Leaders of the world’s largest rich and emerging economies will back plans for tighter capital and liquidity rules for banks at the G20 Summit but leave the bulk of the financial regulation issues off the table.
Leaders meeting in Seoul on today and tomorrow are certain to approve plans to triple the amount of capital that banks need to hold in reserve, experts believe.
The Summit will endorse the “Basel III” package to set an effective ratio of 7% of core capital compared with the current 2%.This includes a new minimum core ratio of 4.5%, and an extra buffer of 2.5% without which banks will be constrained from paying dividends and bonuses.
“This is something that will go through on the nod,” said Stephen Lewis, chief economist at Monument Securities in London and a veteran observer of four decades of attempts at financial sector reform.
“I get the impression they think they have put the issue to bed but implementation may take years.”
Plans to impose a whole new system of financial regulation to prevent a recurrence of the credit crisis that pushed the world to brink of financial Armageddon had been seen as the top G20 priority until recently.
A fifth of the Toronto Summit communiqué five months ago was devoted to “strengthening the international financial regulatory system”.
But a major diplomatic row between the US and China over how to resolve global imbalances and avert a currency war will overshadow the summit.
Leaders are likely to hail the new capital rules as a mark of success. “I am quite sure that the G20 leaders in Seoul will endorse the new framework,” Il Sakong, chairman of the Presidential Committee for the Summit, said this week. “So we might consider naming it as the ‘Seoul capital framework’ or ‘Seoul capital accord.”
Hopes have faded that a final deal will be reached to regulate so-called systemically important financial institutions (Sifis).
The Basel Committee on Banking Supervision proposed that banks deemed as too big to fail hold an extra 1-2% of core assets and that countries set up resolution schemes.
While all members accept there should be a resolution regime, the idea that large banks should hold extra capital has been opposed by Japan, Germany and France.
Professor Viral Acharya at New York University and author of Regulating Wall Street, believes the issue should be on the table in Soul.
“A key issue is should there be a global financial regulation for systemically important financial institutions and what should that regulation look like.”
He said he hoped that the G20 would indicate which of the 20-plus largest global banks are likely to be defined as Sifis. But he warned: “This is such as nuts and bolts of the international regulatory system that I wonder if it is better discussed by politicians or by central bankers and regulators.”