World Leaders Commit to Rein in Financial Bonuses

(page 2 of 2)

The statement also marks the group's ascendancy over older, more exclusive multinational gatherings. The G-20 will officially replace the G-8—dominated by the U.S. and Europe—as a forum for economic policy coordination, leaving the smaller organization to focus on noneconomic foreign affairs.

Going Beyond Basel II

On regulatory reform, the G-20 statement covers much of the same ground as previous efforts, and echoes proposals made by member countries' finance ministers in London earlier in the month. It highlights a key U.S. priority, higher capital requirements for financial firms, as well as the executive pay changes championed by French President Nicolas Sarkozy. But in both cases, it kicks decisions on most of the specifics into the future.

Finance ministers and central bankers for the member countries must agree on new capital standards by the end of 2010, with the goal of phasing them in through the end of 2012. The statement says they should include generally higher minimums, countercyclical capital cushions—which grow in good times and are allowed to shrink in bad times—and provisions for additional capital at institutions holding risky off-balance-sheet assets. Following the lead of U.S. regulators, the document calls for an overall, but as-yet unspecified, leverage ratio limiting a bank's total debt relative to assets, regardless of the quality of those assets. Similarly, all G-20 members are to adopt an earlier standard—called the Basel II Capital Framework and largely adopted by Europeans—by 2011.

The Financial Stability Board, made up of central bankers and market and banking regulators, is to monitor progress on pay and report back to the G-20 by March. In remarks to reporters on Sept. 24, Treasury Secretary Timothy Geithner called the group a necessary fourth leg for the global financial infrastructure created after World War II, which includes the World Bank, the International Monetary Fund, and what is now the World Trade Organization.

Another major U.S. priority—rebalancing global consumption—similarly relies on more detailed proposals drafted in coming months and years by the G-20's finance ministers, and on monitoring by the IMF. Without naming names, the statement promises that countries with surpluses—China, for example—will work to increase domestic consumption, while those with large debts—the U.S., primarily—will work to reduce them. The IMF is charged with helping determine whether actions taken by individual countries are "collectively consistent" with the G-20's global goals.

Across multiple issues addressed by the G-20 statement, "the IMF has become a more significant player in the international financial system," says Gardner, the Keefe Bruyette & Woods analyst. "There's a lot being asked of the IMF."

Can the IMF Force Compliance?

In effect, the IMF and, to some degree, the FSB will be in charge of reporting on how well G-20 countries comply with the goals established by the group. How well that works remains to be seen, but history doesn't offer a lot of hope, says Morris Goldstein, a senior fellow at the Peterson Institute for International Economics.

"This peer-group effort is really the triumph of hope over experience so far," Goldstein said. "Peer-group pressure has been tried a lot over the past decade or so, and it hasn't worked very well," he added. The IMF "has really been reluctant to call countries on the carpet for not meeting their responsibilities."

That's especially true on the subject of exchange rates, which many see as critical to the G-20's goal of rebalancing global consumption. But to reduce U.S. consumption, the country will need to export more—which is hard to do unless policymakers allow the dollar to weaken. Meantime, China pegs its own currency to the dollar, meaning its exports become no more expensive to Americans when the dollar declines.

"If the dollar declines further, some other currencies have to go up—and they have to allow them to go up," Goldstein says. And China has shown little interest in letting its currency appreciate.

Global leaders tend to downplay the tension "so as not to have disagreement," Goldstein says. "But they need to do a lot better on currency if they're going to make this system work."

Francis is a correspondent in BusinessWeek's Washington bureau.

Business Exchange

Track and share business topics across the Web.