G20 Looks At Financial Regulatory Reforms

by Glen Shapiro, LawAndTax-News.com, New York

01 July 2010

The G20 group of nations, at their summit in Toronto, discussed proposals for far-reaching regulatory reforms to strengthen the global financial system.

Their statement, issued after the summit, confirmed that they are making strides towards increasing the stability and strength of financial systems, but that further progress is still required on repairing the balance sheets of financial institutions.

They professed to have strengthened the global financial system by fortifying prudential oversight, improving risk management, promoting transparency, and reinforcing international cooperation. However, while they welcomed the full implementation of the European Stabilization Mechanism and Facility, the European Union decision to publicly release the results of ongoing tests on European banks, and the recent US financial reform bill, the statement looked forward to further work on four fronts.

Firstly, they reviewed the progress of the Basel Committee on Banking Supervision towards a new global regime for bank capital and liquidity. Substantial progress was said to have been made on reforms that will materially raise levels of resilience of banking systems. The amount of bank capital will be significantly higher, and its quality of capital will be significantly improved, when the new reforms are fully implemented.

It was agreed that all members will adopt the new capital standards and these will be phased in over a timeframe that is consistent with sustained economic recovery and limits market disruption, with the aim of implementation by the end of 2012. Phase-in arrangements will reflect different national starting points and circumstances.

It was further agreed to strengthen financial market infrastructure by accelerating the implementation of strong measures to improve transparency and regulatory oversight of hedge funds, credit rating agencies and over-the-counter derivatives in an internationally consistent and non-discriminatory way.

There is a commitment to trade all standardized over-the-counter derivatives contracts on exchanges or electronic trading platforms, where appropriate, and to clear through central counterparties by the end of 2012 at the latest.

Secondly, the Financial Stability Board (FSB) was tasked, in consultation with the International Monetary Fund, to report in October 2010 on recommendations to strengthen financial oversight and supervision, specifically relating to the mandate, capacity and resourcing of supervisors and specific powers which should be adopted to proactively identify and address risks, including early intervention.

Thirdly, they committed to the design and implementation of a system where regulators have the powers and tools to restructure or resolve all types of financial institutions in crisis, without taxpayers ultimately bearing the burden. The FSB was called on to consider and develop policy recommendations to address problems associated with systemically important financial institutions by the G20’s Seoul summit in November this year.

However, while it was agreed that the financial sector should make a fair and substantial contribution towards paying for any burdens associated with government interventions, where they occur, to repair the financial system and reduce risks, it was recognized that there are a range of policy approaches to this end. It was said that some countries are pursuing a financial levy, but other countries are pursuing different approaches.

A range of approaches were approved, as long as they protected taxpayers; reduced risks from the financial system; protected the flow of credit in good times and bad times; took into account individual countries’ circumstances and options; and helped promote a level playing field.

Lastly, they strengthened their commitment to the peer review through the FSB. Non-cooperative jurisdictions are being addressed based on comprehensive, consistent and transparent assessment with respect to tax havens, the fight against money laundering and the adherence to prudential standards.

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