FACTBOX-G20 progress on financial regulation

June 3 (BestGrowthStock) – Finance ministers from the G20 group of
industrial and emerging countries meet in Busan on June 4-5 to
review pledges made in 2009 to strengthen regulation and learn
lessons from the financial crisis.

The focus is on the European Union and United States, where
much of the financial crisis has played out.

The United States aims to sign into law in July a sweeping
piece of legislation that implements most of the G20 pledges.

The EU is implementing the G20 pledges in a string of
individual laws on credit rating agencies, hedge funds, bank
capital and supervision.

Following is the state-of-play on the main regulatory
pledges, many of which are not due to take effect until the end
of 2012.

BANK CAPITAL: G20 wants banks to set aside more capital, with
a higher proportion in common stock or retained earnings by end
of 2012. The Basel Committee on Banking Supervision put forward a
package of Basel III reforms in 2009 and aims to finalise it by
this November’s G20 summit. Most banks already hold more capital
than under the existing Basel II accord, which the United States
has yet to fully adopt.

Basel is seen as the litmus test of G20 resolve to toughen up
financial rules. Banks are lobbying hard to delay introduction of
Basel III and dilute some elements on deferred taxes and
treatment of minorities. Some countries are also leery of
proposed leverage caps. There are already signs of slippage in
introducing separate, tougher capital rules on bank trading books
from January.

HEDGE FUNDS: G20 agreed hedge funds above a certain size
should be authorised and obliged to report data to supervisors.

U.S. reform in line with G20 pledge but the EU going much
further by including private equity groups and restrictions on
non-EU fund managers seeking European investors.

DERIVATIVES: The G20 called for greater standardisation and
central clearing of privately arranged over-the-counter (OTC)
contracts by the end of 2012 to cut risk. Contracts should also
be traded on an exchange or other platform, where appropriate.

Japan has adopted such rules while the United States is well
on the way but the EU won’t make formal proposals until July.

Germany unilaterally introduced a ban on “naked” selling of
sovereign credit default swaps but other EU states won’t follow
suit. The United States is keen on pushing derivatives onto
exchanges as well as clearing while the EU is focusing more on
clearing.

ACCOUNTING: G20 set a June 2011 deadline for creating a
single set of high-quality accounting rules, which essentially
means thrashing out common ground between the International
Accounting Standards Board and the U.S. Financial Accounting
Standards Board to give investors greater transparency.

There are significant differences between IASB and FASB over
accounting for financial instruments and the two boards said on
June 2 they won’t be able to have a full set of common standards
by the G20 deadline.

SECURITISATION: G20 wants banks to start retaining some of
the securitised products they sell by 2010 as an incentive to
raise underwriting standards. The EU has adopted a law mandating
retention of 5.0 percent, with the U.S. law set to do likewise.

CREDIT RATING AGENCIES: G20 wanted them registered and
supervised by the end of 2009. The EU has adopted a law mandating
registration and direct supervision that takes effect this year.
The U.S. bill includes similar provisions.

FINANCIAL SUPERVISION: The G20 called for supervision of
systemic risk at local and international level.

The EU’s executive European Commission has proposed draft
laws to create a European Systemic Risk Board, hosted by the
European Central Bank, due to be in place during 2010. Three new
pan-EU supervisory authorities for banks, markets and insurers
are to work closely with the ESRB.

The U.S. bill sets up a council of regulators chaired by the
Treasury with the Federal Reserve playing a role.

PAY: The G20 has endorsed principles to stop bonus schemes in
banks from encouraging too much short-term risk taking, such as
deferral of part of a bonus, including a claw-back mechanism,
payment in the form of shares rather than cash and avoiding
multi-year guaranteed bonuses. Not all G20 members have applied
the new principles.

“TOO BIG TO FAIL”: Several measures are mooted to avoid
taxpayers having to foot the bill for future bailouts and end a
belief among banks they are too big for governments to allow them
to fail:

The International Monetary Fund has proposed two bank taxes
to pay for bailouts but there is no G20 consensus so far.

The United States may adopt the “Volcker Rule”, a structural
measure that bans risky proprietary trading at some banks but the
EU has rejected such moves.

Basel III will force banks to build up extra capital buffers
in good times to tap in troubled markets and lessen the need for
taxpayer bailouts but there are arguments over who and what
should trigger the build-up or draw-down of buffers.

Systemically important firms should develop contingency and
resolution plans — “living wills” — by the end of 2010. Britain
is already running a pilot programme.

Possible “surcharges” on systemically important firms. The
Basel Committee still looking at this.

Stock Trading
(Reporting by Huw Jones, editing by Tomasz Janowski)

FACTBOX-G20 progress on financial regulation