different and more secure than the one that failed so dramatically last year,’ Obama said as the summit in Pittsburgh closed.’These rules will be phased in as financial conditions improve and economic recovery is assured, with the aim of implementation by end-2012,’ said the final summit communique.Bankers cautiously welcomed the G20’s message, which urged requiring them to set aside more and higher quality capital to protect against potential future losses by the end of 2012, with an end-of-2010 deadline for thrashing out exact figures for higher capital levels. ‘Clarity on the timetable is good and what we are now looking for is clarity on the numbers. It’s a good start,’ a spokeswoman for the British Bankers’ Association said.In the long run, banks will likely be made to sock away more capital and that could hurt their profitability, which some analysts expect would result in a long-term drag on banking stocks.’It’s pretty clear the concept of holding more capital and better capital is almost a given coming out of this downturn,’ said Jeffery Harte, an analyst at Sandler O’Neill & Partners.New rules on banker pay were also recommended, including a ban on multi-year bonus guarantees, clawing back of pay where performance has slumped, paying more bonuses in shares, and limiting bonuses as a percentage of revenues in cases where banks have low capital, the draft said.Years of multi-million dollar bonuses awarded to financial executives, even at money-losing financial firms, have outraged political leaders and become a target for advocates of tighter oversight of banks and capital markets.A furore erupted in March over millions of dollars in bonuses paid to executives at bailed out US insurance giant American International Group.Wall Street titan Goldman Sachs further inflamed the issue in July by setting aside US$11,3 billion for compensation in the first half of 2009, just months after getting a US$10 billion taxpayer bailout, which it has since repaid.In addition, the practice of tying bonuses to short-term performance is seen as having contributed to the risky investments that contributed to the financial crisis.’We will tie executive pay to long-term performance so that sound decisions are rewarded instead of short-term greed,’ said Obama.Some European governments, notably France, had pushed for fixed quantitative limits on bonuses in the financial sector, but that approach was not included in the final G20 communique. The United States opposed it as politically unfeasible.The statement said cooperation among the world’s largest economies would ensure regulatory reform.’If we all act together, financial institutions will have stricter rules for risk-taking, governance that aligns compensation with long-term performance, and greater transparency in their operations,’ the G20 statement said.The summit backed a deadline for converging accounting rules by mid-2011 to cut costs for multinational companies, as well as a crackdown on over-the-counter derivatives by the end of 2012, the draft communique added.-Nampa-Reuters