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Leak From G-20 Hints at Capital Standards Based on Basel II
Banks capital requirements are on the agenda for today’s closed-door meetings at the G-20 Pittsburgh Summit, yet leaks of the proposed communique regarding financial reform provide a hint that the group of nations will adopt Basel II as the de facto standard. Apparently, Basel II itself will be shored up, although the degree to which that will happen is obviously a question mark.
Reuters has out a list of proposed items for the communique this morning. Here are the salient ones:
* Leaders have made specific commitments on adopting Basel II rules on bank capital by 2011, phasing in higher bank capital levels, converging accounting standards, introducing a leverage ratio and calling for exchange trading of over-the-counter derivatives. Delivery won’t be easy, however.
* Leaders set an end-2010 date to agree figures for higher and better quality capital levels. The work is being done by the Basel Committee on Banking Supervision, which is reforming its Basel II bank capital accord to apply credit crunch lessons.
* Leaders set an end-2010 date to agree figures for higher and better quality capital levels. The work is being done by the Basel Committee on Banking Supervision, which is reforming its Basel II bank capital accord to apply credit crunch lessons.
* Leaders set an end-2012 date for implementing the tougher capital rules for banks.
* Multi-year guaranteed bonuses must be avoided, a big chunk of variable pay must be deferred, tied to performance and subject to clawbacks.
* The draft communique backs the introduction of a leverage ratio only as a “supplementary measure to Basel II.” The communique says the leverage ratio should be “migrated to Pillar 1” later on — a step which hardwires it into law, leaving less national discretion. The leverage ratio will also be “fully adjusted for differences in accounting.”
* The communique says all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and centrally cleared by the end of 2012 at the latest.
* The draft communique sets an end-of-2010 deadline for financial institutions to put in place contingency and resolution plans — also known as living wills.
The devil will be in the details, as they say.
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