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G20 Leaders Tout Progress on Bank Regulation, But Big Issues Remain

 WASHINGTON—U.S. and foreign leaders meeting at the Group of 20 summit agreed to toughen regulation of global banks, but some key differences remain related to capital rules, compensation and derivatives oversight.

The complexity of the issues suggests they could take months or longer to be resolved. The leaders of the 20 largest industrial and

developing nations agreed to several principles Friday at a meeting in Pittsburgh and committed to more rigorous oversight of financial markets, with a particular focus on the world's largest firms.

U.S. and foreign leaders at the Pittsburgh G-20 summit. Reuters

"Where reckless behavior and a lack of responsibility led to crisis, we will not allow a return to banking as usual," the leaders said in their communiqué following the meeting.

French President Nicolas Sarkozy, who had pressed global leaders to hit banks with much tougher limits, praised the progress and labeled it a "revolution." He emphasized the areas where leaders vowed to revisit.

"What would have been considered as a provocation until only recently is now seriously looked at by the G-20," Sarkozy said. He was referring in particular to the G-20's request that the International Monetary Fund look at possible ways in which the financial sector could "make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system."

Several unresolved issues remain, however. U.S. officials have argued that the world's largest banks should hold much more capital than other financial companies because of the risk they pose to financial markets, but European officials have resisted and appear to be holding their ground.

There is broad agreement among leaders that banks should hold more capital, but the split hinges on whether the largest banks should hold even more than everyone else, a position the U.S. holds.

"The largest, most interconnected firms should face significantly higher capital and liquidity requirements," U.S. Treasury deputy secretary Neal Wolin told a group of financial executives Thursday.

The Financial Stability Board, an group of regulators asked by the G-20 to develop recommendations, issued a list on Friday that appeared to side with European concerns, saying it would "assess" whether to make such a move for large, systemically important banks.

The communiqué appeared to side with the FSB's view, saying "standards for large global financial firms should be commensurate with the cost of their failure." It did not say that large banks should hold even more capital than others, or even that they were considering such a position.

In other areas, the FSB was more direct. It said bank regulators "should limit" bonuses paid to employees "as a percentage of total net revenues when it is inconsistent with the maintenance of a sound capital base." This reflects an aggressive push by France and Germany to limit the amount of money banks pay executives or employees who influence the company's risk.

The FSB also said more than 50% of bonuses "should be awarded in shares or share-linked instruments" to ensure that the incentives are aligned with the "long-term value creation and the time horizons of risk." The communiqué said it "fully endorsed" the FSB's position on "aligning compensation" in this area, though it did not mention these specific percentage limits.

U.S. officials, led by the Federal Reserve, are looking to crack down on compensation as well, but they aren't expected to be as proscriptive.

If European regulators decide that bonus pools should be limited to a certain percentage of revenue, this could become a major issue for U.S. officials.

Domestic regulators have always supervised their own banks differently, but there has been a push in recent years to more closely coordinate bank supervision because many large institutions operate globally. The FSB report stressed the importance of global standards on capital, compensation and derivatives.

Another area that could potentially become an issue is the regulation of over-the-counter derivatives. The FSB recommendations and communiqué said these products should be traded on exchanges "where appropriate." The White House has also held this view, but Senate Democrats, have suggested they are more inclined to require banks to process these contracts through a central clearinghouse. This is a position endorsed by the banking industry.

Congressional Democrats are pushing to overhaul financial market regulation by the end of the year, but they have run into resistance from Republicans, business leaders, and conservative Democrats worried about constraints on growth.

Some of the initiatives, such as higher capital requirements and tougher compensation rules, can be done without Capitol Hill's involvement.

(powered by: THE WALL STREET JOURNAL.)

 

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