G20 Summit: The Group of Twenty

G20 Summit: The Group of Twenty

World leaders agree to step up financial oversightG20 leaders vowed to toughen oversight, but stopped short of calling for a global super-regulator on hedge funds.
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WASHINGTON: Leaders of the world's 20 largest economies vowed on Saturday to toughen oversight of the troubled financial system, but stopped short of calling for a global super-regulator or new restrictions on hedge funds. At an economic summit hosted by soon-to-depart US President George W Bush, officials faulted regulators and policymakers for not tackling financial problems and agreed on a foundation for reform.

Rich and developing nations alike, many having recently bailed out their banking sectors, blamed credit rating agencies, complex derivatives, banks, accounting standards, executive compensation and regulators. Leaders agreed that "colleges" of international supervisors were needed for all major global financial institutions, such as Swiss-based UBS AG or Goldman Sachs. Financial industry experts said it was significant that the 20 largest economies met to discuss financial markets. However, they called the G20 statement vague and broad.

"In terms of the substance, it's remarkably bland," said Edwin Truman, senior fellow at the Peterson Institute for International Economics, a think tank in Washington, DC. "Even the description of supervisory colleges for large complex institutions is pretty vague," Truman said. "It's not much more than what goes on today." Some financial industry reforms are already in motion. The US and the European securities regulators are taking steps to ensure that rating agencies such as Standard & Poor's, Moody's Investors Service and Fitch Ratings, avoid conflicts of interest, provide greater disclosure and differentiate ratings for complex products, such as mortgage-backed securities.

The US and the EU accounting rule makers have also begun working on standardizing global accounting rules and addressing weaknesses in accounting and disclosures for off-balance sheet items. Regulators are already working on central clearing of credit default swaps, sophisticated instruments blamed for exacerbating the credit crisis. The swaps are used to insure against risk that a borrower will default on debt and are often speculatively traded.

CEO PAY RECOMMENDATIONS "Credit default swaps should be processed through central clearing houses," Bush said in a statement after the summit. His comments were a marked departure from the Bush administration's pro-business policies centered on the premise that free markets should police themselves. On corporate executive pay, the group of 20 leaders told their finance ministers to come up with recommendations on compensation practices and said pay incentives should discourage excessive risk-taking. Leaders said the Financial Stability Forum -- an advisory body of rich nations' central banks, regulators and finance ministries -- should expand to include emerging economies. They agreed to assess the best practices of hedge funds and how they could be used to help fix the financial problems. Secretive hedge funds have been a big source of funding for mortgage securities but also criticized for exacerbating the situation by short-selling stocks of troubled banks. Canada's finance minister, Jim Flaherty, expressed disappointment that the G20 didn't directly subject hedge funds to capitalization rules. "Our view is all significant pools of capital that are leveraged need to be subject to capitalization rules in particular," Flaherty said. Leaders poured cold water on the idea of an international super-regulator and said regulation is a national responsibility, an idea applauded by the financial services industry.

"Each country should set up their own regime to deal with systemic risk. Each country has their own customs; creating one global regulator would be extremely difficult," said Scott Talbott, senior vice president at the Financial Services Roundtable, which represents the biggest US banks, insurers and investment services companies. The United States and other nations are taking major steps to restore bank capital, which has shrunk due to enormous write downs of soured mortgages, with some depositors fleeing amid consumer worries about the safety of their money. One summit recommendation was to harmonize measurements of capital at financial institutions and maintain enough capital to "sustain confidence." They also called on international standard-setters to strengthen capital requirements for banks' structured credit and securitization activities. Leaders will meet again by April 30 to review the implementation of the principles and decisions they agreed upon.

Source:ET