Factbox – G20 financial regulation agenda

(BestGrowthStock) – Finance leaders from the Group of 20 economies have signed off on a series of measures on regulation which are expected to be approved at the leaders meeting in Seoul in November.

The following are the key reforms that can be expected:

BASEL III

The Basel Committee of central bankers and regulators approved a “Basel III” package in September to toughen up global capital and liquidity requirements for banks from 2013. It forms the cornerstone of the G20’s reforms to apply lessons from the financial crisis.

The package is expected to be approved in its current form by the G20 summit and hailed as a major advance in financial stability.

TOO BIG TO FAIL

The Financial Stability Board (FSB), tasked by the G20 to implement its regulatory pledges, will present recommendations on “systemically important financial institutions” or SIFIs — a reference to the world’s 30 or so biggest banks whose failure would destabilize the broader financial system.

These will make it mandatory for regulators to make sure there is a resolution regime for any big lenders in their country and that each of them must have a living will. There will also be guidelines on ensuring such financial institutions are subject to an increased “intensity” of supervision.

There is also broad agreement that these “too big to fail” firms should hold extra “loss absorption” capacity with national authorities setting some or a combination of the below items:

— capital surcharge: force big banks to hold a capital buffer on top of Basel III. Switzerland has already pushed ahead with topping up on Basel III capital requirements but Japan, Germany and France oppose surcharges on their big banks.

— contingent capital or CoCos, a bond that converts into equity when an agreed trigger point is hit. Switzerland has approved CoCos for topping up capital of its two big banks but some regulators question market appetite for such debt and its reliability in times of crisis.

— bail-in debt: a bank’s creditors agree in advance to have a restructuring imposed on them if the firm hits the skids.

This process is likely to be drawn out, with the specific loss-absorbency measures unlikely to be set until after the resolution regimes are in place, which could take some time.

The FSB has said it will prioritize work on “global” SIFIs.

OVER-THE-COUNTER DERIVATIVES

The FSB will recommend ways to ensure that as many contracts as possible in the $615 trillion derivatives market are standardized so they can be centrally cleared and traded on exchanges.

It will also recommend that all over-the-counter derivative trades be reported to central depositories.

The United States has already adopted a law to this effect with the European Union on the same track.

CREDIT RATING AGENCIES

The FSB will propose ways to reduce the “mechanical reliance on ratings.” It will recommend that references to credit rating agencies in rules and regulations will be removed or replaced, “wherever possible,” with suitable alternative standards of creditworthiness assessment.

This is aimed at reducing the “cliff effects” caused by changes to credit ratings, which have been blamed by regulators for causing market instability.

ACCOUNTING

A G20 deadline of June 2011 for reaching a single set of global accounting standards will not be met in full as differences have emerged between amendments in the United States and elsewhere in the world. The summit may put pressure on standard setters to redouble their efforts to forge common rules.

SHADOW BANKING

The FSB’s big task for next year is to devise ways to improve oversight of the “shadow banking” system. The fear is that as banks face tighter scrutiny, credit activity will move to less regulated areas. Supervisors want to have powers to extend the “perimeter” of regulation quickly if they spot new risky activities.

(Reporting by Huw Jones and Rachel Armstrong; Editing by Tomasz Janowski)

Factbox – G20 financial regulation agenda