At the end of a two-day summit, leaders from the Group of 20 nations said they plan to cooperate on an overhaul of financial regulations to prevent arbitrage in the global system. By the end of next year, banks will be required to hold more capital, and compensation policies will need to be linked to longer-term performance. Also, systems will be created for winding down cross-border financial institutions. Since these developments will have a direct impact on the profitability of financial firms, investors need to follow the progress and timing of financial industry reform measures.
Securities Industry and Financial Markets Association President and CEO Timothy Ryan called the proposals “unprecedented.” “While individually each initiative may have merit – and the industry supports many reforms – taken together, these reforms could negatively impact investors, capital flows, and economic growth and job creation during a period of global economic vulnerability,” Ryan said. The G-20 also released a statement about its plans for maintaining stability in financial markets and encouraging economic growth, among other goals.
“Our reform is multifaceted but at its core must be stronger capital standards, complemented by clear incentives to mitigate excessive risk-taking practices,” the G-20 said. “Capital allows banks to withstand those losses that inevitably will come.”
The member countries committed to conduct “robust, transparent stress tests as needed” and called on banks to retain a greater portion of current profits to bolster capital. The statement didn’t go as far as the Financial Stability Board (an international organization established to address vulnerabilities and to develop and implement strong regulatory, supervisory and other policies in the interest of financial stability that is comprised of senior representatives of national financial authorities (central banks, regulatory and supervisory authorities and ministries of finance), international financial institutions, standard setting bodies, and committees of central bank experts) recommendation that banks restrict dividends, stock buybacks or compensation.
The G-20 said it would support introducing an international leverage ratio, adjusted for differences in accounting regimes that could supplement existing Basel II risk-based standards. The leaders called on financial companies deemed “systemically important,” meaning that their failure would pose a risk to the entire financial system, to develop contingency and resolution plans that work internationally.
To reduce the risk of derivatives traded over the counter, the G-20 proposed moving all standardized contracts onto exchanges or electronic platforms, where appropriate, by the end of 2012. Trades should be cleared through central counterparties and reported to trade repositories, the G-20 said. Some contracts would be subject to stricter capital requirements.
The G-20 was unusually detailed, underscoring both the cohesiveness of the member countries on this issue and their determination to instill real financial regulatory reform across the globe. The goal of such reform is to slow lending and, thus, slow growth to avoid damaging asset bubbles. Investors need to pay close attention as financial regulatory reform measures, such as those proposed by the G-20, make their way toward becoming reality. Stock markets have enjoyed a remarkable rally on the back of government spending, very easy monetary policy, and no meaningful financial reform. Those trends may be reversed in short order, and a subsequent reversal in stock markets as a result, would not be out of the question.
Gregg D. Killoren
victoria1014
