Financial Regulatory Forum

G20 debates exit strategy, capital standards, IMF raises GDP outlook

By Reuters Staff
September 4, 2009

U.S. Treasury Secretary Timothy Geithner (C) addresses a meeting at the G20 Finance Ministers summit in London September 4, 2009. G20 policymakers gather in London on Friday and are expected to promise to keep economic support packages in place until recovery is certain and seek to reassure financial markets they have credible plans to withdraw the stimulus when appropriate.  REUTERS/Kevin Coombs  By Sumeet Desai and Anna Willard
LONDON, Sept 4 (Reuters) – World finance leaders shifted their focus from crisis fighting to banking reform on Friday as evidence mounted that the worst global recession in decades was finally drawing to a close.

U.S. Treasury Secretary Timothy Geithner called for tougher new bank capital requirements aimed at curbing some of the risky lending practices that have been blamed for the crisis, a position supported by another global banking powerhouse, Britain.

But building broader consensus among the Group of 20 finance ministers gathering in London this weekend may prove difficult. French Finance Minister Christine Lagarde said revising existing capital rules known as Basel II should be sufficient.

As the group laid the groundwork for a meeting of heads of state later this month in the United States, there was widespread agreement on at least one issue — no one was in a hurry to withdraw emergency economic assistance until they were certain the recovery was sustainable.

“People are at risk of saying the job’s done, now we can throttle back,” British finance minister Alistair Darling told Reuters. “We’ve made those mistakes before — most notably, in America, in the late 1930s, called it wrong and got themselves back into a recession again.”

More than two years of financial upheaval have left deep economic scars in many countries. With unemployment high and banks reluctant to lend, economic growth may be subdued for a while, putting pressure on governments to maintain supports.

G7 sources have told Reuters that the G20′s communique, due on Saturday, will likely maintain the pledge to keep policy accommodative for as long as was needed.

Leaders from Brazil, Russia, India and China, the four emerging markets that comprise the “BRIC” economies, met with Geithner on Friday, They called in a communique for a more powerful voice in the global financing agencies than the U.S. and EU have so far offered.
ECONOMY HEALING
There were signs the global economy was beginning to heal. The IMF revised up its forecast for the world economy this year and next, according to a document obtained by Reuters, and economic data in the United States showed there were slightly fewer jobs lost in August as economists had feared.

The IMF now forecasts global shrinkage of 1.3 percent in 2009, a shade less than its April forecast of a 1.4 percent contraction, and growth of 2.9 percent in 2010, revised up from 2.5 percent previously.

But policymakers are cautious about declaring victory yet, especially given most major economies are still shrinking this year and only expected to post sluggish growth next year.

“Unwinding the stimulus too soon runs a real risk of derailing the recovery, with potentially significant implications for growth and unemployment,” said IMF chief Dominique Strauss-Kahn at a conference in Berlin on Friday.

TOUGHER REGULATORY ENVIRONMENT
Once the recovery is firmly on track, banking regulations are likely to become more restrictive. Geithner called for higher capital levels at all banks and even more stringent requirements for those that could pose a threat to overall financial stability.

He wants international agreement by the end of next year, with new standards implemented by the end of 2012.

ING analyst Rob Carnell said that while tighter capital rules were probably “not a bad idea,” clamping down could constrict lending and put a heavy burden on banks struggling to recover from heavy losses.

“Raising capital requirements for banks to levels that will provide a much deeper buffer against future asset crises may also make it harder for a repeat of this crisis, but when capital is still being eaten up with rising default and delinquency rates, it is a very tough hurdle for banks to clear,” he said.

“It is also totally at odds with governments’ other demands that banks increase lending,” he added.

With unemployment likely to rise for some while and eat into government poll ratings, the politicians are also looking for someone to blame and will stress that banks cannot return to business as normal.

France, Germany and Britain on Thursday put forward joint proposals to change the bonus culture at banks that many say was the root of the current crisis. These include deferrals and subjecting payments to claw back but fall short of the tax being advocated by some charities and initially the French.

Other issues on the table include ensuring the IMF gets the full resources promised to it at April’s London summit when leaders pledged a mammoth $1.1 trillion increase in the lender’s firepower.

Dinner on Friday will discuss how the IMF and the World Bank can be reformed to reflect better the emergence of the new economic powers.

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