G20 finance ministers Saturday agreed tougher rules for big financial firms blamed for the global economic crisis as they tackled the problem of companies deemed “too big to fail”.
After a two-day meeting in South Korea, G20 ministers and central bankers said in a statement that the 2008-09 crisis laid bare the need for global cooperation on banking regulation.
“We are committed to take action at the national and international level to raise standards, so that our national authorities implement global standards consistently, in a way that ensures a level playing field and avoids fragmentation of markets, protectionism and regulatory arbitrage,” they said.
The rules, known as Basel III, will raise the minimum capital reserves that banks must hold as insurance against any new financial tumult.
The rules, announced in September by the Basel Committee on Banking Supervision, will be phased in over several years starting in 2013. They will be formally adopted by G20 leaders at a Seoul summit next month.
A senior South Korean delegate told AFP: “There was very little disagreement on the issue. This was a simple process of approval.”
European governments see US failure to implement the previous bank capital standards known as Basel II as one cause of the crisis.
Many in continental Europe, along with Canada, Australia and others, said their own banks had weathered the crisis well thanks to strict supervision, unlike those in the United States and Britain.
The G20 ministers backed a broad plan by the Financial Stability Board (FSB) watchdog to tighten supervision of big banks and financial firms.
The board, created last year by the G20, had met on Wednesday in Seoul and the G20 statement endorsed its recommendations “to increase supervisory intensity and effectiveness”.
Also approved were recommendations on implementing the central clearing and trade reporting of over-the-counter derivatives — a move intended to reduce risk in the huge derivatives market.
The G20 additionally backed FSB principles for reducing reliance on credit rating agencies, which came in for widespread criticism for being too close to the firms they assessed and for failing to warn of problems.
The G20 backed too the FSB’s drive “to mitigate the risks posed by ‘systemically important financial institutions’ and address the ‘too-big-to-fail’ problems”.
Enormous bailouts of banks deemed “too big to fail” angered taxpayers in the United States and Britain, and bankers remain vilified, with seven-figure bonuses once more becoming the norm as profits return.
But Nout Wellink, who heads the Basel Committee on Banking Supervision, admitted Tuesday that rules on systemic risks and the biggest banks would not be ready before the middle of next year.
However he said the new capital requirement, combined with a global liquidity framework, “will substantially reduce the possibility of a banking crisis in the future”.
In Brussels Wednesday, the European Commission called for the creation of a system to allow troubled banks to fail without jeopardising the financial sector and forcing taxpayers to save them.
European Internal Markets Commissioner Michel Barnier said setting up a crisis management framework to wind down failing banks in an orderly fashion was vital “to prevent taxpayers from again having to pay for the banks”.
Under the Basel III reforms, banks of all sizes will be required to hold more reserves by January 1, 2015, with the “minimum requirement for common equity”, the highest form of loss-absorbing capital, raised to 4.5 percent of overall assets from 2.0 percent at the moment.
In addition, banks would be required by January 1, 2019 to set aside an additional buffer of 2.5 percent to “withstand future periods of stress”, bringing the total of such core reserves required to 7.0 percent.