FinMin Meeting: Promising Action in G-20 Run-Up

♠ Posted by Emmanuel in at 9/06/2009 09:48:00 AM
Somewhat to my surprise, the finance ministers' get-together in the run-up to the 24-25 September G-20 meeting has yielded results to build on. The ministers' statement is here, while reports by the Financial Times, Wall Street Journal, and Bloomberg provide additional color -

I. Redistribution of shares in the IMF to better reflect growing economic clout of LDCs is mentioned in (7) of the ministers' statement. As a blogger supporting worthwhile developing nation causes, I have been keen on this for the longest time:
We recognise that the IMF should remain a quota-based organisation; and as part of the reforms, the voice and representation of emerging and developing economies, including the poorest, must be significantly increased to reflect changes in the world economy.
There are also references to making the selection of IFI officials open to all comers; not just to Americans (who are appointed to head the World Bank) and Europeans (ditto for the IMF). Again, it's wait and see as the wording is not as specific as I'd wish...
We also reaffirm our commitment to increase accountability, strengthen the involvement of Fund Governors in strategic oversight, and agree to move to an open, transparent and merit-based selection of IFI management.
II. There are various references in media reports to banker bonuses being subject to limits, clawbacks (in case of subsequent financial reversals of fortune), and deferrals. However, there is no mention of these in the ministers' statement as they are supposedly still in the process of being drawn up by the Financial Stability Board. Earlier on, details of banking regulation were portrayed as a tussle between those wanting more discretion over banker bonuses (France and Germany) and those favoring increased capital requirements (the US and UK), especially during procyclical periods. Here's what we have:
Members appear to have passed some of the thorniest issues surrounding reform of bank regulation and the matter of payouts to bankers into the arms of the Financial Stability Board, an international group of central bankers and regulators.

The group stopped short of setting caps on bankers’ bonuses as some nations – France particularly – had pressed it to do. Instead, it has asked the FSB to help it draw up guidelines that incorporated the principles of transparency and improved corporate governance of banks including greater independence of remuneration committees.

It also agreed that compensation packages must have an element in which rewards are deferred for some time, clawback of payments is possible in cases where early profits lead to later losses and there are limits on guaranteed bonuses. [FT]

There was no accord to cap bonuses, an idea pushed hard by France and Germany but resisted by the U.S. and the U.K. Instead, there was a request for the FSB to explore whether individual banks' bonus pools should be limited, depending on the banks' specific circumstances. It would also examine possible sanctions for noncompliant banks. [WSJ]

The G-20 left it to the Financial Stability Board, a Basel-based panel of international regulators, to add detail to the proposals in time for the Sept. 24-25 leaders’ summit.

The group was tasked with studying ways to limit bonus pools as well as the relationship of awards to overall compensation, risk and long-term success. Banks were directed to use more of their profits to boost capital and lending, and told to disclose more about how they reward top earners. They weren’t pressed to cap individual awards as France proposed in the face of U.S. and U.K. opposition. [Bloomberg]
It is no surprise that I favor the continental European position over the Anglo-Saxon one. Excessive risk-taking and speculation is tied to the possibility of reaping excessive compensation (which is frequently undeserved). If the latter possibilities are lessened--by tying bonuses not to one-time windfalls but long-term performance, for instance--matters may be improved. Also, the Franco-Germans are right to be skeptical of the US asking for increased capital requirements when many American financial institutions have not yet adopted Basel II standards for capital adequacy.

I hope these two themes of enhancing LDC participation in global economic governance and reducing unwarranted banker compensation are followed through. As the title says, it's promising and not fulfilled action.