G20 faces fight to reform finance

Economic policymakers from the Group of 20 nations gathering this weekend in London are finding that their drive to prevent the next financial crisis may be jeopardised by their success in countering the current one.

Stock markets are rebounding, with the MSCI World Index of 23 developed nations gaining 59 per cent since March 9, when it reached its lowest level since 1995. Signs of economic revival are also appearing in countries such as the US and the UK after the worst slumps since World War II.

The rally is sapping the political push to impose tougher regulations on financial-services companies. While that might help earnings for Citigroup, the third-largest US bank, and Barclays, the UK's second-biggest lender, it may also leave the global economy susceptible to a fresh cycle of boom then bust.

"We're getting a recovery, so dealing with the true problems is going to be more difficult," said Raghuram Rajan, a former chief economist at the International Monetary Fund who is now a professor at the University of Chicago.

"The risk is that we're just going to tool around until the next crisis."

US Treasury Secretary Timothy Geithner, Bank of England Governor Mervyn King and other G20 finance ministers and central bankers meet on Saturday and Sunday to prepare for the Pittsburgh summit of leaders three weeks later. They are convening five months since their governments blamed "major failures" in supervision as one of the "fundamental causes" of the worldwide credit crunch and vowed to "strengthen financial regulation to rebuild trust".

That drive is now in jeopardy as the crisis ebbs. The IMF plans to raise its global growth forecast to "just below" 3 per cent for 2010 from its 2.5 per cent estimate of July, Jorg Decressin, a division chief in the lender's research department, said yesterday.

Banks are regaining lobbying strength, and other political goals such as health-care reform in the US have captured the attention of legislatures. International differences, including over how to restrain bonuses, are also undermining the G20's united front.

Central bankers are already pressing governments not to slow the pace. "It would be a catastrophe not to draw all the lessons from the present crisis in terms of regulation," European Central Bank President Jean-Claude Trichet told a symposium in Jackson Hole, Wyoming.

"Much remains to be done," Bank of Israel Governor Stanley Fischer told attendees the same day. The former Citigroup vice-chairman suggested the global banking system may need to undergo radical restructuring, perhaps by imposing limits on the size of individual financial companies.

Fischer also recommended that banks be forced to set aside more capital and central banks be given the power to monitor financial systems.

"What I'm very worried about is the recovery is going to come and the political will is going to disappear to actually repair the system," said Stephen Cecchetti, head of the monetary and economic unit at the Bank for International Settlements in Basel, Switzerland, which serves as a bank for central banks.

Geithner told reporters in Washington yesterday that he was confident the US and other countries would ultimately adopt "more effective constraints" on excessive risk-taking by financial institutions. He also said the G20 would discuss in London the framework of a new accord on capital requirements.

Policymakers would be able to adopt such standards on their own, without requiring action by individual country legislatures.

Banks may be the winners of a regulatory impasse because their profits would be spared, said Simon Johnson, a former chief IMF economist who is now a senior fellow at the Peterson Institute for International Economics, a Washington-based research organisation.

President Barack Obama in June proposed the most sweeping overhaul of the US financial-regulatory system in 75 years, calling for the creation of an agency to monitor mortgages and other consumer products and tighter oversight of the country's biggest banks and institutions.

Unless steps are taken to reduce complexity and leverage in financial markets, "we're going to have a replay of what has just happened over the last few years", said Richard Bookstaber, a former trader at New York-based Morgan Stanley.

Financial firms are showing signs of reverting to their old ways, Johnson said. Zurich-based Credit Suisse Group, Switzerland's second-largest bank, and Scotia Capital, the investment-banking unit of Bank of Nova Scotia, Canada's third-largest bank, are among those increasing lending to buyers of high-yield company loans and mortgage bonds at what may be the fastest pace since the crisis began.

Still, stocks fell around the world this week on concerns that their rally has outpaced the prospects for earnings and economic growth.

In the US, Obama's plans face resistance from lawmakers, overseers and the banking industry. Federal Reserve Chairman Ben Bernanke, Federal Deposit Insurance chairwoman Sheila Bair and other regulators have opposed giving up their consumer-protection powers under an Administration plan to set up a new agency to police financial products. Banks have also opposed the new regulator, arguing it would add a layer of expense to their operations and raise borrowing costs for customers and companies.

"There's no chance reform gets done this year," said Andrew Laperriere at International Strategy & Investment Group, noting the breadth of changes proposed by the Administration. It also may take more than a year for the European Union to unify market oversight in its 27 nations.

Executive pay is one area of disagreement that may become a point of contention at this week's meeting of financial officials from China, India, Canada and other G20 countries.

European finance ministers meeting in Brussels yesterday agreed to push for tighter rules on bank bonuses.

"Bonus payments are the thing that quite rightly drives a lot of people up the wall," German Chancellor Angela Merkel said in Berlin last month with French President Nicolas Sarkozy beside her. The two leaders said they want the G20 to limit the size of banks and tighten capital rules.

France drew criticism from US analysts and investors last week by announcing it won't hire financial firms unless they follow their French counterparts and defer some bonus payments.

GROUP OF TWENTY

* The G20 is a group of finance ministers and central bank governors from 19 of the world's national economies, plus the European Union.

* G20 finance ministers and central bankers meet on Saturday and Sunday to prepare for the Pittsburgh summit of leaders three weeks later.

* The G20 members are: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, United States, and the European Union.

- BLOOMBERG