Tags: Merkel | G-20 | Effort | Avert | Bank | Bailouts | Falling

Merkel: G-20 Effort to Avert Bank Bailouts Falling Short

Thursday, 11 Nov 2010 10:33 AM

German Chancellor Angela Merkel said the Group of 20 is falling short so far in efforts to avert future bank bailouts, even as leaders of the world’s biggest economies are poised to agree on tougher capital, liquidity and leverage requirements.

Merkel, addressing a business forum in Seoul today, said she’s “not quite satisfied yet” with G-20 plans for reducing risks linked to the world’s biggest and most systemically important banks. She called for an international framework that pushes creditors to help bear the cost of any future rescues.

“There may be a conflict here between the interests of the financial world and the interests of politicians,” Merkel said. “We can’t constantly explain to our voters that taxpayers have to be on the hook for certain risks, rather than those who make a lot of money taking those risks.”

The discussions reflect a voter backlash against rescues of companies from American International Group Inc. to Royal Bank of Scotland Plc during the deepest financial crisis since the 1930s. While the U.S. and European Union have agreed such firms should undergo regular stress tests and be subject to extra supervision and loss-absorption requirements, regulators have yet to specify how they will define systemically important banks.

The G-20 leaders conclude their two-day summit in Seoul tomorrow.

G-20 Focus

G-20 efforts this year have focused on how to reduce the likelihood of banks needing a rescue, rather than addressing the issue of how to proceed once crisis conditions emerge. Leaders are on course to endorse so-called Basel III capital standards, while deferring decisions on oversight of derivatives and the process for dismantling a failing global financial company.

The rules will need to be implemented carefully so that banks aren’t hurt by regional differences, Gerard Mestrallet, chairman of Suez Environnement SA, said in an interview today. Otherwise, he said, the Basel rules could reduce the flow of investment.

“There’s a big difference between the U.S., where 80 percent of financing is done on the securities market, and Europe, where 70 percent of financing is done by banks,” he said. “You can’t apply the same rules rigidly across borders.”

U.K. officials have signaled the G-20 should listen to industry concerns, while U.S. Treasury Secretary Timothy F. Geithner said the G-20 can’t shirk its duty to require banks to guard against potential losses.

‘More Cushion’

“The most important way to reduce future crises is to make sure those financial institutions hold more capital, hold more cushion against the risks they take,” Geithner said in an interview today with CNBC television.

Geithner said the proposed new standards would be applied without creating a two-tiered system that affects similar banks unevenly. Small and medium-sized banks don’t operate at the same level as the globally active banks that are in need of a “level playing field,” he said.

“What I expect you’re going to see is the heads of state endorse, support, the new standards for reducing risk and leverage across the largest global financial institutions,” Geithner said.

The Obama administration has been working with Europe to narrow differences over financial regulation, including sending staff to Brussels to help with proposed derivatives regulations. Geithner issued a joint statement on Oct. 29 with EU Financial Services Commissioner Michel Barnier pledging cooperation.

List of Banks

A Canadian official told reporters in Seoul that global regulators have yet to put together a list of banks that are deemed systemically important. The official, speaking on condition he not be identified, dismissed reports that such a list includes Royal Bank of Canada, the biggest Canadian bank and one of 18 primary dealers that trade with the Federal Reserve.

U.S. and European regulators are working out how to enforce capital and liquidity requirements so banks can’t evade the tighter standards, a U.S. Treasury official told Bloomberg in an interview last month, speaking on condition of anonymity.

Heading into next year, the G-20 will focus on whether to add additional risk-protection requirements, on top of the Basel III standards, to firms whose collapse could threaten the entire financial system, the U.S. official said. Proposals under discussion include a surcharge, contingent capital reserves or other strategies to improve their ability to withstand losses.

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German Chancellor Angela Merkel said the Group of 20 is falling short so far in efforts to avert future bank bailouts, even as leaders of the world s biggest economies are poised to agree on tougher capital, liquidity and leverage requirements. Merkel, addressing a...
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Thursday, 11 Nov 2010 10:33 AM
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