G20 urges banks to muscle up on capital by 2012-draft

September 25, 2009

France's President Nicolas Sarkozy (L) and his wife Carla Bruni-Sarkozy (2nd R) stand with U.S. President Barack Obama and first lady Michelle Obama as they arrive at the Phipps Conservatory for an opening reception and working dinner for heads of delegation at the Pittsburgh G20 Summit in Pittsburgh, Pennsylvania, September 24, 2009.     REUTERS/Philippe Wojazer (UNITED STATES POLITICS BUSINESS) By Kevin Drawbaugh
PITTSBURGH, Sept 25 (Reuters) – Banks would have to bulk up on capital and slim down on bonuses under a conditioning plan recommended on Friday at the G20 summit by world leaders seeking to avert future financial crises.

Whether member nations of the international body get with the program remains to be seen. The G20 has no lawmaking power, but it sets the tone for institutions that do.

Bankers cautiously welcomed the G20’s message, which urged requiring them to set aside more and higher quality capital 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.

The new capital rules would be phased in as financial conditions improve and economies recover, said a draft of the summit’s communique obtained by Reuters.

“As expected there are comments about a stronger more robust capital regime, but much of the detail and practical implications are still to be seen and resolved,” said Ian Gordon, an analyst at Exane BNP Paribas.

In the long run, banks will likely be made to sock away more capital and that would hurt their profitability, he said.

“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

“Reforming compensation policies and practices is an essential part of our effort to increase financial stability,” it said.

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 draft. The United States opposed it as politically unfeasible.

“It’s entirely appropriate to focus on strengthening the connection between employee pay and long-term incentives,” said Scott Talbott, a lobbyist at the Financial Services Roundtable, an industry group in Washington.

“Setting a cap would go too far, be too draconian, and would have the government replacing the free market as far as setting salaries,” he said.

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 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.

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