G-20 revamps regulatory package for financial sector

New compensation policies key element of financial stability plan.

The G-20 leaders have agreed on a strategy for strengthening the international financial regulatory system that would now require the finance ministers and central bank governors of these countries to implement a five-point reforms package.

The detailed note on the declaration adopted at the end of the G-20 Summit here yesterday points out that reforming compensation policies and practices in the financial sector is the first essential element of G-20’s strategy to increase financial stability.

The key measures suggested in this area are: Align compensation levels with long-term value creation (and not with excessive risk-taking) by avoiding multi-year guaranteed bonus, defer a significant portion of variable compensation, align the compensation for senior executives with performance and risk, make the firms’ compensation policies transparent, limit variable compensation as a percentage of net revenues in cases where such packages are inconsistent with maintaining a sound capital base and ensure that compensation committees are able to act independently.

The leaders have committed to developing by the end of 2010 internationally agreed rules to improve both quantity and quality of bank capital and to discourage excessive leverage. These rules will be phased in as financial conditions improve and economic recovery is assured with the aim of implementation by the end of 2012. These measures are expected to reduce incentives for banks to take excessive risks.

The leaders also agreed that all standardised over-the-counter (OTC) derivative contracts should be traded on exchanges or electronic trading platforms and cleared through central counterparties by the end of 2012. Similarly, OTC derivative contracts should be reported to trade repositories and non-centrally cleared contracts should be subject to higher capital requirements.

In addition, there is an agreement that by the end of 2010, all systemically important financial firms should develop internationally consistent and firm-specific contingency and resolution plans. This will require the development of resolution tools and frameworks for financial groups to help mitigate the disruption of institutions and reduce moral hazard in the future.

Finally, the leaders have entrusted the newly created Global Forum on Transparency and Exchange of Information with the task of improving tax transparency and exchange of information so that countries can fully enforce their tax laws to protect their tax base. There was an agreement on firmly dealing with tax havens, money laundering, proceeds of corruption, terrorist financing and prudential standards.

G-20 plan...

Compensation policies and practices in the financial sector to be reformed
Quantity and quality of bank capital to be improved; excessive leverage to be discouraged
Trading of all standardised OTC derivative contracts on exchanges or electronic trading platforms
All systemically important financial firms to develop contingency and resolution plans.
Global Forum on Transparency and Exchange of Information to improve tax transparency and exchange of information.