In addition to the validation of the Basel III regulations, the Heads of State endorsed several recommendations of the Financial Stability Board (FSB), put in place after the London summit in spring 2009. These recommendations concern primarily the regulations for systemically important financial institutions and OTC derivatives (over-the-counter trading, rather than trading in a regulated market).
Validation of Basel III rules
Unsurprisingly, the rules validated by the Basel Committee in September were adopted in their existing state. They provide for the strengthening of bank capital requirements, with banks ultimately obliged to increase their “top quality” capital ratio, corresponding to ordinary shares and retained profits, to 7%, vs. 2% currently.
The summit's final communiqué sees in the validation of these rules a “profound reform of the global banking system,” which should reduce the attraction for banks “to take excessive risks, reduce the probability and seriousness of future crises,” and enable banks to withstand – without government help – shocks on the scale of those they experienced following the financial crisis.
Member States must now transpose these rules into their national legislation, with phasing in from 2013 to 2019.
Systemically important financial institutions
While they have recognised the need for specific rules for financial institutions of a size such that their collapse would generate systemic risks, the G20 members have remained at the level of the main principles.
The FSB, which recommends primarily imposing additional capital requirements on these institutions, is scheduled to propose a number of specific measures next spring. In particular, it needs to define a list of these systemically important institutions, the amount of additional requirements, and devise a process for resolving crises to ensure that collapse can be avoided without calling on public funds.
Derivatives markets and rating agencies
The G20 members again agreed to enhance the regulations and supervision for hedge funds and rating agencies, but also for OTC derivatives.
Accordingly, the Heads of State announced their desire to reduce the systematic dependence of financial sector players on rating agency decisions. They also endorsed FSB proposals for a reform of OTC markets, calling in particular for greater standardisation and the implementation of centralised clearing mechanisms.
Already considered to be buried during last June's Toronto summit, nothing further came of the idea of a tax on financial transactions, primarily championed by European countries such as France and Germany, in Seoul and is not featured in the final communiqué.