World leaders gathering in Pittsburgh this month may take the biggest step to curbing the pay and profits of bankers after their economic policy makers narrowed differences over bonuses and capital rules.
Finance ministers and central bankers from the Group of 20 nations left weekend talks in London with a regulatory blueprint for a financial industry whose risk-taking triggered a global recession and required taxpayer-funded bailouts. The pledge to shore up the international financial system spurred European and Asian shares higher today.
“The G-20 has shown once again that governments from around the world can come together to agree on the global governance the new global economy needs,” U.K. Prime Minister Gordon Brown said. “This is an important step on the way to Pittsburgh.”
With the G-20 authorities vowing to sustain a nascent economic recovery, the U.S. and euro area found common ground on the push to revamp bank rules. The effort may still founder on trans-Atlantic divisions. And the specifics, being written for the Sept. 24-25 summit to be chaired by U.S. President Barack Obama, run the risk of being unenforceable, say analysts.
Finance chiefs agreed that elements of a global pay code include forcing banks to “claw back” cash awards if earnings falter; better tying compensation to long-term performance and base pay; deferring payments and disclosing more on what they hand top earners, according to a Sept. 5 statement.
Banks will also have to curb leverage and raise the amount and quality of assets they keep in reserve once growth takes hold. They were also prodded to use profits to raise capital and lending and to outline “living wills” on how to fold international operations in crises.
The ministers left it to the Financial Stability Board, a Basel-based panel of regulators that the G-20 established five months ago, to flesh out the plan. The board will also research whether there needs to be a limit on bonuses as a percentage of a bank’s profits.
Separately, a panel of central bankers and regulators that oversees the Basel Committee on Banking Supervision yesterday agreed on new standards calling for lenders to raise the quality of their capital, introduce a leverage ratio and devise ways to boost reserves when the economy is robust.
Even if the deadline for detailed proposals wasn’t in less than three weeks, officials would struggle to control how bankers pay themselves, said Nicholas Stretch, a London-based partner at law firm CMS Cameron McKenna.
“There’s no teeth here,” Stretch said. “If you push too far in one direction, banks will just move in the other.”
Political leaders expressed doubts that financial-industry interests can be overcome.
“Will the U.S. follow us? Will President Obama have the courage to tackle the ancient order?” French Prime Minister Francois Fillon said yesterday in Seignosse, southwestern France. “We will know in a few days if actions live up to speeches.”
The weekend agreement built on G-20 efforts born in the wake of the crash of the U.S. housing market and the collapse of Lehman Brothers Holdings Ltd. almost exactly a year ago. The ensuing crisis led to $1.6 trillion in bank losses and writedowns.
The G-20 is also seeking to quell public anger after governments rescued banks only to see them soon return to profit and awarding bonuses.
“Greed was one of the reasons for this crisis,” Italian Finance Minister Giulio Tremonti said. Because of the bailouts, “limiting bonuses isn’t only about how much a banker earns, but it’s about the relationship between banks and governments.”
Goldman Sachs Group Inc. set aside a record $11.4 billion for compensation and benefits in the first half of 2009, up 33 percent from a year earlier, while Morgan Stanley allotted 72 percent of its second-quarter revenue.
In France, BNP Paribas SA and Societe Generale SA were among the banks that bowed last month to President Nicolas Sarkozy, deferring for three years two-thirds of bonuses and paying a third of them in shares. They also vowed to stop offering guaranteed payouts to new hires.
“We need to bring the sense of common purpose and urgency that we demonstrated at the peak of the crisis to the challenges of restoring growth and to reforming the financial system,” said U.S. Treasury Secretary Timothy Geithner, who wants new capital rules in place by the end of 2012.
Push to Contain Bonuses
Finance ministers from France and Germany, who spoke to reporters together after the meeting, claimed credit for what they called a successful push to contain bonuses, overcoming initial resistance from the U.S. and U.K. The Europeans relented on a proposal to limit individuals’ compensation.
While the ebbing of the crisis may still slow the reform effort as banks regain strength and attention wanes, the re- election campaigns of German Chancellor Angela Merkel this month and the U.K.’s Brown next year may provide momentum.
“The finance ministers provided a good foundation for the leaders meeting,” said Daniel Price, who organized last November’s G-20 summit in Washington for President George W. Bush and is now a partner at law firm Sidley Austin LLP in Washington. “Leaders shouldn’t lapse into demonizing or demagoguing particular products or practices.”
They also narrowed a trans-Atlantic divide on capital rules. The U.S. agreed to implement Basel II capital rules, acknowledging French criticism that Obama’s administration was beginning a new reform drive without enacting existing capital standards. Setting aside more capital may hurt banks’ earnings.