G20 takes on banks and bonuses

Group of 20 leaders built on the common front they forged in fighting the financial crisis to chart a shared path towards a more stable banking system and a stronger global economy.

President Barack Obama and his counterparts ended their Pittsburgh meeting promising to "raise standards together" to ensure banks restrain pay and build up capital buffers. They also established a peer-review process to monitor individual efforts to rebalance economies and to hand emerging nations a greater say in managing world growth.

"There is much more work to be done, but we leave here today more confident and more united in the common effort of advancing security and prosperity for all of our people," Obama told reporters.

He praised the group's efforts in battling the financial crisis. "Our co-ordinated stimulus plans played an indispensable role in averting catastrophe. Now we must make sure that when growth returns, jobs do too."

Obama said actions taken so far "brought the global economy back from the brink".

Enacting the proposals may prove difficult. Banks buoyed by rising stock prices may resist or find a way around the new regulations; countries may ignore policy advice from others and the G20 itself may be too unwieldy to deliver on its goals.

"The G20 has to prove itself," said Simon Johnson, a former chief economist of the International Monetary Fund. "They need to establish legitimacy and get things done."

A lot is at stake. While the international economy is showing signs of recovering from its worst recession since World War II, pockets of weakness remain, especially in the US and other industrial countries. Demand for US durable goods unexpectedly fell in August and loans to households and companies in Europe grew at the slowest pace on record, data showed on Saturday. European and US stocks posted their biggest weekly declines since July.

The Standard & Poor's 500 Index has dropped 2 per cent since September 18 and Europe's Dow Jones Stoxx 600 Index has slipped 2.4 per cent in the same period.

The third summit of G20 leaders in the past year plotted a roadmap for revamping the banking industry after the two previous meetings, in Washington and London, focused on fighting market turmoil and reversing the spiral into recession.

"Given this is the third meeting of these people in 10 months, the fact that they've gotten as much substantively done as they have is quite impressive," said Edwin Truman, a former adviser to Obama's Treasury and a senior fellow at the Peterson Institute for International Economics in Washington.

After recording US$1.6 trillion ($2.2 trillion) in losses and writedowns, banks were told to avoid "multi-year guaranteed bonuses" and a "significant portion of variable compensation" must be deferred, paid in stock, tied to performance and subjected to clawbacks if earnings flop. The G20 baulked at endorsing a French proposal to introduce specific caps on pay.

Awards must also be curbed if they are "inconsistent with the maintenance of a sound capital base".

Regulators should be allowed to modify the compensation practices of key firms. Banks will also have to increase the quality and quantity of capital they hold by the end of 2012.

"There is no going back to systems of bonuses that were based simply on short-term speculation and not on the long-term success of companies," British Prime Minister Gordon Brown said.

French President Nicolas Sarkozy said: "I am very satisfied by what we decided."

The growing influence of emerging economies such as China and Brazil was marked by the agreement that the G20 would supplant the G8 as the guardian of the world economy.

The G20's newfound status reflects how the slump was sparked by the developed economies and the rebound is being powered outside their ranks. That is a reversal from previous international crises when the G8, whose genesis lies in the oil shock of the early 1970s, drove the recovery.

The smaller group will continue to play a role in security and foreign-policy issues. China and other "underrepresented" economies will also gain greater sway at the IMF and World Bank through higher voting rights. As the G20 becomes the primary arena for politicians to forge pacts on the economy, officials agreed to establish a "framework for strong sustainable and balanced growth".

Countries with significant deficits in their trade accounts promised to save more, while those with surpluses will strengthen domestic demand. The IMF will help them to assess one another's attempts to meet those objectives.

Some economists cast doubt on the pledges, given no sanctions will be levied to enforce them and a similar push in 2006 by the IMF petered out.

"The jury is still out on the implementation side of this framework," said Stephen Roach, chairman of Morgan Stanley Asia. "It boils down to whether sovereign nations are willing to abdicate national policy to the world's collective interests."

Another test for the G20's credibility may be whether regulators can enforce the new rules as the rebound in growth and stockmarkets since March helps banks regain lobbying strength.

If they can, the profits and share price of banks from Goldman Sachs to Barclays would fall with their scope to invest and trade, said former Bank of England policymaker Charles Goodhart.

"Regulation almost certainly means the size of the banking industry will contract and its rates of return will go down," said Goodhart, professor emeritus of banking and finance at the London School of Economics.

The regulatory overhaul is "for real, but there will be plenty of argument over the detail of how it's done," said Leon Brittan, vice-chairman of UBS Investment Bank and former European Union trade commissioner.

The mixed economic environment and rising unemployment are leaving governments with no option but to keep up their support of banks and fiscal stimulus, which totals more than US$2 trillion, even as their debt mounts. They promised to develop a plan for withdrawing the aid when expansion is secured.

The G20 was originally established in the 1990s as a forum for finance chiefs and its leaders met for the first time in Washington last November and then in April in London.

Canada will hold the next summit in June 2010 followed by South Korea in November 2010 and France in 2011.

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

- BLOOMBERG, AP